This is a simplified, contrived example for illustrative purposes.

Below, we have the 2017 IRS tax brackets for single individuals (for taxes filed in 2018). For this example, I’ll pretend income stays constant and the tax brackets remain the same over an entire working life.

Let’s pretend a high-school graduate earns \$37,950 per year of taxable income for 47 years: Age 18 to 64. Let’s pretend a college graduate spends seven years in college, perhaps earning a graduate degree, earning no taxable income during this time, but then earns \$69,591.25 per year of taxable income for 40 years: Age 25 to 64. This figure is contrived to result in the college graduate earning exactly \$1 million more taxable income than the high-school graduate: \$2,783,650 vs. \$1,783,650. The college graduate’s \$1 million earnings advantage is a common talking point among marketers and educators.

\$37,950.00 × 47 years = \$1,783,650 [High-school graduate]
\$69,591.25 × 40 years = \$2,783,650 [College graduate]

(Note: We are just considering taxable income in these examples. The standard personal deduction for 2017 is \$6350, so in this example, the high-school graduate is actually earning \$44,300 per year and the college graduate is actually earning \$75,941.25 per year, assuming both do not itemize.)

Although the college graduate earns \$1 million extra, \$31,641.25 per year of the college graduate’s taxable income is in the 25% tax bracket, while all of the high school graduate’s taxable income is in the 15% tax bracket or below.

The high school graduate’s taxable income is taxed at 10% on the first \$9325 and 15% on the next \$28,625.

The college graduate’s first \$37,950 of taxable income is taxed the same way as the high school graduate’s. However, the additional taxable income (\$31,641.25) is taxed at 25%.

In each year, the high-school graduate pays \$5226.25 of federal income taxes, or \$245,633.75 over 47 years, which is 13.77% of his/her lifetime taxable income.

In each year, the college graduate pays \$13,136.56 of federal income taxes, or \$525,462.50 over 40 years, which is 18.88% of his/her lifetime taxable income.

This means that while the college graduate earned \$1 million additional taxable income than the high-school graduate, after federal income taxes, the college graduate netted only \$720,171.25 more. This is the college graduate’s “late start” earnings disadvantage. While it will usually be more subtle, it is usually there. There is a high cost for failing to saturate the 10% and 15% tax brackets in any calendar year. There is also a high cost for earning more.

Because the college graduate had no taxable income during his/her seven years of college, he/she was missing out on saturation of the lower tax brackets in these years. He/she could have been earning taxable income and enjoying a lower tax bracket on this income if his/her earnings were “spread out,” so to speak, rather than concentrated in a lesser number of lucrative years once the college education had been completed.

Moreover, the college graduate was prevented from contributing to tax-advantaged retirement accounts during Ages 18–24, because earned income is required to make such contributions. This is a tremendous loss. Just by itself, contributing the current maximum of \$5500 to a Roth IRA during Ages 18–24 would total \$38,500. If this Roth IRA is invested, rather aggressively, in a S&P 500 or total-market index fund, it will probably double every ten years, even adjusting for inflation. This is potentially a 16-fold increase at Age 65, to \$616,000. The high-school graduate could contribute to the Roth IRA during Ages 18–24, paying only 15% federal income taxes in these years, which totals \$5775 of taxes. Because Roth IRAs are tax-exempt, tax is paid when the money goes in, but not when it comes out. All \$577,500 of inflation-adjusted gains would be tax-exempt. These earnings would be in addition to what both the high-school or college graduate could potentially earn from contributing to tax-advantaged retirement accounts at Age 25 and beyond.

Although the college graduate could have, while in college, just worked a few months each year to achieve \$5500 of earned income and then contributed the maximum to a Roth IRA, this does not compensate for the previously discussed tax bracket differential. Also, college graduates typically accumulate student-loan debts and would have to take additional student loans to be able to contribute to a Roth IRA. (Taking student loans, if they are below perhaps 10% APR, to contribute the annual maximum to a Roth IRA in a whole-market index fund is actually a great idea, at least from a mathematical, non-psychological perspective. Tax-advantaged retirement contributions are so valuable that the APR of the loan required to make them can exceed the stock market’s average annual return-on-investment [ROI] and they can still be worthwhile. Debt hawks like Dave Ramsey totally eschew this point.)

Finally, there is a lot of collateral damage, so to speak, with achieving a higher income. Higher earners may become ineligible for healthcare subsidies such as the advance premium tax credit (APTC), ineligible for the earned income tax credit (EITC), ineligible for other need-based aid, and subjected to higher income taxes at the state and local level as well.

Due to the time required to acquire specialized knowledge and expertise (whether actual or perceived expertise), college graduates, financially, are late bloomers. This “late start” has substantial mathematical and tax-related costs. Therefore, a comparison of nominal dollars earned in one’s lifetime may present a rosy picture of college’s ROI.