The College Investment: Will It Pay Off?

 
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 manage college costs and debt. During our discussion, we will traverse the rugged 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 four of our four-part discussion on the value of higher education with Wharton management professor Peter Cappelli and retired PwC Partner Michael Deniszczuk. Here, we explore whether college is worth the investment. Will it pay off?

Below is an edited transcript of the conversation.

Knowledge@Wharton High School: In this perfect storm over the past several years of soaring costs, rising student debt and shrinking job prospects, is college worth the investment?

Michael Deniszczuk: Certainly, from my standpoint as a partner in a large accounting firm, we would only hire college students and we generally only hire college students from colleges that are well-known for graduating good accounting students.

I believe college is a worthwhile investment, with the appropriate planning at the front end. We talked about the fact that millennials with college degrees make an average of $17,000 or so more per year than peers with high school diplomas. Part of that might be again the fact that they’ve gone four more years. But I think that it’s important to note that this education pay gap has actually widened since Generation X. And you talked, Peter, about maybe that reversing. I don’t know. When you think about this being less of a manufacturing economy and more of a service economy, I wonder whether it will reverse and whether that pay gap will continue to widen.

There was a study done by The College Board, a non-profit organization, that showed that in general within 11 years, higher earnings and lower unemployment rates made up the cost of that education. And according to a report by Georgetown University, nearly two-thirds of job openings for workers will require some college or better going forward.

There’s going to be more and more demand for college graduates. It’s going to be important. You think about money and you think about getting jobs. But people with college degrees tend to keep their jobs during recessions, and tend to have lower unemployment rates over time than those with just a high school degree. Furthermore, it’s important to look beyond the financial compensation to measure the benefits of a college education.

Studies show that people with more education are in better health, their children are in better health, their marriages are more stable relative to people with less education. Those are factors that go beyond the financial piece that you might want to consider.

Peter Cappelli: I’m not as sanguine as Mike on this. I don’t think there’s any guarantee, there’s nothing written up that says college has to pay off. There’s also the problem of the difference between causation and correlation. We know that college graduates do better on all kinds of things than high school graduates do. There’s strong reason to believe that would have been true even if they didn’t go to college because they come from families that have more assets. They come from a different social strata in society. They come to college with a different set of values.

It’s pretty hard to know why it is that college graduates do better than high school graduates. One explanation is that they learned a lot in college that’s useful. But another is that they came to college already with many more assets than the kids who don’t go on to college. There’s also some evidence that maybe in college they’re demonstrating something, like the ability to work hard that causes them to be able to get a better job because they’ve demonstrated perseverance in a context where employers can see it.

I wouldn’t pay much attention to forecasts because the forecasts have proved to be incredibly wrong. But here’s some counter-evidence: Of the 20 fastest growing jobs in the U.S. right now … only one requires a college degree. Roughly, the average American has a third more education than their current job requires. The fact that U.S. college graduates have lower unemployment rates than high school graduates is because college graduates take the jobs that high school graduates would take when the economy is down, which is what’s been happening now.

It isn’t true around the world. If you look at China, for example, the unemployment rate for college graduates — the official rate — is over 50%. The unofficial rate is probably 75%. The unemployment rate for high school grads in China is 4%. What’s going on there? In China, the college graduates won’t take the jobs that the high school graduates take because they think it’s beneath them. In the U.S., we’re willing to do it.

The fact that college graduates make more doesn’t answer the question of whether college pays off. Whether college pays off means whether the investment you’ve made in college is going to earn a return which is enough to at least pay off the investment you’ve made in it. And that doesn’t appear to happen for everybody, even if it happens on average. As I said before, at about a quarter of the colleges, the rate of return is negative. And it’s certainly well below roughly the 7% or so many people have to pay in order to get to college in the first place because of student loans.

The reason that matters is you’ve got to think carefully where you’re going to go because there’s no guarantee that it will pay off. The jobs which seem to be great for college students now — the ones you hear so much about like many of the tech jobs — are often boom and bust jobs. The hottest job in America last year was petroleum engineer — paying like, $97,000 a year for a college graduate or almost 50% more than the next highest paid job. But kids poured into that field and the market reversed because oil prices dropped. That job is about to become a bust now.

The problem is it’s unpredictable. Because of that, you have to think carefully about where you go, how you pay for it, and especially keeping your options open. Many people find over the course of their career they’ve got to change directions a lot. Many people find even in college they change directions a lot. I would think about keeping your options open as well as … determining whether this is going to pay off for you.

KWHS: You mentioned the boom and bust of petroleum engineers. Can you talk a little bit more about that? How students can find out if their major in say, psychology, is actually going to pay for them so they don’t go down a path that ultimately prevents them from becoming employed and paying off the loans that were supposed to help get them a job in the first place?

Cappelli: There’s been a huge shift over time in college toward vocational degrees. Liberal arts has shrunk to almost nothing. The biggest major in college right now is business, which has three times as many majors as the next highest major. It is a very vocational world now in terms of college. One thing you can do is look back on the experience of other people in that field. One of the things we know about engineering and IT, for example, which are currently the darlings of job opportunities, is they’re boom and bust fields.

It’s not just that engineering is hot or IT is hot – it is particular fields within IT and particular fields within engineering. One of the problems of a specialty like petroleum engineering is that if they’re not hiring in petroleum engineering, you’re not going to do electrical engineering. You can’t easily shift to some other field within engineering. So, you want to think carefully before you go into a boom-and-bust field. You also want to think past the first job to where this career or degree will take you. It could be, as in IT, that there are great opportunities the year you graduate but after about five years we see in the field of IT incredible out-migration. That is, people leave the field to do other things. It isn’t a career that lasts very long — it lasts maybe five years for most people.

