A couple of weeks ago an article from SmartMoney about college education costs and salary caught my attention. In particular the chart caught my attention. Being the math dork that I am, if there’s a table of numbers, I’ll often skip to that before reading the article. This article had one of the most interesting charts I’ve seen.
The chart showed a bunch of public schools at the top as having the best value. I’m not going to claim that public schools don’t have great value – they do. However, since the top 18 were public schools, I knew more or less their methodology – which is one I greatly disagree with.
Before I get to their methodology, let me reference my previous article on The 15 Most Profitable Movies of All-Time. CNBC went through box sales and divided the box office sales by the costs to make the movie. The number 1 movie there was My Big Fat Greek Wedding. How is that the case? When the calculation is down as a ratio keeping a small numerator pays off big. Almost all the movies on the list cost very little to make. A movie like the Blair Witch Project (which was inexplicably missing on the CNBC list) could be considered quite profitable in terms of return per dollar spent, but was it as profitable as Avatar? Let’s run the number from IMDB:
The Blair Witch Project
Budget: $60,000 (estimated)
Net Profit: $248,579,099
Budget: $237,000,000 (estimated)
Net Profit: $1,802,472,387
Using CNBC’s calculation of “profitable”, the Blair Witch wins. Using my definition of “profitable” (which made more money after its cost) Avatar blows it out of the water. I’ll let CNBC have their Blair Witch any day, as along as they give me Avatar.
How does this apply to SmartMoney and their rankings? Let’s look at their methodology:
With help from PayScale, a Seattle-based compensation-data company that maintains salary profiles of 29 million workers, we collected median pay figures for two pools of each school’s alums: recent grads (who’ve been out of school for an average of two years) and midcareer types (an average of 15 years out). For each class, we divided the median alumnus salary by tuition and fees (assuming they paid full price at then-current rates), averaged the results and, finally, converted that result to a percentage figure. The outcome: a measure of return on (tuition) investment that we’ve dubbed the Payback Score. For example, a hypothetical grad who spent $100,000 to attend college and now earns $150,000 a year would score 150. The higher the score, obviously, the better.
Does that seem a little familiar? I helped you out a little above by highlighting the key word – “divided.” In other words, they are giving you the math that makes the Blair Witch the most profitable movie, not the math that makes Avatar the most profitable. When division is used in calculations like these, keeping the denominator low is the key to ranking on top. That’s why you see all the public schools ranking at the top. Like Avatar, people may have made more money at colleges that cost more.
Here are a few other things details that may sway these numbers:
- The source of the information is from PayScale, a site that generally covers a broad middle class range. Are people who are unemployed reporting to the site? Are CEOs entering their salaries to the site? Is it more likely that a graduate from University of Florida (to pick a top ranking school) is unemployed than one from Harvard? Which is more likely to be a CEO?
- The methodology uses two sample years instead of a more comprehensive salary history. The tuition and fees are paid only for the 4 years that one attends the college. The salary earned is typically for around 40 years. To put this in perspective, in 1996, four years of Princeton cost $50,000 more than four years of University of Georgia. In just year 15 salary, the Princeton graduate earned around 45,000 more than the University of Georgia graduate. What about years 16, 18, 20, etc… This is where the Smart Money (pun intended) should go with the Avatar method.
- Public school costs more now. As the article mentioned, “Private tuition has increased 70 percent since 2001, to an average of more than $27,000 annually, according to the College Board; public tuition more than doubled over the same stretch.” This tells me that the cost of the public schools from 1996 are not relevant to today. They were a good deal then, but many of the top schools on the Smart Money list have tripled their costs since 1996, while Princeton has an 80% increase in that time. None of the private schools on the list had tripled their costs from 1996 to 2009. Mathematically, it looks like the schools at the top of the Smart Money list, made it because they were bargains – not necessarily because they still are bargains.
What can we take away from this?
The math that SmartMoney uses is helpful if finances are tight in your household. The people who made Blair Witch didn’t have the money to put together an Avatar. That’s understandable – few people do. Give those Blair Witchians (Witchers?) a lot of credit for making the most out of the dollars they had.
