Look at College as an Investment

Dr. Thomas Stanley suggests that people should start looking at college as an investment. What does this mean? Well, what do you want when you invest? The best possible return on your money, right? Shouldn't investing in college be the same way (that you at least get a decent return on the time and money you invest)?

Well, looks like someone is helping us all in this effort. The details:

Smart Money looked at [the incomes of] two groups of alumni: recent grads out for an average of 2 years and mid career alums out 15 years.

It computed the so-called "Payback Score. .an average of those two groups, current income expressed as a percentage of the sticker price-tuition and fees."  The top five with the highest [Payback Score] were:

1. Georgia Tech [221]
2. University of Texas [194]
3. University of Florida [191]
4. University of Georgia [186]
5. University of Illinois [184]

The Ivy League school with the highest Payback Score was Princeton University with a 102 score.  Georgia Tech's Payback Score means that its alumni earn 2.21 times more annually than the estimated cost of tuition and fees where they attended school.  Interestingly, Smart Money's estimates actually understate the productivity of public universities such as Georgia Tech because it used out of state tuition and fee figures which are significantly higher than in state costs.

In case you're interested, here's the chart of the top 50:

I have a lot of thoughts on this one:

• They key to being high on the list is relatively low costs and yet relatively high income. I know that's kind of the point of the whole piece, but so many people spend "whatever it takes" to go to XYZ college without a thought of cost or career earnings that many will see this analysis as enlightening.


• Note how public schools were at a disadvantage. Many more would have ranked higher if a blended tuition rate (not just out-of-state tuition) was used.


• Princeton ranked 19th. The 20's and 30's were full of Ivy league schools, but they we not the "best" options.


• Granted, people go to college for many more reasons than strict economic value (otherwise everyone would go to Georgia Tech, right?) But at least this gets us going in the right direction -- looking at both the cost of and the return on a college investment.


• My undergraduate school was ranked probably something like 9,345 (I wish they had a way to see the score for any college, but I don't see it -- let me know if you discover how to). But to my credit, I went there for free and was only using it to get into law school. Then my plans changed and I went for an MBA.


• My MBA school is ranked in the top 20 shown in the chart linked above. But I spent well less than what they have listed as a cost and make way more than what they have listed as an income. Yes, my education was a great $5k investment.

This issue is becoming more and more important to me as my kids approach college age. It's something I've been thinking about quite a bit and will be doing more of in the future as I seek to help them decide the best options for their education.

Comments

[Paul]

FMF - you imply that the linked list is the "Top 50", but really its just the only selected 50 colleges and universities that Smart Money studied. I'm pretty sure my alma mater (Texas A&M) would have ranked much higher than Princeton, for example, but it wasn't on their list.

[Lurker Carl]

I'm thinking your field of study is more applicable to future earnings than the school you attend.

[Apex]

The point of this article is good but the emphasis on the school rather than the major and student performance is a mistake almost as big as the mistake the article is trying to correct. You can go to any of the schools on this list and make a very poor investment if you do it wrong.

It is true that there are certain fields that if you go to a top 10 or top 14 school as it is considered by the firms that recruit, such as big law or wall street and you want to work for one of those firms then the school can make almost all of the difference. Outside of that it's not the school but what you major in and how well you do in it.

The schools that ranked high might have higher enrollment standards so they get better students which will result in better jobs for those students. They also might have a focus on certain degrees. The school I went to had a good Com Sci program but they had a huge focus on elementary education. Pretty sure their medium wage is pretty low given 1/3 of the students majored in elementary education. What does that say about if my school was a good choice for Computer Science? Nothing.

That's why this kind of analysis is very poor.

There have been studies that have shown that students who were good enough to get accepted at some of the elite colleges but choose to go to a far less prestigious school do just as well in school and get just as good a paying job as the students who go to the prestigious school and do so for far less money.

You are a product of your abilities, your choices, and your efforts, not the insignia on your diploma.

[Apex]

@Carl,

That is exactly correct. Way more important. We need to stop lying to people that a college degree is some kind of magic that opens doors. Doors have keys and if you have the wrong key you are not going to be happy with the door it opens. A college degree has been promoted as some kind of master key. Maybe that was true when they were rare. They are far from rare now and many of them are not worth what they cost anymore regardless of which school you get them from.

[Mark]

Apart from the very legitimate issues of selecting majors and also student ability, I still disagree with the conclusion.

Is it really better to pay $27K for Georgia Tech and then earn $105K mid-career, or would you rather pay $76K for Dartmouth and earn $123K?

Seems like I can generate an additional $18K PER YEAR (mid-career) by investing an additional $49K up-front 15 years earlier. Isn't that a good deal?

Also interesting to see the tuition gap closing. In 1996, private was 4 times the price of public, now it is "only" double.

[Emily]

Author Charles Murray argues that most young people don't need college, or aren't college material.

As a former schoolteacher, I tend to agree, esp. when you're talking 4-yr degrees. College is only an investment if a person is really going to get something valuable out of it, and not end up in debt and a dead-end job.

[jim]

I agree with the title that college is an investment.

I do NOT like the Smartmoney metric of looking at median pay / sticker price tuition. Frankly I think its an AWFUL measure and very misleading.

