A College’s Return on Investment is a Personal Calculation

I have read too many posts on the “payoff” of earning a college degree. The word payoff has also been used to explain the return on investment when one goes to college, over not going, or the value of going to one school over another. This might be applied to people who attended a four-year school and completed a bachelor’s degree vs. those who attended a community college. Or it might be used, for example, to claim that a graduate of an exceptionally-selective college will make more money over time than a graduate of a less-selective one.

At the same time, graduates of different schools do not always head in the same directions after college. Suppose one liberal arts school sends  ten percent of it’s graduating seniors on to medical school and 25 percent on to jobs in investment banking and consulting after graduation while another sends 25 percent of its graduates on to medical school and 10 percent on investment banking and consulting after college. With schools have a senior class that is approximately the same size. Which school is likely to have the higher average salary ten years out? The first school. Why? Because more of their graduates have been working for  between eight and ten years–some might have gone to business school for two years in between–than the other school.

The payoff or return on investment in a college degree is a personal calculation. It cannot be based on how college graduates have fared in the past. It must be based on the options that will be available to you as you choose a college.

I’ll give an example that is typical for a very bright student from New Jersey, where I live. Unlike most college-bound students, about half of New Jersey residents will choose to leave the state for college. My student has 2200 SAT scores. His family has an Expected Family Contribution of $20,000. He wants to attend a mid-sized or large research university to study electrical engineering. He is accepted to these schools with these costs and offers:

• Rutgers University-New Brunswick: Presidential Scholarship. Full tuition and fees, room and board for four years, contingent on maintaining a 3.25 GPA. Value for freshman year is approximately $27,000. My student will also be in the Honors College, meaning that he will have smaller classes in subjects such as Chemistry, Calculus and Physics.
• University of Pennsylvania: Costs are approximately $65,000. Aside from the $20,000 expected from the family, my student will need to take out a $5,500 Stafford Loan. The balance will be covered through scholarships.
• Princeton University. Costs are approximately $65,000. The balance of costs, less the $20,000 Expected Family Contribution, will be covered through scholarships. This student will not need to take out a loan for the freshman year.

All three universities offer the major my student wants. All offer access to internships, though Rutgers is the only one of the three that offers credit for them as well as co-op. All three have excellent career services for engineering students as well as very strong alumni bases in most major metropolitan areas of the U.S.

Which school will offer the best return on investment?

Rutgers.

• The student and his family are receiving a free education.
• The student may use his wages from internships to cover expenses beyond room and board. He will graduate with no debt.
• His parents will be at least $80,000 richer for not putting their hard-earned savings into the  Ivy League school.
• And, in all honesty, the education the student receives through the Honors College will be more personal in the first two years than the education he would have received from the Ivy League schools. He will be treated as someone “wanted,” as opposed to “a member of the class.” Academic distinctions have value.

Now some may argue that Princeton would be the better value, that the Princeton graduate will make more money over the long haul than the Rutgers graduate.

Maybe this is the case if the employer contact who is doing the hiring is a Princeton alumnus who prefers to employ the best candidates from Princeton, no matter where they rank in their class. That employer places a premium on what Princeton has to offer and is loyal to the school. But how many such employers are there who are seeking entry-level talent? I doubt that there are many.

Now we look at on-campus recruiting. Suppose the same company in New Jersey or the Philadelphia area goes to Penn, Princeton and Rutgers to recruit electrical engineering graduates. The on-campus interviewer is going to look for candidates who demonstrate enthusiasm for engineering as well as excellent grades.  She is not going to interview every candidate at every school who has submitted a resume. She is going to pick the best candidates. Maybe she will ask her employer to send a second recruiter to do interviews; she can interview only 14 candidates in a day. The student who falls below the top 14 or 28 candidates at Penn or Princeton will not be interviewed. S/he might have been better off being in the top 14 or 28 at Rutgers. That is, assuming Rutgers is the “easier” school, which it is not.

Now the recruiter has the candidates she likes and wants to bring them back for second interviews. There will be offers made to graduates of each school. Will the Penn or Princeton graduate be paid significantly more than the Rutgers graduate to do the exact same job? No. Even if the Ivy Leaguer actually received more money for the entry-level job, it would not come close to the difference in the costs of his education versus the costs for the Rutgers graduate.

Could the Ivy Leaguer make up that difference over time, presuming that his career continues in an upward trajectory? Maybe, if s/he rises up the ladder faster. The difference between the Rutgers education, which costs my student nothing, and the costs he might have paid to go to Princeton were $80,000. Maybe he and his family would have made that up if he was a high-potential employee.

Now suppose the company also hires an Ivy Leaguer who has loans, whose parents paid out over $200,000 over four years. It’s going to take that person more time to make up the difference. There’s no guarantee that person will be promoted faster into better-paying positions than his peer who came from Rutgers.

What are the points of this exercise?

• Your return on investment in a college education depends on the investment that the college will ask you to make–and what you do with your education.
• Students who attend exceptionally selective colleges may have access to some employers that graduates of a very good flagship state university may not. When comparing the two schools the major difference is the alumni base.
• But when an employer recruits at both types of schools, that employer wants the best that each school has to offer. The employer will rarely choose a weaker candidate from the Ivy League over the strongest candidate from a flagship state university.
• Graduation from an exceptionally selective school does not come with assurances of a higher entry-level salary, especially when the employer recruits on several college campuses.
• The more that a graduate has spent on their education, the more time that graduate will need to make up the difference in what s/he and their family spent–especially if that difference is covered through a large debt.

It is important to add that many families choose colleges for reasons other than costs or return on investment. There are “good feelings” about gaining admission to an exceptionally selective school that cannot be underestimated and “good feelings” about being part of a select group. Those good feelings may lead someone to become more enthusiastic about the education and their school. But they do not necessarily translate into a higher income after college.

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