In the same vein, I don’t want to come off as someone against public schools. There are a lot of good deals at them. Plus if you are going to go into something like blogging as I did, the degree doesn’t mean a thing – there’s little use in spending the big bucks on it.
It’s possible to recognize the value of public schools, without going overboard and making the private ones look like poor use of money. They appear to be anything but that.
Finally, be skeptical of articles that try to use division that favors small denominators. Sometimes, you actually get what you pay for.
Tommy Z says
There are a few more problems with their rankings. In order to arrive at their rankings, they only look at 2 factors:
1. Cost of tuition.
2. Median salary.
The problem I have with the number they are using for #2. It implies that the college istelf is what determines one’s earnings when this is not true at all.
The “better” students attend the “better” schools; the compound this by having higher restrictions/qualifications to get admitted. Then, when those very talented students do well in their careers – the school likes to take credit for that when in reality, that same person could have made just as much money going to a “less quality” school.
Second, one’s major largely determine’s one’s earning power. To say this in a more simplified way, let’s say:
School A: 90% Engineering majors and 10% Liberal Arts majors
School B: 90% Liberal Arts majors and 10% Engineering grades
Which school is going to show a higher median income for their grads? The answer is obvious.
Because the article does not take majors into consideration, it is useless.
Lazy Man says
Thanks for pointing out a couple more of the problems, Tommy Z. I agree with both points.
My wife went to a public school and became a pharmacist. It was a well-concocted plan considering that her family didn’t have a lot of money and it was a career with the potential to change that.
Kosmo @ The Soap Boxers says
@ Tommy Z:
“The “better” students attend the “better” schools; the compound this by having higher restrictions/qualifications to get admitted. Then, when those very talented students do well in their careers – the school likes to take credit for that when in reality, that same person could have made just as much money going to a “less quality” school.”
This is a good point. While I’m hesitant to use standardized test scores for anything important, they could have least grouped the students by SAT/ACT range and compared the median salaries for each cohort group.
I definitely agree that the student plays a huge role in the value of an education. After I eventually figured things out, I sought out the professors who were hard instead of avoiding them, as most people did. These profs were trying to cram in extra knowledge – more for my money.
Three quick points.
When I was in school – I had a professor who decided to be undeniably cruel to people who could not do basic math and look at points in assignments. He made every homework assignment worth 1,000 points. He made tests worth 100,000 points. There were a million points in the semester. So people work working their butts off because they thought a 1,000 point assignment was going to make or break their grade. They worried about the point values, and not the relative worth of those points. A homework assignment was worth 0.1% of your grade, who cares if it is perfect?
When I graduated school, we had a student athlete who also graduated and signed a $60 million dollar contract. That year, the school of liberal arts had an inflated adjusted graduate earnings. It went from $30k to like $60k, making more than the engineers who are world redound from this institution. Did the School of Liberal Arts do anything better for their graduates who the previous year earned much less on average? Nope, just one lucky schmuck got stupid NBA money.
Finally, There are three main reasons why public colleges are charging more. First off the economy. There is a lack of money coming in. When state budgets are slashing education, who do you think gets hurt? Also when people don’t have as much to give, they don’t give to their alma mater either. Secondly, inflation. Inflation is occurring, and the things that an institution has to do (build buildings, run dorms, have insurance, police forces, etc.) are all increasing in costs. Finally, the prestige of being a college professor is wearing off, and they are demanding more money to teach. Well institutional pride and prestige of the big names is marketing and pride, institutions have to have those big names to attract the best and brightest, thus they have to pay for them.
Tommy Z says
I disagree with your third point. While it is true that a bad economy results in fewer donations and less state tax revenue to fund the costs, it does not automatically mean the schools must charge more.
Sure, schools like to use a bad economy as an excuse for increasing tuition…but they also use a good economy as an excuse to charge more (presumably the students can afford higher tuition in a good economy).
Why are costs out of control?
A. Society promotes this myth that college is “worth it” at any price…kinda reminds me of the tech stock bubble in 2000 or the real estate bubble in 2008.
B. The government hands out student loans like candy…and the colleges know this…and therefore there is no incentive to get costs under control.
