Be Smart in Selecting a College

Blog - 5 - 02 - 16

There’s nothing quite like the thrill of being accepted to a big-name college: The news not only validates a student’s hard work and intelligence, but it also carries the promise of a lucrative career after graduation.

But there’s a catch. Unless your child is offered a generous scholarship, he or she may graduate with an enormous debt burden. The price of college, after all, has risen more than four times faster than inflation since 1978. And that may handicap your child financially for many years after graduation.

It’s imperative for your child’s sake—and your own, since you’ll doubtless be pitching in—to try and determine whether that huge investment will be worth it. Simply put, families should consider the financial return that their child can likely expect on their investment in an education.

Return on investment (ROI) is used by businesses and investors to gauge whether they’re turning a profit on the money they’ve spent. Colleges can be evaluated the same way. Historically speaking, does a school’s tuition translate into correspondingly higher income down the road?

Research shows that top colleges often do give most graduates a leg up when it comes to earning power. One resource for comparing colleges’ ROIs is Payscale, Inc. Payscale compiles data about graduates’ pay over 20 years. It subtracts the cost of tuition, fees, room and board, books and supplies. Then it subtracts estimated wages lost by attending college rather than starting work right after high school.

The latest data show that Harvard has an impressive 20-year ROI of $646,000. But Princeton, where costs are similar, has a much higher ROI: $795,700. By comparison, the ROI at U.C. Berkley is $703,100—but its four-year total cost of 129,900 is about $100,000 less than either of those two schools.

There can also be significant differences in ROI between state schools. UC Irvine, where four years cost $118,000, brings a 20-year ROI of $535,000. UCLA? If costs $125,500 but touts an ROI of just $477,500.

But those numbers don’t account for an important factor: which career a student pursues after graduation. A recent study of thousands of individuals who graduated from college a decade ago found that diplomas from prestigious schools do boost future income in certain fields, but not in others.

The researchers found that careers in fields like science, technology, engineering and math pay about the same whether an employee graduated from an expensive marquee school or a cheaper, unheralded one. Thus, earning an expensive degree may be a waste of money. On the other hand, an alma mater’s prestige does have a significant impact on earnings for business and other liberal-arts majors, the study showed.

The analysis confirms what may be common sense. If your child yearns to work in a relatively low-paying field, he or she should think twice about buying a $200,000 education at a marquee college.

Another consideration is that schools outside the top tier often provide more scholarship aid to their students. Quality degrees from these schools, along with access to their alumni networks, can help graduates have very successful careers in specific fields.

The bottom line: In selecting a college, it can pay to set aside emotion and look at the numbers to help guide your decision.