If that’s the case, even if the first job pays well, is that a good position for you? About as good as you can do is look at the track record in the field that you’re trying to go into, over time. But I would also say it’s very important to be able to delay your career choice until as late as possible.

If you’re in the IT field, for example, it’s rarely been the case that generic IT degrees pay off in big way. It’s the case that very specific sub-fields pay off and it’s impossible to know those four years in advance. But it is possible to know one year in advance. If you delay until the last year some of your more practical, very specific classes, there’s a better chance you’re going to be able to match up to the market. Being able to delay your choice of major until you get a sense of what the market is like is much better. If there’s only a two-year delay, you’ll be much better off than if you were trying to pick your career when you’re a senior in college where it’s almost impossible to tell what the market’s going to be five years into the future.

Deniszczuk: But I would say that if you are interested in IT, getting involved in IT courses, even on a general basis early on, would be helpful because then in your senior year you can make that change to something much more specific and you’ve got all the background courses that you needed in order to achieve that.

Cappelli: That’s probably true. It’s also true that most college kids now — parents might not know this — graduate with a fair amount of IT experience anyway because they’re using it in all their courses. For many employers, that’s what they’re after. So, you might not even need an IT degree in order to get an IT job. We forget that in Silicon Valley when it got started, only 10 percent of the people working in Silicon Valley had any kind of IT degree — and yet they built the entire IT industry.

KWHS: Jeanne Paseman, a teacher at Centennial High School in Idaho, says she knows high-performing students who have been admitted to prestigious private colleges where they will have to borrow in excess of $25,000 per year in order to attend. In addition, these students also have generous merit scholarships to state schools. She wonders, is it worth taking on considerable debt in order to attend a prestigious college? Is it easier for students from prestigious colleges to get jobs? And are they hired at higher salaries than students who attend state universities?

Deniszczuk: There is a fairly high correlation between the reputation and rankings of universities and future earnings. Ivy League graduates do quite well by both measures, with Princeton ranked sixth and Harvard eighth in PayScale’s rankings on mid-career median salary. Graduates of top schools also argue that the network and contacts they make during college are the most valuable part of their experience. That’s something you might not be able to get at a community college and certainly not at a trade school.

Research shows that elite schools more clearly appear to generate a worthwhile return on investment as employers are willing to pay higher salaries to those folks. The more elite schools on average provide a broader diversity of experience, bringing in students from around the world in many cases as opposed to around just your community perhaps.

All that being said, as someone who attended a state university, my view is that there are several affordable colleges and universities where you can get an excellent education and end up with an excellent and rewarding career. According to studies, your choice of field matters more than your choice of college in many cases. After controlling for ability, the earnings differences of graduates from elite and non-elite institutions are small at best. Any earnings advantage that may emerge over the long run is difficult to concretely tie back to the effects of one’s college choice.

I have a quote from a Forbes contributor, Rick Smith, and it matched what I felt. The quote is, “In the end, perhaps it is ambition that ultimately points most accurately toward where you are headed in life. If you attend an elite school you can take advantage of all that it offers. If you do not but are equally ambitious, it seems you are not disadvantaged over the long term. Anyone making a decision about education should consider not just cost and prestige but also factors like, career services and alumni network, expectations of the campus experience itself.”

In other words, life is often what you individually make of it. If you’re ambitious, you have initiative and you work hard, you can be successful no matter what college you attend.

Cappelli: It’s probably a good point to remind ourselves that the college experience has a lot to do with things other than just getting a job. It might very well be that you’re getting a bunch of stuff from elite schools that are quite expensive which you’re not getting from cheaper schools, particularly state universities. It’s hard to put a dollar figure on that. One of the things that you do get is much higher graduation rates as people graduate on time. And people tend to report nice experiences from these places — that counts as something.

The other thing we know is that it’s difficult for students to do well when they’re going to schools that are not their first choices. If they are going to a school they didn’t really want to go to, it’s hard to get them motivated.

This isn’t personal opinion. There are studies looking at these sorts of things. It is true that [there are] interesting studies that looked at students who were admitted to very elite schools who went to schools that were less elite. They followed them up after afterwards to see how well they did just in terms of money, and there wasn’t much difference. Now, you might say that that proves the issue it’s really the selection into the colleges that matters rather than what happens to the kids when they’re there.

Another way to say it is that college is only one of many factors that affect your wages going forward. But there’s some contrary evidence as well. There was some evidence in the state of Texas that shows that kids who graduated from the elite university in the Texas system, which is frankly, University of Texas at Austin, did much better than their peers who graduated from other schools.

Now, the problem there is that it is actually pretty difficult to control for ability differences because the colleges are selecting people based on all kinds of things which aren’t easily measure by things like SAT scores. So, it’s a little tricky to make the decision. If you’re worried just about money then it’s probably not worth it — particularly to borrow money to go to an elite college. If you’re worried about the experience and it’s a place the kid really wants to go to for all kinds of reasons that make sense, then it’s a consumption decision. For a lot of parents, college is about consumption. They’re going to spend money on their kids one way or the other. They have enough money to pay for it. If that’s the case, then maybe you could justify it. But it’s a consumption decision rather than an investment decision.

Related Links

• Knowledge@Wharton: Will College Pay Off
• A Review of Peter Cappelli’s Book Will College Pay Off?
• Money Crashers: 33 Factors for How to Choose a College
• College Affordability Guide

Conversation Starters

Michael Deniszczuk and Peter Cappelli express some differing views on the worthiness of the college investment. Take a look at their viewpoints. Why might someone in the business world and someone in the academic world assess the economic value of higher education differently?

Do you think college is worth the investment? Why or why not?