September 13, 2012, 10:05am, Topics: tuition, ranking, admissions, earnings, selectivity
Years of research show that, when it comes to your future paycheck, the name on your degree really does count.
Meet Ben. He's a high school senior from a middle class family in Massachusettes who is choosing where to attend college next year. He's down to two schools: prestigious Boston College, or the University of Massachusetts at Amherst, his state's top public campus. Even with the generous financial aid package from BC, he would still graduate with a big mound of loans. UMass, meanwhile, would be more than $15,000 a year cheaper.
Which should Ben pick? Prestige or price?
With the cost of higher education climbing every year, and student debt surpassing $1 trillion, more and more young people will have to decide whether to make that trade-off. It begs the question: Does it really pay to go to an elite university, financially speaking? Researchers have been investigating this issue since at least the 1980s. And their findings tend to show that when it comes to future earnings, where you go to college counts.
Study 1: DO THE RANKINGS MATTER AT ALL?
Yes. The more elite the school, the better its alums' paychecks.
Figuring out the payoff of an elite education is a tricky task for economists because of the sheer number of variables that can come into play. Some students are smarter than others. Some are richer, or more motivated. A few students may pick a lower-ranked university to take advantage of a particular program -- say, a science whiz who chooses to attend the Colorado School of Mines in the hopes at landing a lucrative engineering gig in the oil industry. For academics, controlling for all these factors is a bit like trying to rid mosquitos from a swamp -- pretty close to impossible.
That hasn't stopped them from trying. One of the earlier such efforts was a 1999 paper in The Journal of Human Resources that looked at data on thousands students who went to college in the 1970s and 80s. The researchers grouped their subjects' schools by reputation using old college guide books, then compared their post-campus wages.
The rankings, it turned out, mattered a great deal. The more elite a school, the better its alums' paychecks. The effect also increased over time. Among students who had graduated high school in 1980, those who had gone on to a top private university eventually made 20 percent more than their counterparts from bottom tier public school. For the class of 1972, the wage boost was just 9 percent.
The graph below shows data from the high school class of 1982. Again, whether public or private, a college's quality (or at least its reputation for quality) had a significant impact.
The study did have a large hole: It didn't separate students who actually graduated college from the dropouts. That likely pulled down the wage averages at less renowned institutions, which tend to have lower completion rates. But studies since have still detected a similar pattern. In 2000, a Department of Education report found that, overall, the quality of a college decided 2-to-3 percent of earnings among men and 4-to-6 percent in women -- making it less important than how they actually performed in class. But in some cases, the effect was much larger. Men who went to an institution that was one standard deviation better on its quality measures saw their salaries jump 8.1 percent. For women, the boost was 17.4 percent. The report's author calculated that for males, the increase could translate to an extra $107,000 over the course of a lifetime. For females, it might mean an extra $173,000. To put that in context, people who go to college make somewhere between $412,000 and $570,000 more on average than those who don't, according to various estimates.
Study 2: IF YALE REJECTS ME, AM I DOOMED?
Nope. There's evidence that where you apply is more important than where you attend.
In studies this decade, academics have gone out in search of naturally occurring experiments to try and figure out if it's the school that counts when it comes to earning potential, or the student. One of the best known efforts was by Stacy Berg Dale of the Andrew Mellon Foundation and Alan Kreuger of Princeton, who came to the unexpected conclusion that, in some respects, where you went to college was less important than where you applied.
Here's how they got there. Using information on undergraduates from the late 1970s, the authors matched students who had been accepted and rejected by similarly selective colleges.* In effect, they created imaginary groups of academic siblings. As expected, most of these siblings chose to attend the most selective school they got into. But a few decided to attend a less selective college. That gave the researchers a chance to see what would happen when young people who were equally talented in the classroom -- at least on paper -- picked different quality institutions.
The big surprise: Selectivity didn't matter. Academic siblings ended up making just about the same wages after college regardless of how choosy their school was. In fact, where the students applied, and their final class rank in school, were much better correlated with earnings than their school's admissions standards. If you were smart enough to get into Yale, or even take a shot at it, you were probably smart enough to earn like a Yale grad.
There was a big caveat, however. Although tough admissions standards didn't count for much, tuition prices did. Students who went to more expensive schools consistently outearned their peers during life after college. Dale and Kreuger theorized that spending per student may have been the explanation. While an ambitious sophomore could probably find like-minded classmates to study with anywhere, they couldn't make up for their school's resources. The authors also allowed that students at posher colleges might come from wealthier families, which could have an effect.
Study 3: IF I CAN'T GET INTO A GOOD STATE SCHOOL, AM I DOOMED?
Actually, yeah. You might be.
In a 2009 paper, Texas A&M professor Mark Hoekstra used a somewhat simpler experiment to try and solve the elite college question. He compared the earnings of white, male students who had barely missed the admissions cut-off for an unnamed public flagship university to those of students who had barely been accepted. Although the subjects were roughly similar in academic terms, the differences in their future earnings were profound. Enrolling at the flagship increased wages by 20 percent, a divide illustrated vividly in the chart below.
Study 4: SHOULDN'T INDIVIDUALS MATTER MORE THAN INSTITUTIONS?
They should, and they do. Exceptional students at superior schools get the biggest lift.
Not all of a college's graduates will earn the same. A student's grades, major, and innate talent all make a difference. Professors at the University of Texas at Dallas, University of Tulsa, and Cornell have tried to capture that dynamic in a new working paper that looks at the range of wages earned by students who went to college in Texas between 1996 and 2002.
The study looked at four sets of schools: University of Texas, Texas A&M, the rest of the state's non-flagship colleges, and its community colleges. Both Longhorns and Aggies earned more than their peers at less prestigious schools, even after controlling for other variables. But the returns varied dramatically, depending on the student.
The two graphs below compare the earnings curve of each flagship to Texas' other four year schools. Surprisingly, the typical A&M student does better than the typical UT-Austin student. But exceptional students at UT-Austin beat everybody.
In other words, it was much more important to be in the top 1 percent at UT Austin than at A&M. Why the difference? The authors suggest that A&M's general emphasis on engineering, a broadly lucrative major, may be giving the middle chunk of its students a leg up compared to liberal arts grads from Austin.
Bonus: WHAT SCHOOL OFFERS THE BEST RETURN ON INVESTMENT?
So speaking very broadly, better schools yield bigger paychecks. But does that mean they're always worth the price? Bloomberg Businessweek has teamed up with Payscale, which collects self-reported earnings data from its users, to estimate the return on investment for more than 500 colleges. Topping the list: MIT, with lifetime ROI of about $1.8 million for graduates, or 12.6 percent a year. It's followed closely by fellow elite engineering school, Cal Tech. The upper ranks of the list is dominated by elite private colleges, though, on percentage basis, some of the best deals are top state colleges, such as Georgia Tech and University of Virginia. The report's methodology might not be as exacting as the studies above, but it's a good quick guide to what an education is worth.