Where to go to college is one of the most important decisions your students will ever make. Choose wisely, and your student could go on to receive a great education and a great experience giving them a launching pad to a satisfying career. Choose poorly, and they could end up moving back in with you after graduation, not being able to afford their student loan payments.
Professor Peter Cappelli explores the complications of the college decision in Will College Pay Off? A Guide to the Most Important Financial Decision You'll Ever Make. Although college does pay off on average (a statistic many schools are likely to point out to justify their high costs), this means little to the individual. Whether college pays off for your child depends on many factors, including how affordable the school is, what major they choose, if they are able to graduate on time (or at all) and more.
Unsurprisingly, not all colleges are equal when it comes to ROI. Perhaps more surprisingly, some schools actually have a negative ROI after taking into account the costs of attending.
The real test is whether the higher wages are enough to offset the investment in time and money associated with college. By that standard, college education does not look nearly as good. In fact, the financial return from attending many colleges actually appears to be negative. (Cappelli, Loc 542)
So How Do You Ensure a Good ROI?
Every financial decision has some element of risk involved, but there are some things students and their parents should be aware of before choosing a college.
1. Beware of Excessive Debt
Using loans to pay for college is very risky, because there is no guarantee of a high-paying job for students to immediately begin paying them off. Once the interest begins building on loans, it creates a snow-ball affect that is difficult for many new graduates to keep on top of.
Many people rely on loans, and they aren't necessarily bad, but they can be very quickly overdone. The best advice for students is to steer clear of programs or degrees that would require them to take out private loans which typically have higher interest rates.
Because the limit on loans backed by the federal government is $31,000, the students you hear about who have borrowed $50,000 or even $100,000 to pay for their education are largely in debt to private lenders. (Cappelli, Loc 2212)
2. Graduate On Time
The majority of students take more than four years to graduate, if they graduate at all.
There is virtually no payoff from college if you don’t graduate. Taking an extra year to graduate may well wipe out the cost savings that come from going to a cheaper college. Again, even if we are sure that it won’t happen to our child, the fact that a majority of kids do not graduate in four years should wake us up to the idea that our kid might not graduate on time, and making the choices that help them do so is worth it. (Cappelli, Loc 806)
Choosing a school where a large amount of students graduate "on time" is one of the first things you should be looking for. This also means a seemingly well-priced school isn't really so well-priced at all when you see that only 17% of students graduate in four years.
3. Choose the Right Major
Many students and their parents try to analyze the job market or take average salaries into account when determining what to choose as a college major. It is wise to consider all the data you have, but Cappelli warns against trying to predict future job markets. The problem with this analysis is that it is extremely difficult to predict what jobs will be "hot" by the time a student graduates college.
While it is true that new graduates in some fields command huge salaries, the only reason those jobs pay off so well is precisely because we couldn’t predict years ago that they would be hot, so the supply is temporarily depressed relative to the demand. It’s supply and demand. (Cappelli, Loc 495)
So what is the right major to choose? Cappelli recommends thinking long-term rather than short term, choosing a major that will teach you important transferable skills and stress critical thinking. He also recommends choosing a school with a strong cluster of majors of interest to make changing majors easier.
Several studies have found that students who choose a major that fits their personality and interests get better grades in school and are more likely to graduate on time. Students will tend to get farther studying a major they love than one they just believe may result in a high-paying job.
Is the Current State of Higher Education Sustainable?
Parents and students should arm themselves with information in order to make the best choice possible, but we all should be concerned about the current state of our economy that makes a college degree so necessary, but also prices it out of the reach of the average American.
Just because there are high returns on a college degree today, does not mean there will be tomorrow. And it is foolish to think every student has to get a four-year degree in order to be successful. Cappelli references an interesting study where a pair of economists found that students who had strong mechanical ability but not high academic ability made much higher salaries as mechanics or in trades then they did when they went to college.
College Factual envisions a future where data on higher education outcomes is transparent and easy to obtain, and where every student is able to go to their best-fit college without boat-loads of debt. Will you join us?