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Choosing and Paying for Higher Education

I am now at an age at which many of my friends have kids preparing for, or going to, college.  I have a few more years to figure out the details, but this is an issue that I have followed for a long time.  My local in-state university, the University of Colorado at Boulder (CU), estimates the all-in cost of attendance at $26,000 per year.  This varies a bit, based on which program you choose.  Tuition, fees, and books cost about $14,000 per year (though this varies by program) and the estimated cost of room and board is about $12,000 per year.

So, a four-year degree is going to run about $100,000.  Many undergrads don’t complete a degree in four years, of course.  This is, by all accounts, a lot of money.  If you choose a private college, you can easily double this amount.  Colorado College, a well-regarded small private school, estimates their all-in costs as $54,000 per year.  This seems consistent with other schools.  Swarthmore clocks in at $58,000 per year and Harvard is about the same.

The average college graduate who has borrowed for college graduates with $26,000 in debt.  Fully two thirds of people graduating in 2011 borrowed to attend university.  We must not forget, however, that there are plenty of people who attend for a while, but do not graduate, and many of these people also have debts.  In addition, it is estimated that these debt numbers are probably too low because the amounts of debt are self-reported by the colleges and universities themselves and many schools simply choose not to provide numbers at all.

The ability to recoup the costs of higher education is perhaps currently at an all-time low.  Unemployment for recent college grads is higher than the national average and fully 38% of young graduates who are employed are doing jobs that do not require a college degree.  At the same time, college debts have become a major national issue, surpassing credit card debt.  In fact, the cost of college has risen twenty times faster than college grads’ wages over the past two decades.

Let us not forget that we are still talking about the undergraduate education.  Once we start to look at grad school, averages just don’t make a lot of sense.  The costs and benefits of attending graduate school vary widely.  Law school has been getting considerable scrutiny lately, with the revelation that 89% of law students borrow money and they borrow an average of $80,000 to obtain their law degrees.  And we have to remember that there is also the issue of foregone earnings while you are in school.  A 2011 article in Fortune estimated the total cost of a top-tier MBA at over $300,000 once you account for the average earnings that students are giving up to attend.  Even ignoring this ‘opportunity cost,’ an MBA at Harvard will cost you $168,000.

The missing piece in almost every one of these analyses of the costs of education is the enormous variability across specific situations.  Someone with an under-graduate degree from a solid engineering school or computer science program who also earns an MBA from a high-ranked school can easily justify $300,000 in education costs, assuming that they are going to graduate and start work in a corporate job that requires their credentials.  If they graduate and decide that what they really want to do is start their own business, they may have a problem.  If they graduate and decide that what they really want to do is become a teacher, they have a serious problem.  What this really comes down to is that your choice of higher education is a decision to invest in a specific path, and that decision comes with irreversible high cost.

The situation that most concerns me is that we are increasingly asking 18-year-olds or 22-year-olds to make financial decisions that can dramatically impact their future choices in life.  These are people, however mature and intelligent, who are typically ill-equipped to make such decisions.  We do not want to create a tier of society who are, in effect, well-paid indentured servants who will spend decades paying off their ‘passage’ to a higher income job.

In addition, the colleges themselves are doing an aggressive job of marketing themselves.  My daughter is already getting recruiting materials from private colleges that show beautiful campuses and make these schools seem like a fantastic way to spend four years.  She is in ninth grade.  It starts now and accelerates, based on what I have heard from other parents.  The process is strikingly similar to the ways that luxury car brands are marketed.  Many of these colleges are focusing on the symbolic appeal of the ‘college experience’ and their brand rather than on what they actually provide.  This is smart marketing and the fact that colleges have been able to successfully raise their costs as much as they have shows that the marketing is working.  It seems to me that we are not doing a great job in helping our kids to effectively parse this sales barrage.

The second issue that really concerns me is the figure cited above that shows that 38% of college grads who have jobs are doing work that does not require a college degree.  Given the huge investment in time and money to obtain an education, we are clearly seeing a problem with this figure.  The fact that college grads make more than non-grads is somewhat less impressive if college grads are simply taking the top-paying jobs that would otherwise be available to non-college grads.

Finally, while money is not everything, it is useful to try to gauge college affordability by comparing the costs vs. the salaries of both recent and mid-career graduates.  The best attempt that I have seen is a new measure created by SmartMoney.  This ‘payback’ measure simply ranks colleges based on the ratio of salary to tuition and fees.  For state universities, they used out-of-state tuition.  For the full set of rankings, click here.  The ranking table included both costs and median salaries for recent and mid-career grads.  Even though they use out-of-state tuition rates, public universities totally dominate the rankings.  I was not surprised that Georgia Tech wins the number one spot for highest payback because I attended Georgia Tech for my undergraduate degree.  Tech is unabashedly vocational in its focus and the statistics bear this out.  That does not mean that I believe that all universities should strive to become as much like Georgia Tech as they can.  The University of Colorado (where I got my Ph.D.) provided a much broader and more enjoyable educational experience (CU ranks 19th on this listing).  With college costs rising as rapidly as they have, there are few families who can really afford to ignore this type of metric when deciding with their child how to approach higher education.

For other thoughts, the Bogleheads forum has an interesting thread on this topic.


The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services.

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