I ditto the point Mark made. pay/tuition isn't really a good measure. I'd much rather spend $76k to go to Dartmouth if my salary was $123k than spend $27k at Georgia Tech and make $150k. If you financed the entire $40k difference in loans then that would be about $5500 extra in loan payments for the first 10 years but your pay would be $18k more. You'd certainly come out ahead with a pile of loans and a larger salary.

Geographical differences in wages impact this kind of thing too. For example, most of the people who graduate from UCLA end up living in the LA area. They get paid a lot more on average due to the high cost of living and therefore the median pay for UCLA grads may look better in this respect than another school. UCLA's not on the list but just making an example.

Major matters more. The reason Colorado School of Mines is so far up that list is that its graduates are generally engineers and scientists who get paid more than other majors. So the median wages are higher cause of the occupations the students go into. This doesn't mean that an English major at the Co. School of Mines will do any better than an English major at University of Colorado. But if you read this list you might assume you would.

Also you shouldn't look at the 'sticker price' tuition rate unless you're one of the few people who receives zero financial aid. Most students get some form of financial aid so what really matters is hte bottom line cost after financial aid. Thats going to vary a lot depending on the students families financial situation and the state and the school. Most students in low or middle income families can go to Ivy league schools for free or little out of pocket cost due to the very generous aid and massive endowments of Ivy schools. Most students in Georgia can get free tuition as long as they maintain decent grades. The difference between in state tuition and out of state tuition is huge and basically puts most in state public schools above virtually all out of state schools in the affordability scale. I mean what do I care if Georgia or Texas schools are a good value if I live in another state and have to pay full out of state tuition and get no aid?

[jim]

FYI,
The Smartmoney article cited Payscale as a source of their data. They are getting the median pay figures from Payscale.com

http://www.payscale.com/best-colleges/top-colleges.asp

You can find similar figures for other colleges there.

Noe that the payscale salary numbers do not consider anyone who got a grad or professional degree. That skews things some. They are doing that to make sure its apples to apples.

[jim]

Another point... their data looks equally at people who graduated in 2009 and 1996. The people who graduated in 1996 paid 1996 tuition rates. Those tuition rates are gone and no longer really relevant to current students making decisions on school. Seems to me that you should really only be looking at current tuition rates if you're thinking this metric would be useful for picking a school today. Consider Texas vs Purdue. In 1996 Texas was much cheaper but today Purdue is cheaper. If you just look at pay / todays tuition then Purdue should be above Texas. I mean why should anyone looking at college today care that Texas used to be cheaper 15 years ago?

p.s. sorry for heaping on the negativity today. I'll wander off now.. ;)

[Cherleen @ My Personal Finance Journey]

I agree. College is an investment. Yes, there are people who succeeded though they did not finish college, but they are the rare species. Ordinary people like us need a college degree to land on a good job. Unfortunately, despite the fact that we are armed with knowledge and skill after graduation, certain companies prefer to hire graduates of Ivy League schools than those who finished from state colleges and universities.

[Old Limey]

It helps to be in a career where jobs are in great demand. Thanks to the Cold War with the USSR, jobs in the defense industry were abundant in my days.

Here's a chronology of my path to an MS degree in engineering that cost me nothing but provided a 42 year career without a single day of unemployment.

1951 - Graduated from high school in England and became an apprentice for a leading aircraft manufacturer. The company required attendance at a local municipal college one day and 5 evenings/week to work for a Higher National Certificate in Engineering (Considered to be the equivalent of a BS degree but with courses that were not Math, Science or Engineering omitted).

1956 - Finished apprenticeship and graduated with Higher National Certificates in both Mechanical and Aeronautical engineering. Married my childhood sweetheart and immediately sailed to Canada, passages paid, to work for a Canadian Aircraft company.

1958 - US companies were placing ads for engineers in Canadian newspapers so we left Canada and headed to Denver, CO for a job working on an escape capsule for the Convair B58 Hustler bomber. The job was good but there was no easy inexpensive path for me to pursue a Masters degree.

1960 - Mailed out 3 applications to Boeing Seattle, Lockheed Burbank, and Lockheed Sunnyvale. Within days received three comparable offers and selected the offer from Lockheed Sunnyvale (in what is now Silicon Valley)based upon climate and geography.
Lockheed encouraged me to get an MS degree at a nearby private university and paid all tuition fees.

1963 - Graduated with my MS degree in Engineering Mechanics with my wife and two small daughters in the audience. The guest speaker was an alumni - Alfred Hitchcock, the movie director.

1990 - The cold War ended as the Berlin Wall came tumbling down.
Aerospace contracts started diminishing and the company started contracting.

1992 - I was planning to retire in 1993 but in September 1992 the company offered a Salaried Incentive Retirement Program (SIRP) to all salaried employees. I decided to take it, received a good sized Golden Handshake that paid off our mortgage, and bid Good-bye to all my colleagues.

[Mark]

As Old Limey so clearly demonstrates, and as so many other people also mentioned, the biggest impact is choice of major.

Just as defense and aeronautics were hot in the second half of the 20th century, the energy is hot today. Petroleum engineers with a BS and zero experience are routinely hired at salaries of $80 to $100K. And we have a shortage of them.

Any list of top-paying jobs basically consists of engineering and IT jobs. Those people seldom make the really huge money received by a tiny minority in he financial and other industries, which is more like being a sports star - a few very successful and mostly much less successful. But technically qualified people are pretty much assured of a solid salary and little likelihood of significant unemployment over their careers.