John had a stern, almost angry look on his face when he put up his hand. The Stanford bound high school senior is a student in my Personal Finance class. He had just finished a series of calculations determining whether college graduates are better financially served earning a Bachelor’s degree at a state college versus an Ivy League institution. I posed the question as a lesson on “opportunity cost” and to be honest, I didn’t know the answer. I just wanted the kids to understand the “time value of money.”
For example, if one student spends $220,000 on a Stanford degree and a second spends $86,980 for four years at Texas A&M University, what is the true cost of going to Stanford after loan interest payments? And what if the state college graduate invested what the Stanford graduate paid in interest ballooned fees? Who comes out ahead?
John checked comparative college costs and median expected salaries for new graduates, as well as mid career salaries at a variety of schools. He was certain that the Ivy League colleges were literally worth more. But he was disappointed. And the vast majority of my students, running the numbers with a variety of different schools, came to the same conclusion.
Then one of the girls made an important observation: “None of us will pay for our college expenses, so it shouldn’t matter. Our parents are paying.” She was partly right. I teach at Singapore American School, where the high school annual tuition is roughly $25,000 a year. No, it’s not a boarding school. Most of the people who pay such high school fees can afford Harvard.
But then I posed a different question: “What if your parents gave you the difference between an Ivy League college cost and a state college cost? And what if you invested it?”
A twenty two year old kid with $134,000 in a balanced index fund could have $3.6 million at age 65 if she earned an 8 percent return, $5.4 million if she earned 9 percent. My students again, concluded (in most cases) the Ivy Leaguer had virtually no chance of financially catching up.
You might disagree with their findings, but Alan Krueger and Stacy Berg Dale found data that could bury the debate forever. Krueger, a Princeton economist, and Dale, affiliated with the Andrew Mellon Foundation, began comparing students in 1976: those who entered Ivy League schools versus those who entered less prestigious colleges. They found, for instance, that by 1995 Yale graduates were earning 30 percent more than Tulane graduates. But that didn’t isolate the variable they were seeking—whether Ivy League schools themselves added value.
They sought graduates who were smart enough to earn Ivy League acceptance, but had declined, choosing less prestigious schools instead. By their peak earning years, the isolated variable (the college itself) had no bearing on the graduates’ salaries. Those who were smart and driven enough to gain Ivy League acceptance (but chose otherwise) earned the same as their Ivy League contemporaries.
Had Krueger and Berg Dale calculated the opportunity costs of Ivy Leagues (loan interest costs coupled with future investment benefits) the smarter state school kids would be running circles round the ivy patch.
College costs, like healthcare costs, have grown faster than inflation for decades. And it’s important for parents (and students) to crunch the opportunity costs before selecting their schools. A degree from Harvard, Yale or Stanford could accompany ruinous long term costs.
And the school itself, as an isolated variable, appears to have no long term earnings benefit.