Every year high school seniors across America go through the ritual of applying for college. They weigh the differences between private colleges and state colleges, in-state or out-of-state, traditional or for-profit colleges. These decisions seem critically important to the people filling out the applications. On the larger scale, though, are they really so significant? Does it matter where you go to college?
The answer to that question depends on several factors, and it’s worth taking a closer look.
The College Difference
You may have heard some people say that college is worthless, but the data don’t support that story. Studies support a wide range of benefits to attending college.
- Annual earnings are about $32,000 higher.
- Lifetime earnings are around $635,000 higher.
- College graduates are 47% more likely to have employer-provided life insurance.
- College graduates are 72% more likely to have an employer-sponsored retirement plan.
- Degree holders are 24% more likely to be employed.
- 44% more college graduates report being in excellent or very good health.
- The probability of being divorced or separated is 61% lower among college graduates.
- The probability of being incarcerated is almost 5x lower for college grads.
Those figures add up to a powerful case for attending college, but how much difference does your choice of college really make?
Colleges: What’s the Difference?
Your college options fall into a few broad categories.
- 2-year state colleges or community colleges, offering a range of certificate and Associate degree options.
- 4-year state colleges, offering 4-year Bachelor’s degree programs.
- State Universities, offering both Bachelor’s and post-graduate Masters and PhD options. In-state students typically pay much lower tuition.
- Private for-profit colleges, operated as private businesses and typically offering 4-year degrees.
- Private colleges and universities offering Bachelor’s, Masters, and PhD programs.
- Highly exclusive private colleges are at the top of the cost and prestige pyramids and are the most sought-after schools.
The differences between these schools are clear enough, but the impact of those differences on your future may be less clear. For example, imagine that a student is accepted at both a private university and a state university in their state of residence. What would that student lose by selecting the much more affordable state option?
The Difference: Earnings 10 Years After Graduation
Some of the differences between colleges, like prestige and student experience, are hard to compare. It is easier to compare the impact of college selection on income.
|Major||Most Selective||Very Selective||Selective||Not Selective|
|Math, comp sci, engineering||$79,811||$73,792||$67,966||$64,400|
|Social science / humanities||$76,468||$61,581||$58,631||$52,740|
|Professional / vocational||$66,727||$63,216||$58,281||$55,082|
|Life / physical sci||$66,422||$60,376||$64,176||$51,841|
Income by Major and Selectivity, 2003, 10 Years After Earning Bachelor’s Degree
Source: Inside Higher Ed
These figures show a clear relationship: in any given field, graduates from more selective institutions earn more, and graduates of the most selective institutions earn a lot more.
They also reveal a less obvious truth: graduates in high-value fields at less selective schools may earn more than graduates in lower-value fields from more selective schools.
Other studies suggest, however, that the income gains from attending a selective school vary widely among majors. Specifically, they found that the gap between more selective and less selective schools was minimal in engineering and other STEM fields, but much more significant among business and liberal arts graduates.
Diplomas from prestigious schools boost future earnings only in certain fields, while in other fields they simply don’t make a difference.Eric Eide, Professor of Economics, Brigham Young University
But What About Costs?
A degree from a selective school will probably allow you to earn more than a degree in the same field from a less selective school. It will also cost you more, in many cases a whole lot more. Let’s look at some of the differences.
|Institution Type||Total Cost of Tuition||Total Additional Expenses*||Total Cost of Degree|
|*Additional expenses do not account for potential lost income nor student loan interest.|
Total Cost of a Degree
The most exclusive private colleges and universities may cost substantially more. The University of Chicago, for example, costs an eye-watering $77,556 a year for tuition and room and board alone, for a total degree cost approaching $350,000!
Assuming that the discussion is based purely on costs vs. expected income, we then have to decide whether the higher incomes earned by graduates of exclusive schools justify the higher cost.
A report from the Georgetown Center on Education and the Workforce determined that the economic gain from a private not-for-profit college is $838,000, while that of a public college was $765,000. That’s a difference of $73,000. That study included the actual cost of the degree in its findings, but there are other factors to consider.
The Financing Factor
Much of this comparison depends on how you intend to finance your education.
Most American college students now finance at least part of their education with student loans. If you’re using loans to finance your education you’ll have to factor interest expenses into your calculations.
👉 For example:
If you graduated with $30,000 in debt at a 4.66% annual interest rate and paid off your loans in 10 years, your total loan expense would be $37,588, adding $7,588 to the cost of your education.
