A high school student is best served by going to a college where they are most likely to graduate, get a good GPA, and pay as little as possible for the GPA signal helping them to get a job. But why is that?...
Table of Contents
College "could" pay but there are risks
Employers do not really care from which college you graduate
For first-gen students, which college matters. For legacy-gen… not so much
Bottom line
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
College "could" pay but there are risks
The U.S. Government through the Bureau of Labor Statistics ("BLS") illustrates the financial benefits of higher education by presenting data on college returns. Their analysis indicates that college graduates earn higher salaries and experience lower rates of unemployment. While this is narrowly accurate, it could also be deceptive.
The deception occurs because the BLS "College Pays" conclusion uses a cherry-picked analytical approach. The approach is only descriptive of the population achieving college success after-the-fact. The challenge is - we must make the college decision before we go to college! If we could time travel to the future, the BLS analysis would be more useful.
Let's use a mutual fund example to help explain the problem of the BLS analysis for making a before-the-fact college decision. Let's say you need to buy a mutual fund for your investment portfolio. Similar to the college decision, a significant upfront mutual fund investment is made with the expectation of returns occurring years and decades in the future.
You are considering two alternatives:
Fund A: Over the last three years, this mutual fund earned 15% annually.
Fund B: Over the last three years, this mutual fund earned 4% annually.
So Fund A, the 15% yielding mutual fund sounds much better. Right?
But then, the wise investor would ask, what is the risk I am taking to achieve 15%? It turns out that the 15% mutual fund is a VERY high-risk, small-cap, foreign-based fund, and the 4% mutual fund has almost no risk exposure, with investments in U.S. Treasuries and related high-quality bonds. This is different - and if like most people - you are more likely to avoid very high-risk investments or deploy a sophisticated strategy for managing the risk.
It would be deceptive for a fund manager to tout their fund returns without full disclosure of the fund risks. But, when it comes to the college decision, that is what the BLS is doing in their "College Pays" analysis. Showing the returns of college without a full risk disclosure.
Furthermore, the way student loans are distributed may present even more risk. The U.S. Government entity responsible for student loans is the Department of Education ("DoE"). They allocate student loan debt according to your expected family contribution ("EFC"). The EFC is a formula that 1) identifies the gap between a family's financial wherewithal and college costs after public assistance, then 2) fills the gap with student loans.
Although this may appear reasonable initially, the challenge arises from the lack of restraint over the costs imposed by different colleges that require funding. If a small, private college charges four times the amount compared to a public college, the Department of Education will likely authorize the higher debt. This would be like a mortgage lender making a home loan without regard to the borrower's ability to repay. This fantasy "toxic" mortgage amount would be allowed to increase based on the borrower’s preference for a larger or more expensive home, not because they can afford it.
The core student loan is provided in two loan types, which are called subsidized and unsubsidized loans. The government pays the interest of the subsidized loan until you leave college. The student is responsible for interest on the unsubsidized loan while in college but is allowed to delay payments until they leave college. Consequently, because of the four or more years of payment delay, the student and their family become desensitized to the impact of increased college expenses, making them more likely to overlook the risks involved. This desensitization is a widely recognized and pervasive psychological phenomenon called 'Availability Bias.'
In summary, the BLS showcases the advantages of going to college without disclosing the potential risks involved, while the DoE offers financial support masking such riskier scenarios. This creates long-term risks for student borrowers and taxpayers. As a hard to stomach contrast, the mortgage industry is subject to the Dodd-Frank Act and the Consumer Financial Protection Bureau’s oversight to prevent mortgage originations that cannot be repaid. Conversely, the Department of Education makes loans that cannot be repaid as standard operating procedure. Caveat Emptor!
Is it any wonder that 1) college default rates are so high? and 2) college inflation is so high? Easy money for student loans is like a wolf in sheep’s clothing—tempting at first, but it can devour your financial future.
The proper analysis to support before-the-fact decision-making is called "static pool analysis." Static pool analysis is commonly used by decision-makers when there is a significant gap between the time the decision is made and when the outcome of that decision can be measured. See the following article for the college decision static pool analysis results. Compared to the BLS analysis, it paints a very different, not as rosy picture.
Known as "life impairments," the analysis shows the probability of these risks accumulating in a prospective college student's life. More life impairments correlate with a lower chance of achieving long-term wealth. The risk analysis shows the landmines the students should consider, especially before they commit to student debt. At the end of the article, a link is provided for considering lower-cost higher education options that reduce these life impairments.
The better conclusion is that college could pay, but only if you graduate, get a good job, and do not take on life-debilitating debt.
Employers do not really care from which college you graduate
It is widely believed that attending prestigious colleges is the key to accessing top jobs. Nevertheless, employer practices and employment law challenge this belief for several reasons.
1. The "big brand" selective colleges, like the Ivy League, Stanford, MIT, University of Chicago, and a few others only educate about 1% of new college graduates. There simply are not enough selective colleges to move the needle on college new-hire recruitment at American companies.
