Nathan writes in:
I am entering my senior year in high school next fall. My parents want me to go to college in the fall right after graduation. They have some savings for me but I will have to add some student loans. I want to take a gap year or two and work full time. I would put that money aside for college and figure out what I want to do because I don’t know what I want to study. Is it better to graduate a year later with no student loans or go straight to college after high school with student loans and go straight to a job with better pay?
This is a really great question from a well-spoken high school student. I have a feeling that Nathan, with his ability to think through situations and his ability to present them this well, will do just fine in whatever he chooses to do.
The question you’re asking, in essence, is whether or not the relatively low earnings you might bring in during a “gap year” right after high school, when applied to college tuition, is more financially valuable than starting in your career path a year early.
That question is loaded with a ton of assumptions. You have to assume how much you’d earn during that year off and what portion of that you’d actually save. You have to assume how much you’d earn after graduating and what portion of that you would immediately be able to apply to student loans. There’s also the issue of a changed career trajectory – would the “gap year” change your overall career trajectory in a positive direction, improving your post-graduation annual salary?
Let’s look at the easy question: does a gap year help you with your career trajectory? If a gap year can actually improve your career path, then it should be a no-brainer, right?
According to the clearest data I could find, a “gap year” can help if you use it in a way that genuinely improves your college results by helping you get into a better school, clarifying what you want to do in school, and helping you build a better work ethic. However, the benefits of a gap year seem to be heavily tied to how you spend that year. The best outcomes seem to come not from working at a job in your hometown for a year, but engaging in a program like Americorps for a year.
I’m not going to get into the nuances of a gap year, but it seems that the most benefits from a gap year aren’t correlated with maximizing income during that gap year but rather maximizing rewarding experiences and personal insight during that year. In other words, a gap year offers the best career outcomes when the primary goal is rewarding experience and helping you figure out your goals rather than just maximizing income. It is unclear whether a gap year of this type is a net positive financially, but it does seem to be a pretty strong net positive in terms of college performance and happiness with one’s career choices. Sarah and I are open to the idea of our own children taking a gap year for this very purpose – life experience and figuring things out, not earning income.
Let’s get down to the dollars and cents of it, though. Let’s say, for example, that you took a year and worked 50 weeks full time at a job paying $10 an hour while living at home. You’d earn $20,000 – let’s assume after taxes and some minimal expenses, you were able to bank $12,000 of it.
That $12,000 would theoretically cut out $12,000 in student loans. Student loan rates seem to be somewhere around 5% right now, and most loans are on a ten year repayment schedule. That ends up totaling $15,367 in student loan repayment over the lifetime of that loan.
That’s what a gap year focused on income saves you, but what does it cost you? In terms of your career, it essentially costs you a year in retirement, assuming you would have the same length of career as you would otherwise. However, if you were to assume that you stick that $127 a month for the first ten years that would have been your student loan payments into a retirement account that returns an average of 7% year, you wind up with an extra $200,000 in your retirement coffers, which actually lets you retire a year or two earlier than if you didn’t take that gap year as you’ll hit your target retirement number at a younger age.
The issue with these kinds of calculations, however, is that it assumes perfect financial behavior on your part. It assumes that you’ll work a full time job for 50 weeks during that gap year. It assumes that you’d contribute that now-nonexistent student loan payment to your retirement account rather than spending it. It assumes your lifelong financial path will be smooth.
In my eyes, this exercise reveals two things.
One, the decision of whether or not to take a “gap year” is less important in the end than the commitment to lifelong smart financial choices. If you commit to spending less than you earn every year of your life and doing something smart with the difference and if you commit to using windfalls and extra sources of money for wise things like debt elimination and retirement savings, you’ll blow away the financial difference between a gap year of working for money and going straight to college after school.
I think this is a really key lesson that applies to almost everyone. Making wise financial choices day in and day out trumps almost any life choice you might make. If you consistently spend less than you earn, eliminate debts and avoid high interest consumer debt, and get into a situation where you’re not relying on loans for cars or eventually a home, your good financial choices will trump most of the life and career choices you might make.
I really like the old Charles Dickens quote from David Copperfield:
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
It’s as true then as it is now: consistent smart financial choices, starting with spending less than you earn, is incredibly important for a stable life and trumps most life and career choices.
Two, in terms of maximizing the benefit of a gap year in terms of your career and quality of life, the focus of your gap year should be quality experiences and personal growth, not the wages of a 40 hour a week job. A gap year that focuses on quality experiences, figuring yourself out, maturing, and getting a grip on what you actually want to do with your life seems to strongly correlate with better academic performance in college.
In the end, it comes down to your own personality and situation. Do you know what you want to do with your life? Do you have good personal habits when it comes to being self-motivated? The more sure you are about your future and your own habits, the more sense it makes to go straight to college. However, if I were making a recommendation to my own children when they were unsure about what to do next after high school, I would probably encourage them, if they were reasonably mature, to consider taking a gap year and figure out their plans going forward while getting quality experiences through a program like Americorps.
Good luck, Nathan, but I think you’ll be fine either way.