Paying for College: Why the Money Issue Is a ‘Big, Big Deal’

 
Welcome to the PwC-KWHS Podcast Series for High School Educators on Business & Financial Responsibility.

I’m Diana Drake, managing editor of Knowledge@Wharton High School, and today we are talking about the economic value of higher education and how to help students prepare to manage college costs and debt. During our discussion, we will traverse the rugged financial landscape that surrounds higher education. Students are faced with ever-rising tuition costs, staggering student-loan debt, a difficult job market and the inevitable question: Is college worth the investment? I’m here today with two experts who will help us sort through these important issues, and offer high school educators some practical insights and advice to help their students make more informed decisions about their financial lives after high school and on college campuses.

This is part two of our four-part discussion on the value of higher education with Wharton management professor Peter Cappelli and retired PwC Partner Michael Deniszczuk. In the context of rising college costs, we look at issues and strategies related to paying for college, as well as ways students can avoid too much debt. (Note: Michael Deniszczuk has retired since the taping of this podcast.)

Below is an edited transcript of the conversation.

Knowledge@Wharton High School: Let’s focus now on paying for college. Yes, the cost of college is on the rise. Students have a dizzying array of options to help them pay, from applying for financial aid to pursuing grants and scholarships and more. In general, how should students tackle this process and prospect of paying for college?

Michael Deniszczuk: I have three pieces of advice — plan, plan and plan. When you stop and think about it, college is one of the biggest decisions students will make in their early lives. You’ve got financial aid, school loans, borrowing from family — they’re all viable and responsible options. But if the details aren’t thoroughly understood then the step to advanced education can be economically detrimental. The key is advanced preparation and planning — taking a long term, thoughtful approach to the education you’ll need to achieve your professional goal can help eliminate surprises and guide students, parents and guardians to the right course of action.

I don’t think you have to pick the most expensive option to get the best education. As Peter [Cappelli] said, it may be that the sticker price might not be the best way to look at a college either. You’ve got to get in and do some research, find out what kind of financial aid is available at certain private universities, for profit and not-for-profit, and compare that against the career that you’re looking for and in the state that you’re in.

Based on the students’ view of what type of career they want to pursue, try to determine what the best colleges or other higher education options are to help them achieve this. Research the schools and where employers in the profession hire from. There’s a wealth of information out there if you take the time to do the research.

Let’s go back to high school now. Grades matter and they play a factor in financial aid options. While colleges use admission tests like SAT or ACT to compare students, they’re also very interested in the student’s grade and the grade point average and how much they’ve challenged themselves in school.

The important thing to remember here is that this is something the student has control over because if they work hard, challenge themselves in high school with course work beyond the basics — for example, honors or AP course work — and make good grades early on, say starting in the ninth grade, and sustain those good grades their senior year, it can make a difference. Strong grades and GPA can translate into more scholarship or financial aid opportunities, both through the school and from private scholarship programs.

Now, I mention ACT and SAT. They are important and those are tests that many colleges still require as part of the student’s application process. The higher the score, the more competitive the student is in the college admissions process. This can translate into merit scholarship opportunities to the school in which they’re applying. Ideally, students should begin preparing for those kinds of tests perhaps in their junior year, maybe taking it at least once as a junior, with opportunities to retake and improve their score in their senior year.

There are a number of tools out there that students and families can use to calculate college costs. In fact, many schools now include college calculators on their websites within their financial aid web page. … One of the tools that students and parents should consider using is the JA Build Your Future app. This was an app created jointly by PwC and Junior Achievement. It’s an app you can find in both Apple and Android stores.

It’s a pretty simple app. It helps teens explore the potential future income from their desired career and evaluate the costs of a post-secondary education to help them make informed decisions. It allows teens to explore more than a hundred careers and see what levels of education are required for those careers, from high school in some cases to a doctorate in other cases. They learn about potential income from those careers, calculate the costs of education, include factoring in the costs of attending an in-state, out-of-state, public or private university. Then they can adjust the level of money they and their parents or guardians may contribute combined with student loans they may need to secure.

