A lot of people question the value of a Stanford degree. Over winter break, for instance, the New York Times published this article suggesting that you can get the same value education at a state school rather than at an elite college like Stanford.
Andrew Luck’s (awesome) decision to stick around for another year offers us an opportunity, I think, to revisit this question. Figuring out the present value of various cash flows is exactly the sort of problem that a class called engineering economy teaches you how to figure out (a class, by the way, that Luck will have to take in order to graduate). My sports-fanatic roommate I calculated that Luck is giving up around $14.1 million dollars by sticking around for another year.
That Luck values a year at Stanford at 14.1 million suggests that the school creates value that far exceeds the value of the salary you’ll earn once you graduate. (To be fair, Luck’s senior year may include things like a Heisman Trophy or BCS championship, events that are not common to all Stanford seniors. But his dad cited friends and academics as reasons for staying, things we can all appreciate ). By our rough calculations, the present value of a Stanford architectural design major’s salary is a little under a million dollars. As the graph and Andrew Luck show, a Stanford education is worth a heck of a lot more than the salary you earn once you graduate.
Here’s a few assumptions. Let’s say Luck, as an architectural design guy, can earn the median Stanford mid-career salary of $119,000 a year. This is generous since architects aren’t usually that valuable. Let’s also assume that Luck plays football until he’s 35 and then immediately enters the architectural design market earning that salary. Also, let’s give him a 10% discount rate.
The present value of Luck’s salary from his degree, then is a cool $258,583.
Let’s also make the dramatic assumption that without a college degree, Luck can’t get a job after his playing career finishes. (This, by the way, is the worst case: fellow Stanford quarterback John Elway just got a job as VP of Football Operations at the Broncos, for about $100,000 a year.)
We’ll also assume that Luck earns the same amount of money as an NFL quarterback whether or not he stays for an additional year. The catch is that he’s now entering a post-lockout NFL. Sam Bradford, last year’s #1 overall pick as a quarterback, won a 6-year $50 million contract. My roommate estimates that Luck won’t get more than a $30-million dollar contract because of the bargaining that will happen next year. The present value of the difference of their contracts? A $14.37 million dollar loss for Luck.
Combine that $14.37 million dollar loss caused by the contract with the present value of Luck’s architectural design salary ($.258 million) and you see that he’s giving away about $14.1 million dollars for his senior year at Stanford.
We can take these calculations a step further. Now that Luck has defined the value of a Stanford degree to him, let’s compare that to the present value of the degree based on its salary. As before, we’ll assume a salary of $119,000 a year, a 10% discount rate and now a 48-year career. We’ll also assume that without the degree you could make $20,000 per year. Since I have to go to class, we’ll neglect the tax implications of the income tax bracket change and we get a present value of $979,000 per year.