Is The Ivy League Worth It?

Harvard Yard CropContinuing the seasonal back-to-school theme, two blogs recently addressed essentially the same question, namely are elite colleges worth the elite price?

Last week, Silicon Valley Blogger at The Digerati Life gave us a long and methodical discussion, complete with charts, Should You Invest In An Ivy League College Education? The post tees up the major issues, but stops short of presenting a definitive answer to its own question.

In contrast, Zac Bissonnette’s post at The Consumerist, 5 Reasons Why Every Single College Ranking Is a Pile of Crap, makes it clear where he stands. “A student’s success or failure in college and in life will ultimately be determined by who they are, not which college they attend.”

It is hard for me to avoid thinking that this question is overly, you will excuse the expression, academic. All parents should be so fortunate as to wonder if shelling out $200K to send the kid to Yale for four years is really worth it.

When we talk about the elite schools we are talking about maybe two dozen schools out of the 4,100 colleges and universities in America. This is not a personal finance question like “Should you buy a car new or used?” It is a hypothetical exercise along the lines of “Is a house on Nantucket a better value than one on Martha’s Vineyard?”

But just for fun, I am going to pretend it is on the list of personal finance problems that all consumers need to be able to tackle. Cuz ya’ never know.

To begin with, let me define the question more precisely. We are not talking about going to Elite University or not going to college at all. The choice is really between Elite U. and the University of Your Home State or similar. Put another way, you can go to an expensive top 20 school or a much cheaper place that merely ranks in the top 100.

Further, for the purposes of our analysis, we assume that money is your only concern. The only downside to going to Elite U. is that it is more expensive, and the only upside is an increased income later in life. We ignore, for example, the non-trivial advantages Elite would give you in the dating and marriage market.

We will further assume that Elite will set you back $200K. That’s a nice round number cited in the Digerati post, but it is something of a worst-case scenario. Although places like Harvard and Yale charge around $35K/year for tuition, with room, board, and other expenses not included, that’s more of an asking price than a firm quote. The majority of students receive financial aid of some kind.

And let us arbitrarily peg the cost of the lesser alternative to Elite at $80K, that is, $20K/year, a big slice of which is living expenses. Thus the net cost of Elite is $120K.

How much more income would you have to get over your working life to justify paying $120K now? Not that much. Even assuming an unrealistically high 10% discount rate, you would only have to increase your annual pay by more than $12,271 a year for 40 years to make Elite worth it.

A website called PayScale runs an annual survey of the salaries earned by the alumni of American colleges. Their top 20 have median “mid-career” incomes that range from $126K down to $109K. I have a lot of problems with their methodology, chief among those being that they exclude alumni who later got graduate degrees and use what can only be small and skewed sample sizes for some schools. But I think they hit the side of the barn, more or less. Let us assume that Elite grads pull in an average of $118K a year in mid-career.

As a representative lesser and cheaper school, I will use The University of Virginia, fondly known to its friends as UVA. (Actually, it’s only cheaper if you are a Virginian, and even then won’t quite squeeze into $20K/year.) PayScale does not number its list, but I have counted out UVA as having the 81st highest alumni pay at $93,900. The gap between Elite and UVA is then $24,100 a year, roughly twice the difference that would be needed to justify the additional expense of Elite.

So, assuming the “mid-career” difference in salary is a good estimate of the average difference throughout a working life, there really is no question. Elite is a buy.

Bissonnette makes the argument that comparing median salaries is misleading because it assumes that the only difference between the median grads of the schools is that they went to different schools. What we really want to know is the salary difference for an individual person should they attend one college or another. It seems reasonable that a given student might expect to make less than the Harvard median if he went there and higher than the UVA median if he went to that school.

I am sympathetic to that argument, in fact I’ve made it myself. But I won’t go so far as to say that which college you go to has no economic impact at all. And although the difference in tuition may seem staggering when you are about to write a check, spread out over a lifetime of working it is comparatively small.

Again, the Ivy-or-not question is not likely to be a practical issue for most people. Many more people are, or will be, confronted with the state school vs. Ivyish school conundrum. And then the results can be quite different. Imagine a resident of Virginia choosing between UVA and comparatively swanky Middlebury college, which weighs in at a hefty $52,120 a year for tuition, room, and board. It also ranks one slot lower than UVA on the PayScale survey at $93,600 for mid-career salary.

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