At the end of all that exercise, once they plug all that information in — it’s not very hard to do, it’s easier than doing some of the financial aid forms that people do — the teens are given a return on investment score between one and five. A score of one suggests it will difficult to pay off your debt based upon future income. An ROI of five would indicate that there should be less financial hardship paying off debt with that estimated future income.

Peter Cappelli: The subtitle of my book [Will College Pay Off?] is “A Guide to the Most Important Financial Decision You’ll Ever Make.” … Let me just add a couple of things in terms of thinking about this investment.

Back to the issue of grades, for example. There’s a distinction between financial aid as we usually think about it, which is need-based. … It’s based just on your family income. But your grades and other attributes affect what’s known as merit aid. Merit aid is increasingly important. When I was in college, merit aid basically didn’t exist.

Merit aid is basically colleges trying to buy a better student body. What that means is they are trying to get students with higher scores than they had before because it makes the college look better.… What they’re offering you is the opportunity to trade down — that is, go to a school that might not be as elite or selective as the one you would have gone to. But if you take that, it’s a lot cheaper.

Some of these merit-based scholarships are quite substantial. It’s not unusual to get a 30% to 50% reduction in your tuition in order to go to one of those schools. This is a tough choice, but it’s one you ought to think about carefully if you’re a family … if it lets you avoid taking out student loans.

The typical student loan interest rate right now is about 7%. The federal government student loans, the very best ones, are pegged at the moment at about 4.8%. But 7% is a pretty high interest rate. For most of these loans, the interest starts compounding from the day you take them out. It continues to compound even if you don’t have a job and you cannot get out from under these.

Some federal loans, you’ll be glad to hear, you can get out from under if you die. But that’s about it. If you declare bankruptcy, you’re still stuck with them — and these are big, big deals. Most parents would have a very hard time if their kids took out a car loan of $50,000. But if a student took out a college loan of $50,000, we wouldn’t blink about that. It happens all the time. But it’s actually much more serious. So the merit … scholarship decision is a tricky one to think through because we also know that if kids go to colleges they don’t want to go to, they don’t do as well there. Any parent who’s tried to talk their kid into going to someplace the kid doesn’t want to go to, will find that’s a really unpleasant conversation to have.

On the other hand, the money issue is a big, big deal. It’s something we better think about carefully. … I would really discourage somebody at age 17 from trying to pick their career. And the reason is you don’t know much of anything at 17. It’s quite likely that once you get into college and you see other opportunities, you’ll change your views on your major. You’ll change your views on what your career interests might be. Those of us who are older know that many people later in life still aren’t sure what they want their career to be.

The reason that matters is in choosing your college you want to be able to go someplace where you can change your mind. For example, you think you want to be an accountant, let’s say, and you go to an accounting school and you decide once you get there that you don’t like accounting — if you have to change colleges to change your major that’s a difficult thing to do. Changing majors is something that most kids do. Many kids do it more than once. You really want to go to college where it’s easy to change your major.

The most important thing for parents who are thinking about the investment in college is, will my kid graduate and do it on time? Only 40% of kids graduate in four years in the U.S.; only 60% graduate in six years. One of the big hurdles in graduating on time is getting your majors completed. Particularly when kids change majors, they often find that they have to take a different sequence of courses and they have to take them in a particular order to get this major. Often, they can’t get the courses they want in the order they need to take them and they end up spending a fifth year at college because they have to do it in order to complete the new major.

I would think a lot about going to a school where, if I change my mind, it doesn’t put me into a hole. I would think about that as being one of the primary things that guarantees you’re not going to get burned too much on the cost side.

KWHS: Another question from an educator: Lou DiCesare from Irondequoit High School in New York wants to know what advice you might offer to the average college applicant. This would be someone who has average academics, is not a Division I scholarship athlete and his parents make too much money to receive grants and too little money to save or pay a sizeable amount of the cost. What other options are out there — things like dual enrollment, community college or even working part-time during college?

