Tuesday, July 22, 2014

A college degree pays off, but how much does it matter where you go to school?

We all know that a college degree has a great deal of value once you get to the working world.  Many employers see a bachelor’s degree or four years of college as a fundamental requirement when hiring; a foot in the door, not a guarantee.  In fact, according to the U.S. Census Bureau, the average income for a college grad is $51,206 per year compared to $27,915 for people who end their education upon graduating high school.  According to those numbers, over a 40-year work career the college grad will earn about a million dollars more than the high school grad!  Yes, a college degree pays.

But how much does it matter where you go to college?  Is there a big disparity in success and income levels based on which four-year university you attend?  The answer to this question is of paramount importance not just for alma mater bragging rights, but because the cost of higher education has skyrocketed.  More students are graduating with a student loan debt-load they’ll be paying off for decades.  So does it really matter if you get your degree from a prestigious (and expensive) private school, or does any old degree from any college pay off just as well?  I hit the library (ok, Google) to find the answer.

The first thing I noticed when researching this question was the surprising lack of definitive studies, especially considering the impact.  The cost of a degree is more than ever – some estimates are that a college degree costs $300,000 on average if you add room and board, books, and opportunity cost of missing 4 years in the working world – which makes college the biggest purchase you’ll make in your life besides your home.  For 7 out of 10 graduates, student loans pick up a good portion of the bill, almost $30,000 each.  Student loan debt load has now topped one trillion dollars in the United States and paying for college is acknowledged as one of the biggest stressers for Millenials.  And yet there are only a few comprehensive studies that analyze the cost of college compared to the payout.  Some of the studies are from as far back as the 1970’s or look at only a small segment of the population.  But I wanted to get to the bottom of this question so by pulling an all-nighter to cram for this exam (just like in college,) I came up with an answer.

Does it matter where you go to college?

The short and sweet answer is: Yes. But not nearly as much as you may think when it comes to getting a job, professional success, or lifetime income levels. 

The research on this is complex and often contradictory:

In 2000, the Department of Education reported that the quality of college a person attends accounts for a 2-3% variance in earnings among men, and 4-6% among women.  That’s a miniscule payoff considering what private or big name colleges cost. 

A more recent study by Texas A&M professor Mark Hoekstra in 2009 compared the income levels of white, male students (so there was a homogenous and large sample size with controlled external variables) who had just barely missed the admissions cut-off for an unnamed public flagship university to those of students who had barely been accepted.  Ostensibly, this compared students of similar academic standards to see if those who got into a good school later out-earned those who were rejected, and therefore had to attend a more pedestrian institution.  Hoekstra found that enrolling at a flagship university increased their wages by 20% over time – which is significant.

A 1999 paper in The Journal of Human Resources backed that up, showing that elite schools did equate to higher paychecks and that effect did increased over time.  From all high school graduates in 1980, those who attended a top private university went on to earn 20% more than their counterparts at bottom tier public universities.  Antiquated as it may be, the data from 1980 shows that going to an elite school pays off. 
But there’s a big caveat to these findings - we don’t know how much of this is causation and how much is correlation.  Is it the degree that helps them earn more, or the fact that they’re smart and motivated enough to attend that college and able to network with other smart people?  A follow-up study in 2011 came to the conclusion that there’s certainly more parity and consistency in educational quality these days, so where a student goes to school doesn’t matter as much as other factors like their major, extracurricular activities, networking, internships, and their grades.  In summary, there may have been a huge income divide 40 years ago, but less so now.

Perhaps the most conclusive study was conducted by professors at the University of Texas at Dallas, University of Tulsa, and Cornell, who examined the wages of students who went to college in Texas between 1996 and 2002.  The professors looked at data from four different schools; Texas, Texas A&M, a group of the rest of the state’s non-flagship colleges, and finally the state’s community colleges.  They found that students who went to the more prestigious U of Texas and A&M did have better post-grad income levels, but the variance most depended on how well they did at their own school.  In fact, the top students at A&M did better than the top at the U Of Texas.  Having a valuable major – like engineering – and how well they ranked academically was a far greater determiner of success in later life.   

Another study with a fascinating conclusion was conducted by Stacy Berg Dale of the Andrew Mellon Foundation and Alan Kreuger of Princeton.  By compiling data from the 1970’s, they matched students in pairs – one whom was rejected and the other accepted by similar universities.  Those who didn’t gain admission usually ended up enrolling at a lesser university (which they could get in to.)  Decades later they revisited those “student siblings” and analyzed the data on income levels.  Their startling conclusion was that it didn’t really matter where you went to school – it mattered most where you applied! If you were the kind of person who could come close to gain admission to a great college – enough that you were willing to apply – then you’d most likely earn and succeed post-graduation almost identically as if you actually attended that same school. 

All of these studies reinforce the notion that there’s a correlation, but not causation, with the quality (and cost) of college and later income levels. Of course you’ve got a huge advantage in potential earnings if you attend Yale, Harvard, Princeton, or MIT.  But once you discard those institutions from the mix, whether you went to USC or Cal State Sacramento isn’t the most important factor when it comes to getting a job and the income you’ll earn. 

So what factors are more important?

Look for part 2 of this blog next week, what employers look for in a college graduate. 


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