Is the Ivy League a waste of money?
by Liz Weston
The merits of elite schools are open to debate, but there's no question that a college education is now essential -- and that aspiring students need to set practical goals.
Princeton professor and economist Alan Krueger set out to prove an Ivy League education paid off. He wound up proving exactly the opposite.
Well, sort of. In 1999, Krueger and fellow researcher Stacy Berg Dale discovered (.pdf file) that students who were good enough to get into Ivy League schools but who attended other colleges earned just as much after graduation as those who actually went to the more elite schools.
A new version of their study (.pdf file), which includes more data and tracks subjects' income for decades longer, was released this month. It came to the same conclusion: Elite colleges don't pay off financially for most graduates.
The only grads in this group of highly qualified students who seemed to enjoy any significant financial advantage from attending Ivy League schools, the researchers found, were African-Americans, Latinos and people from low-income homes or whose own parents hadn't gone to college.
The researchers' findings, however, seem to have had no discernible impact on the arms race that the elite college admission process has become. Last year, Princeton, for example, was the most selective it's ever been, offering acceptance to a scant 8.18% of the record 26,247 students who applied. Other Ivy League schools reported a similar surge in applications for their finite number of openings.
Whether or not an Ivy League education makes a difference, parents and students think it does, so they continue to battle to get in.
Other studies have shown that attending elite private schools does give graduates a financial advantage, especially when measured against the least selective schools. A widely cited study by researchers from Rand, Cornell and Brigham Young University, which was released the same year as the original Krueger-Dale study, found that alumni of an elite school earned more than those who attended a middle-ranked private institution and much more (as much as 39% more) than those who attended one of the least selective public universities.
Measuring an education's worth by future earnings is just one metric. It's also certainly true that elite colleges invest a heck of a lot more in their students' educations than the least selective schools -- and that the gap has widened dramatically in the past couple of generations.
Caroline Hoxby, a Stanford economics professor -- and a Harvard graduate who disparages the Krueger-Dale study -- notes that the elite schools spent about 4.5 times as much per student in 1967 as the least selective colleges. The gap had widened to 7.75 times ($92,000 for the elites, versus $12,000 for the bottom-ranked schools) by 2007.
I'll stop with the studies at this point, because my purpose here isn't to decide the relative value of an Ivy League education for any individual. My purpose is to get parents and students thinking about something else that needs to be a factor, which is what they can really afford. To that end, I'd like to make two points:
I'm not one of those who warns against the evils of all debt. I see federal student loans -- with their fixed rates, many consumer protections and forgiveness options -- as good debt when used in moderation. That's especially true these days, when a college education is pretty much a requirement to get into the middle class (or keep from falling out of it).
In fact, I worry about those who refuse to take on any debt and so don't get a college degree. Here I'll quote researchers Richard Settersten and Barbara Ray, who parsed a decade of longitudinal and panel studies of people in their 20s for their new book "Not Quite Adults":
"Debt is not the main reason young adults are failing to launch," they wrote. "In fact, not taking on debt is sinking the futures of many young adults. Fearful of the burden of college loans, they are underinvesting in themselves at this critical time, letting their immediate worries compromise their long-term security. . . . Not taking on college debt in this knowledge economy is a costly decision."
But borrowing a huge pile of money, either as a student or a parent, on the assumption the education will pay off no matter what -- well, that's just foolish.
This may not be an issue for actual Ivy Leaguers. As college student Zac Bissonnette points out in his provocative book "Debt-Free U," graduates of Princeton, Harvard and Yale are among the students who graduated with the least amount of debt in U.S. News & World Report's 2006 study. That's probably because the schools have generous financial-aid packages to lure the students who might not otherwise be able to afford the costs, while many others who attend have rich parents.
But cost is an issue for the vast majority of families whose kids don't get into the Ivies but who may be lured by a "dream school" that charges a small fortune or that provides inadequate financial aid. Just look at the list of schools from the same U.S. News study whose graduates left with the most debt:
As Bissonnette rather delicately puts it, "none of these institutions is likely to stand out on a résumé to the extent that Yale, Harvard or Princeton might." In other words, these students -- and others who attend expensive schools that aren't in the first tier -- may well be paying a premium for an education that doesn't justify it.
I'm not concerned just about the Leah Cowels of the world -- the students who overdose on debt. Cowels accumulated nearly a quarter of a million dollars in debt attending Ithaca College in New York to get a bachelor's degree she never used. And she's far from alone, as the testimonies on sites such as StudentLoanJustice.org can attest.
I'm also fearful for the parents who may drain their retirements and home equity, or pledge themselves to a life-shattering amount of debt, to buy their kids an education.
In too many families, discussions about what is and isn't affordable don't happen until the acceptance letters -- and the painfully inadequate financial-aid offers -- are in hand. And that's way too late.
By the time your kid is a freshman in high school, you should have a pretty good idea of your resources, including your savings. You can then go to the financial-aid calculator at FinAid.org to estimate how much your family will be expected to contribute to your child's education.
Set limits now on how much you'll borrow through federal student loan programs. The most that students can borrow for an undergraduate degree is typically $31,000. Parents can borrow up to the total cost of an education through the PLUS federal loan program, but they shouldn't agree to any loan that would prevent them from saving adequately for retirement. Any loan bigger than that -- or any student loan that doesn't come directly from the government, with its federal student loan protections -- is a sign you're over your head.
Armed with those numbers, you can start searching for schools that fit your budget.
If your kid does get into an Ivy League school, congratulations. Chances are pretty good that its financial-aid programs will make the tab affordable, especially now that many of these schools have adopted "no loan" programs that award grants and other discounts.
Otherwise, be wary. In education, you don't always get what you pay for.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Click here to find Weston's most recent articles and blog posts.