Higher Education's High Finance

Comparing the costs of colleges or grad schools and evaluating the potential return on that investment is hardly simple -- but it is critical

Students and their parents have always had to rationalize the high cost of higher education as an investment in the future -- one that could be expected to more than pay for itself in skills and insights gained, status conferred, connections made, and earnings taken home. But as the cost of a college or graduate degree increases far faster than both inflation and average incomes, justifying that investment may seem harder than ever. Over the last 25 years, the cost of private college has increased at a 7.4% annual rate, to $27,512 a year, while the national inflation rate has climbed at 3.8%. And in the past few years wage growth on a national level has stagnated.
The economics of graduate school are particularly tough. For the academic year starting next September, Yale University charges $31,460 in tuition for its undergrad program, $38,800 for its three-year law school, and $36,800 a year for its two-year MBA program.

DEPENDS ON THE DEGREE.  At the top business schools, average tuition is up 55% over the past six years, to $33,774. MBA students must anticipate a steep return on investment to justify paying $70,000 for a two-year program and forgoing earnings during those two years of nearly $140,000. That's a major reason why applications to top MBA programs have dropped almost 30% since 1998 (see BW, 4/18/05, "MBA Applicants are MIA").

"It's clearly worth it to get the bachelor's degree," says Joel Naroff, of Naroff Economic Advisors in Holland, Pa. "Moving on from there, it depends which degree you happen to be talking about."
Still, the benefits of higher education have never been greater, says David Kelly, Putnam Investments' senior economic adviser. In 1980 someone with an advanced degree earned, on average, 2.1 times as much as a person with only a high school diploma. By 2003 that ratio had jumped to 2.7 times, he says. According to a July, 2002, study by the U.S. Census Bureau, workers with a professional degree could expect to earn an average of $4.4 million over their lifetimes, while those with a bachelors' degree would earn $2.1 million, and high school graduates just $1.2 million.
START EARLY.  "The gradually growing gap between rich and poor in America is being defined more than any other factor by education," Kelly says. "Everyone focuses on the rising costs, but we need to think about the rising benefit, too. Education doesn't just cost, it pays."
The trick for parents and students is to make sure they get the best deal possible on higher education. That means parents should start saving and investing early in a child's life (see "Multiple Choice in College Savings"). Students need to focus on earning scholarships and obtaining student loans (subsequent stories in this special report later this week will help with those matters).
In the long run, this may be most important to getting the best return on your education investment: Families need to put lots of research and effort into making sure students attend a college that's a good personal fit. One kids' pressure cooker is another's party school. While one personality type might flourish at a small, less competitive liberal arts school, another might be bored and long for more programs, diversity and resources.

PUBLIC VS. PRIVATE.  "You need to be in a place where you can do really well," says Kelly, whose son is applying for colleges currently. "You don't want a place where you can loaf because it's too easy or where you'll struggle because it's too hard." Kelly believes a student will be better set up for career success by earning top marks and building confidence at a less-prestigious school than by struggling at an Ivy League campus.
Costs come into this equation because large public universities are usually much cheaper than the elite private universities and small, liberal arts colleges. For example, Rutgers University in New Brunswick, N.J., with 27,000 undergrads, charges in-state students $8,500 in tuition and fees, while tiny Sarah Lawrence in Bronxville, N.Y., comes in at close to $34,000.
Be forewarned: Schools that seem very similar in size and style can actually have very different records for graduation rates -- a good proxy for how much attention and support the school provides to students. According to The Education Trust, a Washington (D.C.)-based nonprofit, fewer than 4 in 10 freshmen will graduate from college in four years, and less than 6 in 10 will do so in 6 years.
One school the group gives high marks to is the University of Northern Iowa, where 65% of students graduated in six years in 2003, vs. 53% at similar schools. The Education Trust operates a Web site, College Results Online that allows students to compare graduation rates at schools across the country.

WHO NEEDS B-SCHOOL?  When it comes to getting a good deal on an advanced degree, the key is to make sure students have targeted a specific career track where that degree is either a requirement or offers a significant leg up. Otherwise, an expensive master's degree may seem like little more than an extension of the college experience when it comes to finding a job.
Investor Jim Rogers, who has taught at Columbia University's business school, often urges young people and parents not to go for an MBA. "It would be better for them to take that money and start their own business," he says. "If they succeed, they'll make a lot of money. If they fail, they'll still learn a lot -- more than they would from an MBA."
Yet B-school can put its top students on a fast track. According to results of a May, 2005, survey of MBA graduates by the Graduate Management Admission Council, half the graduates had job offers by mid-March, and the base salary they anticipated was $90,652.

"WHERE THINKING MATTERS."  Even in vocations where a professional degree is required, students should be cognizant of the debt burdens they'll face after completing school. According to the Association of American Medical Colleges, the median debt level for graduates of private medical colleges has increased fivefold in the past 20 years to $135,000, yet physician incomes have remained flat in recent years and aren't expected to increase in the coming years.
Of course, a medical degree pays off in the long run. But the AAMC warns that if trends persist, in six years new physicians can expect to pay about 10% of their aftertax income in loan payments.
Ultimately, higher education is about personal growth and development, as well as career advancement. Naroff doesn't believe education should be measured by dollar returns. "It has to do with broadening the mind, learning to think, gaining an ability to deal with a variety of circumstances," he says. "It helps in any career where thinking matters."
But if parents and students can plan for their advanced education with the goal of receiving a good return on investment, it can provide a useful yardstick for comparing educational options -- no matter what personal or professional goals they seek.