Does an elite college really pay?
Harvard or Yale can cost a fortune, but the theory goes that the cost of a prestigious diploma will pay off in future earnings. Many who've studied the numbers disagree.
By Daniel Akst
The economist Alan B. Krueger teaches at Princeton University, but in his view, it’s probably not worth the money it takes to send your kid there.
Not in terms of future earnings, anyway. Krueger ignited a minor furor when he and Stacy B. Dale, a researcher at the Andrew W. Mellon Foundation, concluded in 1998 that elite colleges do not pay off in higher earnings. They only appear to do so, the researchers contended. Krueger and Dale claimed that, in most cases, the higher earnings piled up by graduates of elite schools were attributable to elite individuals, not their college education. In other words, if you’re smart enough to get into Princeton, you’re smart enough to make a lot of money wherever you go to school.
Whether or not Krueger and Dale’s research holds up -- and the jury is still out -- tuition-paying parents will want to follow the debate closely.
For years, economists have wrestled with the question of whether the hefty cost of an Ivy League or equivalent private college is worth the differential in economic terms. Will attending the elite University of Pennsylvania result in higher future earnings than attending Penn State? And will the higher earnings exceed the higher cost?
The cost of a private college education, already astronomical, is spiraling upward faster than the rate of inflation. (At least in nominal terms. When you adjust costs with financial aid and for inflation, the real costs may be falling. For more, see "The real cost of college: going down?")
A student entering the University of Pennsylvania this fall and paying list price can expect to spend about $160,000 for an undergraduate degree, including personal expenses and expected tuition increases.
At the same time, these institutions are besieged by more and more applicants. Columbia University’s Columbia College, for instance, had fewer than 6,000 applicants in 1991. For the 2001-02 academic year, the figure exceeded 14,000. (This spiraling demand may be helping to drive up fees. On the basis of supply and demand, in fact, Penn is probably underpriced.)
What’s a parent to do? Should you hand over your life savings to get your kids through a place such as Harvard, Stanford or Yale? Is it worth it for students to drive themselves mercilessly just to get into one of these schools?
For some occupations, Harvard doesn't pay
Unfortunately, the answer isn’t so clear. If your kid is going to be a social worker or a minister, going to Harvard will probably never pay off financially. And if you live someplace with a truly great state university (the universities of California, Michigan, Wisconsin and Virginia are good examples), only the very best private colleges are even worth considering as an alternative. Mediocre private schools, on the other hand, are almost never worth the money.
Beyond this there is confusion. Plenty of experts, for instance, think Krueger and Dale are flat-out wrong. "Alan is a former student of mine, and I love him,” says Ronald G. Ehrenberg, director of the Cornell Higher Education Research Institute in Ithaca, N.Y. Nevertheless, Ehrenberg insists, "on average, there is significant gain in going to a top private school,” both in access to better graduate schools and in higher lifelong earnings.
Ehrenberg, along with Dominic J. Brewer and Eric Eide of the Rand Corp., published a study of this issue in 1996 and found that, "even after controlling for selection effects, there is strong evidence of significant economic return to attending an elite private institution, and some evidence that this premium has increased over time.”
The problem is those "selection effects,” meaning the tendency of top schools to admit the best and the brightest, who are most likely to earn big bucks someday anyway. There is no disputing that graduates of top schools make more money than graduates of, say, Slippery Rock University in Pennsylvania, which is one reason parents are willing to pay the tab at such pricey institutions as Cal Tech or Wellesley. Harvard economist Caroline Hoxby figures that men who entered a top-tier private college in 1982 will earn $2.9 million over a lifetime, versus $2.4 million for men who went to one of the most selective public institutions and $1.7 million for men from one of the least-selective public institutions. (All of Hoxby’s numbers are in 1997 dollars.)
Where you apply is a good predictor of future earnings
But elite colleges attract elite students -- students who might have made a lot of money after attending any old college. (As well as a few possibly undeserving sons and daughters of well-heeled alumni.)
To address this, Krueger and Dale looked not just at the earnings of elite-college graduates, but also at the earnings of those accepted at elite colleges who chose to attend a less-selective institution. The researchers found that both groups of students earned about the same. That suggests that the students themselves -- not the school -- account for the difference. To Krueger and Dale, where you applied (rather than where you matriculated) is the best predictor of future earnings.
One difficulty with much of this work is that you have to wait quite awhile for the students to establish postgraduate earnings patterns. That, in turn, means you have to deal with college costs long ago dwarfed by years of increases that have far outstripped inflation. When I enrolled at Penn, in 1974, you could get through four years for perhaps $30,000. Today it takes five times as much. So if you’re paying full freight at Penn today, it’s much tougher to earn out the staggering capital cost of your elite education -- to say nothing of graduate school, which you’ll probably need if you’re serious about making money.
Dan A. Black, an economist at Syracuse University who has studied such questions, says you will make more by attending an elite college, "but it comes out awfully close to what you’d get in the stock market" if you invested the difference in price between a top college and a lesser state school.
But Hoxby, who specializes in the economics of education, has come up with some different answers. She figures student aptitude accounts for somewhere between two-thirds and three-quarters of the earnings difference; yet even allowing for this, she finds that it pays to go to the most selective college you can. "People who invest in education at a more selective college generally earn back their investment several times over during their careers,” Hoxby writes in a study of men who entered college in 1960, 1972 and 1982. She also projected findings based on 1997-98 tuition, with similar results.
"In many cases,” she adds, "even students who are offered a ‘free ride’ by a lower ranked college would maximize their monetary worth by refusing the aid and attending the higher ranked college.”
What’s more, she says, "the returns to attending a more selective college have been rising over time,” and that the career-long income differences "swamp the differences in the total costs of attending more versus less selective colleges.”
The list price vs. what we actually pay
One virtue of Hoxby’s work is her focus on what people really pay. Everyone knows the retail price of Penn is out of sight. But not everyone knows that three-quarters of its undergraduates get some kind of financial aid and nearly half get an outright grant (read: discount). At Penn, for example, undergraduate tuition and fees this fall are $27,988. But the university says the average undergraduate pays just $21,095 -- a discount of 25%. And that figure only takes account of scholarships from Penn or governmental sources. If you add in private grants and the value of low-interest loans, the average price would drop even further.
Hoxby understands this, which is why she compared students paying average 1997-98 tuition at a third-rank public college to those paying average tuition at a first-rank private college. Even adjusting for differences in student aptitude, the private school student would be expected to earn back the difference in costs more than 30 times over during the course of a working lifetime, far outstripping any possible investment returns on invested capital.
If that's true, it’s no wonder parents are clamoring to throw money at Ivy League schools. The wonder is that the schools themselves don’t charge more.
What you should do
Take all this data with a grain of salt and apply common sense.
If your kid intends to become a social worker or minister, an Ivy League education will never pay off in financial terms. And if your child wants to study studio art but is admitted to Cal Tech, there’s no point paying for Cal Tech. Spend the money on a school with a better art program.
If you live in a state with a premiere public institution -- a school such as UC Berkeley, University of Virginia or University of Wisconsin -- it’s hard to justify going elsewhere, unless elsewhere is one of the very best private schools. Even then, in the view of Dan Black, you should pick your state school.
Under no circumstances should you pay for a mediocre private school. These make no sense at all.
If you are made of money, send your kid to the most selective school you possibly can. It can’t hurt.
If you are African-American and your kid gets into Yale, do whatever you can to send him or her. Krueger and Dale found that black students get a bigger financial bang from a top-tier school. There is also some evidence that the same applies to students from economically disadvantaged backgrounds generally.
http://moneycentral.msn.com/articles...pecial=college
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