2. Compliance with the U.S. Equal Employment Opportunity Act requires employers to hire employees by not violating disparate impact requirements of legally protected classes. Legally protected classes are all people except white, Christian, heterosexual men under 40. Because of this requirement, large employers must recruit across many colleges and utilize legally permissible selection criteria - including GPA and major. As a result, someone getting a 2.8 GPA from Harvard would not even be considered if the legally defensible standard was a higher GPA from all colleges, selective or non-selective.
3. Employers consider a college degree and good grades as a great indication of employment readiness. The college degree and good grades signal whether a prospective employee has cultivated the behaviors of consistently attending, putting in sustained effort, and focusing on quality in their work. Sylvester Stalone provides a confirming message about college:
4. Based on legal requirements and long experience, employers have generalized that the quality of college new-hire employees has no causal basis to the college from which they graduated. The large employers' approach is to recruit broadly across many schools and recruit narrowly within schools to attract the best majors and GPA students. The company recruiting attitude is: "All colleges have a subset of great new-hire candidates, the challenge is finding them and recruiting them!"
As a result, large company college recruiting is a numbers game. Across many colleges, companies will compete for the same higher GPA students in the majors needed to support their business. These companies create pools of targeted new hires through internships. They understand that some recruits may withdraw from their recruitment process and accept positions at rival companies.
Attending a college where you can achieve a higher GPA will greatly enhance your prospects of securing a job with a reputable company after graduation.
For first-gen students, which college matters. For legacy-gen… not so much
There is a common belief among many families that life success is strongly linked to attending a prestigious college, such as the ones mentioned previously. Certainly, this belief was on full display during the 2019 "Varsity Blues" scandal exposing how college admissions were corrupted by parents and college consultants paying for access to top colleges. However, research shows this "prestigious college = success" belief is largely false. Research suggests that long-term success, as measured by income, is more of an internal product of the college-goers environment leading up to their college experience. Selective and non-selective colleges broadly address environmental gaps when possible. Ironically, the parents implicated in the Varsity Blues scandal demonstrated a lack of faith in their children, suggesting a potential hindrance to their development stemming from their family environment.
Dale and Krueger provide in-depth research on the impact of different colleges on long-term income. To summarize:
After controlling for childhood factors - like family, wealth, access to educational resources, parent involvement, etc - Dale and Krueger determine there is not a significant difference in long-term income between those students attending selective colleges - like the Ivy League and those attending all other non-selective colleges.
However, for the subset of Black, Hispanic, and students who come from less-educated families (in terms of their parents' education), the effect of selective colleges is significant. This means the selective colleges' financial resources - such as large endowments - are used to provide programs compensating for college readiness not otherwise offered by first-generation college families.
Dale and Krueger's findings lead to the following interpretation:
If you are from a legacy generation college family - meaning at least one of your parents went to college - there is likely no difference to your long-term income based on which college is attended. However, paying more than necessary for that college education will certainly reduce long-term wealth. Plus, not achieving a good GPA at that college will reduce employment options, at least with your first job.
If you are from a first-generation college family, seek a college with first-generation support. First-generation college families are often remarkable, having faced and overcome challenges to make college a reality for their children. However, college is enhanced by understandings potentially unknown to first-generation parents.
In the decades since the Dale and Krueger study, awareness of first-generation student challenges has led to more college programming. Today, many colleges - both selective and non-selective - offer programming for first-generation students. The degree to which that support is provided is a function of the college's financial wherewithal. For example, community colleges are less likely to offer first-gen support than residential colleges.
Chat GPT prompt: To learn more about first-generation college resources, next is a prompt to ask your favorite GPT:
Describe the first-generation support offered by [Fill in the blank].
Fill in the blank = a residential college, like "James Madison University"
Bottom line
The college risks, employer practices, and long-term earning potential beg even more significant questions about the value of higher education:
1. To what degree does higher education contribute to the fundamental education of the student?
OR
2. To what extent does higher education function as an employer signal that the student will excel as an employee?
These two college value effects are powerful and interact. For those in college decision mode, sometimes the answers to these questions are aligned among your college alternatives and sometimes there are trade-offs between your college alternatives. However, it is not clear whether a particular college is any better or worse than others at delivering the fundamental education component. There are plenty of CEOs from "lowly" state colleges and plenty of dropouts from the Ivy League. This implies that student achievement is largely influenced by internal factors, which are determined by the environment before entering college. While higher education increases your chances of success and prosperity, the specific college attended is not as crucial. The largest risk to college success is student readiness, NOT the college's ability to deliver the fundamental educational service. College accreditation ensures the college is fit for college service delivery.
However, given higher education provides an employability signal, one certainly does not want to pay more than necessary for that signal. A high school student is best served by going to a college where they are most likely to graduate, get a good GPA, and pay as little as possible for the GPA signal helping them to get a job. Additionally - if you are a first-generation college student - it helps to confirm the support available to first-gen college students.
Are you ready to learn more about getting a great college education at a steep discount? Check out the article:
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