Cappelli: Good news for parents and for kids: Once you get past the super-elite schools, getting into college is actually pretty easy. These days, as the echo of the baby boom begins to decline a little bit, the entering cohort of 18 year olds is actually getting smaller. About half the schools in the U.S. effectively have open admissions. That is, they’ll take pretty much anybody. There’s a lot of places you can go, and it’s also possible to transfer from one school to another. It’s possible to start at community colleges or at a state university and transfer to the flagship university, and lots of other opportunities.

Going to school part-time is also an option, and a huge number of people do that in the U.S. The trick with it though is that if you are not earning very much money, it’s going to be pretty difficult to pay your way through college going to school part-time. If the average college student takes … six years or more to graduate, if you’re going to school part-time, it’s quite likely to take you a very long period of time to get your degree. And you have to pay it off working at pretty low-wage jobs.

I did a quick calculation a little while ago of how long it would take you if you were working at a minimum-wage job to pay off college. In the 1950s, even at the Wharton School, you could pay off a college education in about a year working at a minimum-wage job if you were living at home. But because minimum wage has eroded in purchasing power over time and college tuition has gone up so much, now it would take you many years to pay off a college education working at a minimum-wage job.

I would think long and hard about trying to go to school part-time. It’s a very different experience than being a full-time student someplace. It might be better to think about going to a community college full-time where you can give it some focus than it is to try to be a part-time student at a four-year school where you’re effectively not going to have a cohort. You’re not going to have an on-campus experience. It’s something quite different.

KWHS: Aaron Greberman, a business teacher from William Bodine High School in Philadelphia, wants to better understand the specifics of financial aid. He asks, how do colleges determine who receives aid? How do they determine the amount of aid offered? And how can parents maximize financial aid awards?

Cappelli: There’s a big chunk of financial aid around and … most of it comes from the federal government. That aid is allocated based on some very clear formulas that have to do with parents’ income and wealth and parents’ obligations like the number of other children they have to support. There’s not much of anything you can do with that, and the schools themselves can’t play around much or at all with that.

The schools themselves have other kinds of financial aid, and those financial aid issues they can play around with more. For example, there is some evidence that if you tell a school that you don’t need much financial aid they might be more inclined to admit you. They don’t often admit that, but there is some survey evidence from college admissions officers suggesting that’s the case.

Then there’s the merit aid we talked about earlier. If you’re a parent, there’s not an awful lot you can do to game the system. For one thing, you better think very hard about making stuff up because it’s a felony if you get caught faking a college financial-aid application for federal government purposes. The issue of admissions and financial aid does matter a little bit. On the merit-aid side, you probably can bargain with schools. You can say, ‘My child would really want to come here but we got a better offer from someplace else. Would you be willing to match the offer?’ … Cornell University says that they will match any other college’s need-based financial aid.

If you get a better deal on financial aid — not merit but just the financial aid from someplace else — you can go to Cornell and say, ‘We got a better offer from Brandeis or Penn and they’ll say, we’ll match it.’ That’s something you probably can bargain with if you get a better offer from another school. On merit aid, that’s something you can shop around with as well.

But otherwise, the straight up, need-based financial aid which is mainly federal-based — you can’t do much of anything about that. Don’t try to manipulate your income in order to try to get more out of that. That’s simply based on your tax return kind of information, and that stuff you can’t fudge.

Deniszczuk: Just from personal experience, I did not qualify for financial aid, but my experience is if you don’t ask for the merit aid, you’re not going to get it. My simple rule is if you don’t ask for it, you’re not going get it. So you may as well ask for it.

KWHS: Are trade schools a good alternative for students who aren’t interested in college? And how does the cost compare?

Deniszczuk: It depends upon the type of career or profession you’re looking at. A trade school is an educational institution that teaches skills in a very specific type of job. Trade schools typically take a lot less time to complete and they have smaller class sizes. And the majority of the training is hands-on, which may be an ideal environment for many types of learners out there. Not everyone is going to go on to university.

There are lots of options that lead to potentially well-paying jobs, like electricians and plumbers and welders and metal workers and masonry workers and locksmiths, and so forth. Some of the professions can pay pretty decent wages. According to PayScale, electricians earn an average of over $20 an hour — somewhere between $30,000 and $80,000 a year.

