Is a Top College Education Worth the Higher Price?For years now, private college tuition has risen significantly faster than inflation, a fact that colleges have used a fancy economics theory called Baumol's Law to explain away. Unfortunately for the families who pay over $200,000 for the privilege of sending a child to one of those private institutions, the value of the education is hard to justify when comparing its costs and benefits to those of a state school.

The lack of difference in value between state schools and the more prestigious private colleges is compelling. A private college -- including tuition, room and board -- costs about $50,000 a year, compared to half that price for a state school. But according to a study cited by The New York Times, the average lifetime incomes of comparably talented graduates of public and private institutions are about the same for most students -- in terms of financial value, it's hard to justify the tuition difference.

But those rising private college tuition payments haven't kept pace with the rise in pay for full professors. For example, since 1970, Harvard's tuition has risen at a 5.4% annual rate from $4,070 to $33,696, while the consumer price index has risen at an average annual rate of 4.4% from 39.6 to 218.8. The salaries of full professors during that time rose at an even greater rate of 5.8% a year, from about $20,000 to $191,200.

Why Has Tuition Risen So Much?

When asked about why tuition has gone up so much, academics such as those at William & Mary cite Baumol's Law. This states that when it comes to offering services, the large productivity boosts common in goods-producing sectors are not possible. That claim is certainly questionable as applied to education, given the dramatic increase in the use of technology to prepare syllabuses, communicate with students and calculate grades, among many other education-related tasks. But regardless, as my DailyFinance colleague Charles Hugh Smith explained in a recent column, "salary increases in those service sectors -- education, health care, government, to name a few -- keep pace with those in industries where raises are justified by greater productivity."

A theoretical cause for the tuition increase that seems more plausible to me is the Chivas Regal effect -- the idea that universities will charge what the market will bear. As Time explained almost a decade ago, during the 1980s, parents increasingly came to feel that "college education was a necessity, a direct conduit to a high-paying job. Easy financial credit, moreover, made it possible for parents to borrow large sums of money; doing so for college became more socially acceptable."

CNBC's Scott Cohn, who produced its piece Price of Admission: America's College Debt Crisis, told me recently that he had a different theory: The real reason for the rise in tuition is the competition among schools to construct new buildings that they can't finance.

Who's Really Paying?

For example, consider the announcement on Dec. 17 that Yale's School of Management is building a $189 million addition to its campus. Ned Evans, former chairman of publishing house Macmillan, is contributing $50 million for the project, but it's not clear who's kicking in the additional $139 million or who'll pay to maintain the new complex.

There's a good chance that some of that expense will be covered by tuition increases -- especially when you consider that so many university endowments took enormous hits during the financial crisis. How can students afford to pay for those increases? Thanks to what Cohn calls the student loan entitlement, most students can get college loans from the government.

Whatever the reasons for the rise in tuition prices, however, articles by DailyFinance's college finance reporter, Zac Bissonnette (author of Debt-Free U: How I Paid For An Outstanding College Education Without Loans, Scholarships, or Mooching Off My Parents) have repeatedly hammered home these key points: In general, private colleges aren't worth the higher tuition they charge, and students at public universities graduate with far less debt.

Rich Tuition, Poor Job Market

That student debt can be a big deal. Given the weak job market, many students are finishing their educations and discovering they are unable to get jobs that recover their costs. Cohn cited the example of a couple who took on $250,000 in debt to cover paralegal training for the wife and an MBA for her accountant husband. After completing their respective programs, she got a job as a paralegal, but got paid the same as a colleague without her education, while her husband ended up in an accounting job that did not require an MBA.

Some students who attend prestigious private schools will win the employment lottery by getting jobs at hedge funds or investment banks. Others will start successful companies like Facebook. But these economic winners are far outnumbered by those who end up just part of the crowd, at the mercy of companies squeezing their employees and outsourcing professional work to countries with lower labor rates. Regrettably for them, the idea that their pricey educations might pay off in the future -- should the job market recover -- won't help repay their student debts.

But is the $200,000 investment in a top private college education worth the extra $100,000? If you measure the return on investment based on how much money students make, the answer is a resounding maybe. According to Robert Zemsky, director of the University of Pennsylvania's Institute for Research on Higher Education, as quoted by Time, a student who graduates from Penn will earn 56.6% more than if he graduates just from high school, compared to just 31.7% more if he graduates from a "flagship public university." Those figures are 10 years old, of course, but let's use them for argument's sake anyway.

