[
Wednesday, May 31, 2006
. Does an Elite College Really Pay?]
Does an Elite College Really Pay?
by Dan AkstHarvard or Yale can cost a fortune, but the theory goes that the cost will pay off in future earnings. Many who've studied the numbers disagree.
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 reasons college costs so much.")
A student entering the University of Pennsylvania 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. A decade later, that had more than doubled.
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 payUnfortunately, 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, New York. 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 earningsBut 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 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 payOne 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 $39,634. But the university says the average undergraduate gets a discount of 25 percent. 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 doTake 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 premier public institution--a school such as UC Berkeley, the University of Virginia, or the 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.
MBA Cutie @ 1:40 PM
------
>
[
Tuesday, May 30, 2006
. Lehman Brothers: Global Diversity Recruiting]
This past weekend I finished reading
Monkey Business, by John Rolfe and Peter Troob. A friend of mine recommended it because I kept asking what exactly it is that investment bankers do, and I just felt like no one really ever gave me a straight answer. This book spelled it out in, much needed, explicit detail. In light of this, the job seems like it's not really something that is up my alley, so to speak, however, there is still an element of glamour associated with this job, regardless of how terrible the life of an associate is. Times have changed a little from when this book was published, but I don't know if it is significantly better.
I decided, on the spur of the moment, to go ahead and apply to the Lehman Brother's Global Diversity Recruiting event in June for future women MBAs, and last week received an invitation for me to make my reservations to attend. I think it will be good for me to learn more about this particular firm, and the field as a whole. For all I know, it may be something I would really like. There may be other jobs at Lehman Brothers, not particularly in banking, that may appeal to me too. Plus, it's a chance to see
Marina!
MBA Cutie @ 2:53 PM
------
>
[
Wednesday, May 24, 2006
. Financial Aid]
My financial aid information has been processed by U of M, and I now qualify for a total package of $59,000 to cover tuition, books, and living expenses for my first year. Part of it is my scholarship, but then the rest is split pretty evenly between federal loans and Citi-assist loans. I need to find out if I am required to take out the entire portion of Citi-assist loans at once. I would much rather take what I need and have the rest available to me as an extended line of credit if I choose to use it.
A few quick tips:
- To get the maximum amount of financial aid, make sure that your parents are not saving money in your name... I discovered this after I filed my FAFSA, so I had to re-file with an ammended one.
- The deadline to file the FAFSA for Michigan is March 1st! This is awfully early, and well before Tax Day. The good news is, you can guesstimate using last year's information and then have until July 1st to re-file an ammended FAFSA.
- Any large, liquid reserves/saving you have, you may want to withdraw temporarily and hold in cash in a safety deposit box or at home during the processing of your financial aid, especially if this is money saved for a trip or expenses prior to business school. This money could count against you in the financial aid calculation.
MBA Cutie @ 11:05 AM
------
>
[
Monday, May 22, 2006
. Career Leader]
One of the things that Ross asks us to do before we get to campus is to start working on our resumes. We have to re-write them to show interest in our future career goals. I know I've been interested in Marketing and PR/Communications for a while, but lately, the lure of a loan free life after two years has made me want to look into Banking and Consulting. It's really hard to create a resume that focuses on all three of those areas. Since I had to narrow it down, I decided to go ahead and take the Career Leader test that Ross offers us through the Office of Career Development (OCD). It turns out that I am a perfect fit for PR/ Communications. (I have no negative attributes with regard to that field!) I'm also a good match for Marketing (only one negative attribute). However, I'm a "low" match for both banking and consulting. I'm sort of sad about this, as I think would really like to try consulting, but after spending four years in corporate finance and discovering how ill-suited I am for the profession, I don't want to make that mistake again. I wonder how accurate Career Leader really is.
MBA Cutie @ 6:34 AM
------
>
[
Friday, May 19, 2006
. Course Waivers]
With the course waiver deadline for Ross quickly approaching (all materials must be received by Academic Services by May 31st), I've been frantically trying to put together my paperwork to send in.
For Class of 2009 applicants, keep copies of all your transcripts. You will need them! And if you took any certification exams, request your official score reports well in advance. It turns out that it will take the California State Board of Accountancy 8 weeks to release my CPA exam scores to Ross! Almost every core course at Ross has a pass-out possibility, except for Corporate Strategy, which is required by all participants in the program. I'm hoping to pass out of three of the courses (ACC 502 - Accounting/ Financials, BE 502 - Microeconomics, ACC 522 - Cost / Managerial Accounting), but most likely will only be granted one or two. I would have loved to pass out of Stats, since I took calculus driven Econometrics as an undergrad, but it's been so long, I don't think I really have a shot at the waiver exam, and I don't want to spend the next two months studying.
MBA Cutie @ 7:34 AM
------
>
[
Thursday, May 18, 2006
. MBA Cutie & The Ross Experience]
For those of you that have found your way here from my original MBA Cutie Blog, Welcome!
I'm creating this particular blog to address all aspects of my Ross Experience over the next two years. Going forward, all personal / non-MBA related posts will be on my personal blog at
www.mbacutie.blogspot.com. But, all specifically Ross and MBA related posts will be here.
I wanted to continue blogging at Ross, and this lets me write about the MBA experience and lets my MBA readers find exactly what they are looking for, without all the extras you find on my personal blog site.
Enjoy!
MBA Cutie @ 8:58 AM
------
>