If you graduated with $60,000 in debt at the same interest rate and took 20 years to pay back your loans, the total lifetime cost of the loan would be $75,176, adding $15,176 to the cost of your education.
The loan expense isn’t the only burden. Many people who are paying off student loans find it difficult or impossible to save for retirement early in their careers, depriving them of those critical early-career investments that have the most time to grow.
👉 Consider this:
If you pay $300 a month for 10 years on a student loan, that’s $36,000 that you aren’t saving. Let’s assume that you pay your loans off by age 35.
If you were investing your money instead of paying off loans, you could have that $36,000 in a retirement account at age 35.
Assuming that the money is in index funds and that the stock market maintains its historical long-term annual average gain of 10%, that would be worth almost $400,000 by the time you’re 60.
That’s a compelling argument for minimizing your debt burden, even if it means attending a less exclusive school
If you’re financing your education with loans, there’s a strong argument for selecting a less expensive school, minimizing debt, and making early-career contributions to a retirement fund rather than paying off a huge student loan bill. It’s even possible to go to college without debt!
Income & Savings
Some parents are still able to pay for college with their own money. In that case, wouldn’t it make sense to invest in an exclusive school? Maybe, but it might not be the bets decision.
👉 Consider this:
Let’s say you could afford the $215,000 cost of a degree from a 4-year private college for your child. If your child attended an in-state public university the cost of the degree would be $103,456, a difference of $111,544. That’s assuming that your child lives away from home: living at home would cut the cost far more.
What if you sent your child to an in-state public college instead of that private school and invested the extra $110,000 for your child’s future? Let’s say you make that investment when your child is 20, with the same investment assumptions used above. By the time that child is 60 that fund would be worth over $4.5 million.
How much more would your child earn over a lifetime with that degree from an exclusive school? Probably more than they would from a degree from the in-state school, but not $4.5 million more! Of course it’s nice to have a degree from a prestigious school, but it’s also nice to have a nest egg in your future!
Scholarships and Grants
We’ve been basing our calculations on the assumption that you’re paying the entire cost of your education, either with your own money or borrowed money. In practice that is often not the case.
You may have heard that over 86% of undergraduate students receive some form of financial aid. That figure is accurate, but it includes federal student loans. The number of students getting outright grants is significantly lower. 42.6% of students get federal grants, with the average grant amount standing at $5,179 a year.
💡 Many private colleges, including very exclusive ones, have their own financial aid programs. Harvard, for example, costs $74,600 a year, but 55% of the students receive some level of scholarship from the school, potentially along with other aid sources. 20% of the students pay nothing at all.
Scholarships and grants can significantly defray the cost of education, but don’t count on a free ride. One source of financial aid data claims that 1.% of undergraduates in 2015-16 were getting enough scholarship aid to cover the entire cost of their education. 2.7% had enough to cover 90% of the cost, and 18.8% had 50% of the cost paid for them.
Of course, you could be one of those that get the scholarships. If you get accepted to an exclusive private school and receive a substantial scholarship, that would swing the financial balance in favor of that school. You’d be getting the benefits of that exclusive degree at much less than the sticker price.
Making Your Decision
Ultimately the choice that matters is whether where you go to college makes a difference for you. Each student is unique and each college has its own cost/benefit ratio. Here are some things to consider when making that personal decision.
- Where are you likely to be accepted? Don’t worry about costs and benefits for a school that won’t let you in.
- What will you study? An exclusive degree can be a huge asset in some fields but less important in others.
- What is the school’s completion rate? If you take more than 4 years to finish or don’t finish at all you may have more expense and less benefit.
- How will you finance your education? If you are borrowing or using your own money, consider spending less and trying to invest more and earlier.
- How much financial aid can you get? If the cost will be defrayed by financial aid, you can get the benefits of an exclusive school without the cost.
If the most cost-effective solution for you is a less exclusive college or an in-state private college, don’t feel as if you’re handicapped. A motivated student from any college can succeed. Plenty of State University graduates are achieving as much and earning as much as their Ivy League counterparts, and a degree from an exclusive school does not assure success.
In that sense, where you go to college really doesn’t matter, or at least it doesn’t matter as much as some may think. The averages might say you’ll do better if you come out of an exclusive private school, but you don’t have to be average! Many, many students have come out of less prominent schools and enjoyed successful and rewarding careers. You can do it too!