Recently the Wall Street Journal featured an article on the President of Purdue, Mitch Daniels, and his goal to freeze tuition. When questioned about his plans, Daniels noted, “I thought this whole process—it’s sort of like a bubble, and people are using that term—just couldn’t go on much further, and so why not get off the escalator before it broke.” Daniels isn’t the first to question whether higher education in the United States has created a potential bubble similar to that created by mortgages in 2008 or the earlier dot-com bubble in 2001. Bubbles have historically occurred when prices ceased to match up with the returns provided by the underlying investment. In the case of mortgage debt, the bubble occurred because so many individuals had taken out more debt than they had the capacity to pay back, a trend that has been noticed in higher education. On the homepage of their website, the Institute for College Access and Success notes that in 2013 seven in ten college seniors graduated with student debt, and possessed an average of $28,400 of debt. As a recent graduate, I can identify. Over just the last six years, my alma mater has increased its annual price tag from $52,000 per year to just shy of $64,000 per year for this fall. I recently questioned my grandfather and discovered that when he graduated in 1965 he paid about $1500 per year for college. That means that 50 years later, a freshman at my alma mater will pay nearly 43 times what my grandfather paid. While you could argue that the cost of living has also risen, most estimates suggest that college expenses have increased on average 2-3% more per year than inflation.
As Daniels points out, we have also done a poor job of defining the quality of an education and have come to believe that the best schools are the ones with the highest price tags. In truth, price has very little to do with post-graduation success. As financial advisors, we often find ourselves viewing monetary transactions through an investment lens, and education should be no different. Just because a stock has a high price, doesn’t necessarily mean it’s a good investment. Likewise, just because a school has a high price tag or a name you recognize, doesn’t mean you’re guaranteed to get the best bang for your buck there. Surprisingly, when ranked by return on investment - how much you’ll make on average after graduating relative to how much you spent on tuition - none of the top five are ivy-league schools (number one is Harvey Mudd College - for a complete list of rankings click here: http://www.payscale.com/college-roi/). An article from the Economist, based on the outcome of the rankings, argues that it’s not just where you go, but what you study that impacts whether or not you’ll be able to pay off the loans someday. The article notes that engineers and computer scientists earn a 20-year annualized return of about 12% on their college fees, while business and economics majors made roughly 8.7 %, compared to the S&P 500’s 7.8% over that same time period. Similarly, the top return-ranked schools are technical schools – schools that produce engineers, scientists, and mathematicians. The article does note that while a degree in the arts and humanities is likely to have a lower return, earning that degree from a prestigious school is more likely to have a higher payoff.
Bubble or not, what’s clear is that not all students are getting the returns they need on their educational investment to justify soaring costs. While the solution may be complex and involve changes from the regulatory entities, student lending programs, and university administrators, what’s clear is that change is needed and the best starting point may be higher expectations from the “investors” themselves – the students. With greater transparency available, thanks to Payscale’s return on investment college rankings and even the colleges themselves (the University of Texas has a website showing how much its graduates earn and owe after five years), students and their parents are hopefully in a better place to make a well-informed decision regarding an educational investment. As Purdue’s, Daniels puts it, “Higher education has to get past the ‘take our word for it’ era.”
Recently Cedarstone sent out an email asking our readers what sort of things they might be interested in reading more about and one of the topic suggestions we found intriguing was the topic of student debt. In an effort to gain a better handle on what exactly the United States debt looked like, we hit the books and came across a rather interesting read written by a father-son team titled The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem. If you’re looking for a good read, we highly recommend it. If there are other topics you’d like us to tackle, feel free to shoot us a message with your suggestion from the contact page.
Payscale Human Capital. (2015). http://www.payscale.com/college-roi/.
Bachelder, K. (2015, April 24). “How to Save American Colleges.” The Wall Street Journal. http://www.wsj.com/articles/how-to-save-american-colleges-1429913861.
Best, J., & Best, E. (2014). The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem. Berkeley: University of California Press.
“Is College Worth It.” The Economist. (2014, April 5). http://www.economist.com/news/united-states/21600131-too-many-degrees-are-waste-money-return-higher-education-would-be-much-better.
“It Depends On What You Study Not Where.” The Economist. (2015, March 14). http://www.economist.com/news/united-states/21646220-it-depends-what-you-study-not-where
The Institute for College Access & Success. (2015, April 27). http://ticas.org/posd/map-state-data.