The way schools are run today sickens me. As an alumn, I’ll get calls from time to time asking for money. I never give anything. Why would I want to feed that beast? It’s time to choke those schools so the education bubble pops.
I did not say that this is a valid reason, I said it was a reason.
I disagree with your rebuttal points. First off, yes some people think college is worth it at high prices. However at any price? If your only choice was to go to a local state school for $1 million a year, would you think it is worth it then? Would many people? No. Only those that can afford it. That is exactly what happens now. Only those that can get enough financing can go through school.
As for the student loans like candy comment. While I agree they are a bit free with the money (in terms of quantity) it is rather hard to determine who will and wont pay it back when people have zero credit history. Secondly you cannot default on student loans, so essentially no matter what, the government gets their money back. This is like guaranteed money.
I agree with out about the calls and crap. I don’t give anything to my alma maters. If they cannot make it as a simple business, then they do not deserve to move on. My Humble Opinion of course.
Tommy Z says
The current mentality of college being worth it at any price is alive and well right now, contributing to a bubble in prices sure to collapse at some time in the future…probably before the cost hits $1 million.
Because the government makes it possible for nearly everybody to afford whatever colleges charge using student loans, it is like giving the schools a blank check to charge whatever they want. Heck, even medical costs can’t keep pace with the rising rates of tuition.
This country would be much better off if we were not addicted and dependent on cheap and easy credit.
Lazy Man says
I think the myth of college being worth it at any price is like the “American dream” of home ownership. It’s something that is perceived to be true no matter what.
People got into horrible mortgages and ended up in worse financial shape. Similarly there are people who graduate college with big debts and a degree that doesn’t guarantee them a high paying job enabling them to pay it back.
I don’t think either case is the norm, but has gotten more common in recent years. In each case, the individual can take appropriate steps to minimize the chance of this happening.
Tommy Z says
You are 100% right, Lazy Man.
My wife went to school to be a pre-school or an elementary school teacher (pre school to grade 3) by studying early childhood education. She also is very religious and opted to attend a private school.
The end result is that she graduated with a degree that is worth between $10/hour in a daycare setting (where most of the jobs are) or about $30k per year in a public school (where jobs are very hard to come by due to intense competition). In addition to all the fees she (and her family) paid along the way towards tuition, books, room & board, etc…she still ended up graduating $85,000 in debt…even with all the scholarships she got.
Even though she realizes now that it is a bad investment to pay $100k to earn a $10/hour job, she didn’t think about it while attending school because her (and most people like her) buy into the myth of “at any price.”
ITIN ANDY says
Tuition costs rise because we continue to pay. To the point, if there can be only so many gifts at Christmas the kids will get them We will always spend dollars on our kids. Additionally, instituions of higher learning have done a remarkable job of marketing the idea that secondary education equals a better life. Has anyone noted the stream of information regarding the need for blue collar workers that are now in such demand their earning potential exceeds that of the college educated?
Kosmo @ The Soap Boxers says
“When I graduated school, we had a student athlete who also graduated and signed a $60 million dollar contract. That year, the school of liberal arts had an inflated adjusted graduate earnings. It went from $30k to like $60k,”
I don’t think it’s just the people in the million point class who were numerically challenged at your college. Hilarious that they used the mean instead of the median.
On the positive side, at least your student athlete graduated …
@Tommy Z (Comment #8)
You keep saying addicted to college at any cost, but I disagree. Not all people think that way. I left school with more money than I went to school with. Prudent investing, working my tail off while at school, and knowing I had a $60K waiting for me got me through school. Those that decide to study liberal arts at $30k a year while putting it all on credit, yes, those are the people you are talking about. People studying, and working throughs school and need a few more grand to finish the degree, I don’t see those are the problems. I think you are picking one stereotype and sticking to it for your statements.
@Lazy Man (Comment #9)
I think the issue is the government forcing their values on us through tax abatements, and people find any way to pay less taxes no matter the cost (going bankrupt, etc.). There is no reason for a family that makes $30k to send a kid to a liberal arts school costing $30k a year. Even with loans or what not, yes that is just stupid. People paying for a house that is way overpriced and and putting no money down, that is just as stupid. This is the reason why people have been doing stupid things. Yes everyone is not as educated as those trying to make the right/good choices, but again, we cannot deny them the right to be stupid (as much as you want to strangle them).