If the Penn grad makes $100,000 a year, it will take 6.3 years for her parents to break even on the additional $100,000 in tuition. (That amount was calculated by assuming that the difference in annual salaries for Penn and state school graduates remains constant at $15,900 -- a figure calculated based on Penn research showing state college grads would make $84,100 annually.)

Parents need to decide for themselves whether that's a short enough payback period to justify the additional investment -- or whether the IRHE study is more convincing than the ones that deny the salary differential exists. But money isn't everything. And some parents may consider the bragging rights of sending a child to an elite private school worth the extra $100,000 is, as they say in the Visa ads, priceless.

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7 Comments

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lyleva

This article is right on! Check the schools that CEO's and board chairmen of the top 500 major companies graduated from...

Most of the time, how far up or how usuccessful a person is after college depends on lots of quarks, such as being at the right place at the right time, company or office politics, and being in the right industry or profession.

College is meant to make you a better educated person and prepare you to live a better life.

January 01 2011 at 10:16 AM Report abuse rate up rate down Reply
wheelzroller

Is an education Necessary ? Yes. Is it worth the Price ? Not Necessarily .
Is there another way ? Yes, but they don't offer Degrees at the Library.
Then again there is this whole thing about the Jersey Shore. I cannot
explain it ! Maybe you can . We should all be so lucky . The only thing that I truly know is that no matter how much I learn, the more I realize how very little I truly know about the world around us.

December 31 2010 at 8:25 PM Report abuse rate up rate down Reply
jkennedy806

My kid, graduated with honors from HS, was approached by big name schools, including Brown, Lehigh, SUNY, and a few others. When we looked at the tuition she said "for what??" the first year is same for everyone, the basic 101's.
so she figured she could spend $50,000 or spend $12,000 at a 2 year college for the first two semesters. She just didn't see the return on investment of all that money and no promise of employment when she graduated college. After this first semester where she made a 3.5 gpa. She had one professor who held 3 Phd's.
Another Prof, adjunct, who also taught at Lehigh and just two regular teachers who she enjoyed very much. I would like to think I have a smart intelligent daughter who knows the meaning of a buck.

December 31 2010 at 5:12 PM Report abuse rate up rate down Reply
philhers

I think that the earnings of Harvard professors are correct. When I was an Assistant Professor there in 1970, I earned about $16,000 for the year.

December 31 2010 at 3:01 PM Report abuse rate up rate down Reply
stevencasey4

Interesting article, dont disagree with the premise of the supporting points, however MasterCard has invested in "Priceless" to segment its brand!

N.B. Educated within VA state schools!

December 30 2010 at 8:08 PM Report abuse rate up rate down Reply
colinhockeypuck

The problem with all of this talk about value in education doesn't describe the advantages of contacts that a private school presents. My son has met more influential people in his 2 years at a private school than he would have in 10 at the large state intitution near us. He often has been in schooling and social events with these individuals and has learned if you want to be a professional act like one, be with the type of people you want to be and learn their success stories and then create your own success. His school has 2-3 times more internships than they have students and he has learned an education will get you nowhere without the contacts to get a job in the future. His time of volunteerism have led to opportunities with great job potential already. His social circle includes many highly motivated men and women that a smaller university setting at a private school provides and when it come to finding the right woman to share his life with he can find a partner with the same ethics, values and life experiences. His experience is opposite of what the author has found.
Is his education worth it. Half way through I can answer a resounding yes, but education is what you put into it and doesn't only include what is taught in class>

December 30 2010 at 5:02 PM Report abuse rate up rate down Reply
1 reply to colinhockeypuck's comment
jkennedy806

Sounds pretty snobbish to me, I don't think I would like my son to marry a Paris Hilton wanna be. Internishps -- oh no, that is a way for corporate America to take advantage of some college student. It's like dangling a carrot -- my daughter also did volunteerism, and in addition has had great references, and has worked for a medical facility on Union Square in NY for pay when she was 16 years old. Why cause she is a smart cookie, took Latin, pays attention and doesn't twitter her life away.

December 31 2010 at 5:25 PM Report abuse rate up rate down Reply