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Does That Pricey College Pay Off?

Investing in a college education pays big lifetime dividends, with college graduates generally earning far more than high school graduates. And some studies find that, after factoring in potentially higher costs, diplomas from the most prestigious institutions may be worth even more.

Mark Schneider, a visiting scholar at the American Enterprise Institute for Public Policy Research and a political science professor at SUNY Stony Brook, compares lifetime earnings of college graduates with those of high school graduates. His study confirms that college graduates generally out-earn workers without college diplomas.

But Schneider goes further, breaking out earnings for graduates of public schools and private schools across selectivity levels, while adjusting for tuition costs and federal income taxes. (Schneider treats college costs as negative earnings, to account for the fact that, while someone who goes directly from high school to the work force is earning wages, a college student is writing checks for tuition.)

Graduates of the most selective public undergraduate schools, Schneider finds, earn about $320,000 more in 2003 dollars than high school graduates. Comparatively, he determines that graduates of the most selective private undergraduate schools average even more — about $500,000 more in 2003 dollars than high school graduates throughout their careers.

Outside this top tier, however, Schneider finds little difference in earnings between graduates of public and private schools of the same caliber. At all selectivity levels except the top bracket, lifetime earnings of public school graduates slightly exceed those of private school graduates. At least part of that difference can likely be attributed to bias within the data. Schneider’s study assumes, for instance, that tuition is the listed price rather than the actual price paid, and also assumes that public university graduates paid in-state tuition. Furthermore, he uses data from only one graduating class (1993), with projected lifetime earnings based on 10 years’ income after graduation.

As with any investment decision, costs are a factor. Private institutions typically have the highest listed tuition prices, followed by out-of-state public schools, and then by in-state public schools. The difference can be as much as $30,000 or more annually. That fact alone suggests a leg up in earnings potential for students attending public universities: lower costs, higher net. However, listed tuitions are simply “sticker prices,” not necessarily out-of-pocket expenses. Financial aid packages and scholarships can often shrink the tuition difference. Tony Pals, a spokesman for the National Association of Independent Colleges and Universities, told USA Today that “nearly nine out of 10 students at private colleges pay less than the list price.” In addition, he says, “students at private colleges are twice as likely to graduate in four years than their peers at public institutions,” further narrowing the final cost of a diploma.

While Schneider’s study considers differences in costs, it doesn’t consider differences in students’ innate abilities. Another study, conducted by Stacy Berg Dale, an Andrew Mellon Foundation affiliate, and Alan Krueger, a Princeton economist, attempts to do that. Dale and Krueger wanted to know which drives lifetime earnings potential more: the institution or the student’s ability. Their conclusions are less black-and-white than Schneider’s. On one hand, they determine, “students who attended more selective colleges do not earn more than other students who were accepted and rejected by comparable schools but attended the less selective colleges.” But they also conclude that the average tuition charged by the school is “significantly related” to the students’ subsequent earnings. “We find a substantial internal rate of return,” they say, “from attending a more costly college.” And interestingly, the “payoff to attending an elite college appears to be greater for students from more disadvantaged family backgrounds.”

Like the Schneider study, the Dale-Krueger study relies on a relatively small sample, with data limited to the 1976 freshman classes from 30 schools, only four of which were public. Furthermore, one might ask whether data from 1976 is still relevant.

Caroline Hoxby, a past Harvard and current Stanford economist, approaches the question differently, also comparing students by ability level. She ranks several hundred colleges, placing schools with the highest average SAT scores at the top of the list. Then, using data from three separate graduating classes (1960, 1972 and 1982), she compares the earnings of students who had similar SAT scores. Although her study does not address the relationship between tuition and earnings, she finds that lifetime earnings of students with similar ability are positively affected by the rank of the school they attended. The higher the school’s rank, the higher the earnings potential.

None of these studies tells the whole story. The findings don’t address the impact of the student’s career choice or field of study, for example; they simply provide averages. “The truth is that no one can predict for you exactly what you’re going to earn," Lauren Asher, president of the Institute for College Access & Success, said in a Wall Street Journal interview.

Therefore, to make an informed investment decision, one should also factor in a projected career choice. From an investment standpoint, there’s little apparent advantage in attending an expensive school for a student planning a career in teaching, for example, where the earnings potential is limited by a uniform pay scale. Spending $45,000 to attend a private university (assuming the sticker price holds true) rather than attending the $15,000 in-state public school would cost the student an additional $120,000, with limited, if any, financial upside. Although getting the best possible education is always a worthy goal, taking on the added debt, from a financial planning standpoint, makes little sense.

Although a student can get a quality education no matter what school he or she attends, the most selective universities offer benefits in terms of learning environment, class size, faculty and other factors that contribute to success.

Hoxby, quoted in The Atlantic magazine, says faculty is not the driving force behind the higher quality of education offered at top-tier schools. Many colleges have great faculty, she says, and there is probably “not much difference,” for example, between the quality of faculty at Princeton and Rutgers. But, she says, “there’s a lot of difference between the students at those places, and some of every person’s education comes from interaction with students.”

A student’s ability and effort play the biggest role in his or her success, Hoxby says, but some of the credit can be attributed to the prestige of the college. It certainly helps to have an elite school on one’s resume.

Having the backing of that prestigious institution perhaps gives a student the opportunity to rise to greater challenges and to send a message about his or her abilities to potential employers or post-baccalaureate programs. Top-flight schools may also provide a stronger network, and their students often get a closer look from prospective employers. FORTUNE Magazine reports, for example, that Robert Frank, a Cornell economist, “found the companies that recruit at Cornell ... made half their recruiting visits to the top 25 schools.”

Unfortunately, the benefits of elite schools — top faculties, higher-quality educations, greater prestige, better networking opportunities — remain largely unquantifiable. Still, although those apparent advantages make the decision seem like a no-brainer for those who have the option, the benefits certainly come at a cost: higher tuition, generally. That’s money one could save, or debt one could avoid, by attending a less expensive school, and students should determine whether the benefits outweigh the added costs.

Of course, financial gain isn’t everything. Students will continue to knowingly select schools and majors that are unlikely to start them on lucrative career paths, simply because they enjoy the course material or subject matter. From a financial planning standpoint, that’s probably irrational. But choosing a college requires considering an array of personal goals, some that can be quantified and many that cannot.

If you enjoyed this article, be sure to check out Palisades Hudson’s book, Looking Ahead: Life, Family, Wealth and Business After 55, now available in paperback and as an e-book.

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