Plumbers are around the same amount. Technical and trade school jobs, if you look at some of the reports out there, pay an annual median salary of about $35,000. But that figure varies very heavily based upon the particular industry and the experience level of the worker. By comparison, the Bureau of Labor Statistics predicted earnings for a bachelor’s degree holder to be roughly $47,000, or about $12,000 higher.

Again, it depends on what type of career you’re looking at, what type of job you’re looking for, how well you’ve done in school and so forth. Going to a trade school might make sense and in other cases it might not. When you look in the longer term, looking at lifetime earnings, a bachelor’s degree still pays off and it opens many doors for the future. It will result in higher starting earnings and better opportunities for increases in earnings, and gives the option to continue studies and earn substantially more with a master’s degree or doctorate. Those would not be available for a person who is going to trade school.

Cappelli: Let me just add a couple of things to why this is such a difficult decision to make. You really have to think about this carefully because it’s quite hard to know how well different colleges prepare you for the job market. Colleges are not required to report placement rates, and they typically don’t. When they report placement rates, the information they’re providing is often not particularly trustworthy.

Now, some of that is just hard to do — period. It’s not their fault because in order to do it you have to follow your alumni, the people who’ve graduated, and find out what they’re doing. Sometimes it’s hard to find them. When you find them, they don’t often answer your requests for information. But what’s reported is often pretty dicey.

There was an interesting paper done by a couple of law professors. They concluded that what law schools were reporting about placement rates was so misleading that it actually constituted fraud. They were reporting that any law school graduate that had any kind of job was employed, even if it wasn’t in law. They were counting people who were working part-time as regular placements — all kinds of things that are highly misleading. So, it’s pretty tricky to figure out what schools will prepare you well for the job market.

The best thing you can do for four-year colleges is go to their placement office and look to see who’s recruiting there, what kind of jobs are available and what are the pay rates of the jobs that are being offered to graduates that year. PayScale has some interesting information about annual salaries of graduates from different colleges. They did an interesting study in combination with Businessweek to look at the rate of return on your investment, which is different than saying, will you make more money as a college grad than a high school grad.

It’s not surprising that college grads make more money than high school grads. For one thing, they’re older. For another, people who go to college are already different than people who only go to high school. They’ve got more parent support. They typically have more money going into it. And what the PayScale guys found is in a quarter of the colleges that they looked at, the rate of return on the college investment was actually negative. That means the best thing you could do at those colleges to improve your return on investment was quit. That’s pretty stunning.

The idea that college will always pay off is not true – it depends on where you go. The idea that you will get a better job out of college, at least in terms of money, is probably not true either. It’s very difficult to predict.

It depends on supply and demand. Back in the 1960s and through the early 70s, high school graduates in the U.S. did not make less money than college graduates, though that was a period when we had strong unions and high manufacturing wages. It’s pretty stunning to think about it. We always just assumed that college graduates make more. But it wasn’t always true.

Right now, that gap between college grads and high school graduates is as high as it’s ever been. If you’re betting, you probably wouldn’t bet that it will stay at this level forever. There’s a lot of uncertainty here, which is why it’s important to try to get as much information as you can. But some of that information is hard to get.

Related Links

• Junior Achievement Build Your Future App
• A Review of Peter Cappelli’s book Will College Pay Off?
• PwC’s Earn Your Future Digital App
• Fortune: Peter Thiel’s Contrarian Strategy
• College Affordability Guide

Conversation Starters

This podcast segment is packed with information to consider before deciding which college you would like to attend. Choose three insights to discuss with a partner and then share with the broader group. Have you considered these particular financial implications before?

Wharton management professor Peter Cappelli says, “The idea that college will always pay off is not true – it depends on where you go. The idea that you will get a better job out of college, at least in terms of money, is probably not true either. It’s very difficult to predict.” That’s a pretty heavy statement. How do you respond to Cappelli’s ideas? He is not just expressing an opinion, but reporting his research. Does that mean you can’t dispute his views? Why or why not?