@Tommy Z (Comment #10)
Yeah .. I understand the myth you speak of, however it is not go to college for any price. It is go to college, get yourself a good degree and you will earn on average a half a million more in your lifetime. Note I said average. If you go to a private school, rack up 100k in debt and know you are going to earn barely above to poverty line? That is stupid and people should have told her that. The banks, her parents, etc. Yes people have to learn somethings on their own, but again, someone should have said something. I do not agree that people or even as a country we have a “go to college at any cost” mentality. We have a “get educated at any cost”, which people have bastardized to make it think the only thing that counts is a college degree. My cousins kid is working hard and is an ACSE mechanic, and now going to BMW school and has a $50k job waiting for him when done in a couple months at any BMW dealership. Not bad for a kid who is 20. I have a friend whose kids went to school and got full rides (so they are not in debt at least) but they have BA degrees in History and the other in Forestry. Lets see, forest rangers make $20k a year and history degrees are barely worth the paper the degree is printed on. At the end of the day one works a manufacturing job and the other works at keeping pregnant and living on welfare. Those are kids were told and told, but they refused to believe their 4 years in school would not yeild crap.
The realization came like a ton of bricks and now they see it. They had a perfect opportunity to do something that mattered with their intelligence, and free tuition. They chose to get degrees because they liked the subject material. This I think is the biggest issue, and not that people are going to get educated. They are going to get educated and spending all this time on worthless degress. Don’t tell me that someone going to get an engineering degree is doing something worthless. It is all these other degrees you are railing against.
Please note that any statistics about blue collar jobs and available workforce has to be taken with a HUGE grain of salt. We have millions of people that want to work, only if they make enough money. Companies don’t want to pay what these people want to make therefore we have open jobs. This is the key to our “open blue collar jobs”. I know tons of ex-UAW people who refuse to entertain any job not paying $25/hour. Refuse. There are open manufacturing jobs for $12-15 an hour begging for experience line folks. However since they are not UAW shops, and don’t make as much, they would rather be on unemployement and union severance. It used to be people worked an honest days work for an honest days wage and now that that “honest days wage” is not what they used to make, they don’t think it requires an honest days work.
Yes, it was sad that they touted that fact that their average salary was $60k for graduates. However Glen never graduated, he left after his Junior year, and they even counted that as he was there for 3 years.
Tommy Z says
“Not all people think that way.”
True, but I think MOST do. The truth is that some degrees are worth it and some are not. Today’s college age students mostly are not smart enough to understand that until after they graduate and realize they just got screwed.
“Yeah .. I understand the myth you speak of, however it is not go to college for any price. It is go to college, get yourself a good degree and you will earn on average a half a million more in your lifetime.”
You remind me of something important. It is a myth that going will result in you earning $500k more in your lifetime on average. Typically, the people that do not go to college are high school dropouts and lesser motivated types of people. College has a propensity to automatically attract certain types of people that would already earn $500k more with or without a college degree, on average.
“Yes people have to learn somethings on their own, but again, someone should have said something.”
I agree with you…but the reality of the situation is that nobody said anything, presumably because they are not worried about getting paid back – student loans cannot be discharged in bankruptcy. It is ironic how the inability to discharge student loans combined with government guarantees has royally screwed up the system. Without these two things, any honest bank would have asked my wife how much college costs and what degree she was going for and then would have promptly denied her a loan.
The result of this is that either the school would be forced to lower their tuition costs, my wife would have had to pick a higher earning field, or a combination of both. It is a perfect example of how the government has screwed my wife over by actually providing financial aid.
If it were not for government screwing this whole education system up, the marketplace would direct people to career fields where they are most needed (and earn the most money) such as engineering, medical, sciences, etc.
“Companies don’t want to pay what these people want to make therefore we have open jobs.”
What companies “want” to pay has no bearing. It is what they can afford to pay. If a worker can only provide $12-15/hour worth of benefit to an employer, that is the most the employer will be able to afford to pay him. Employers are in business to make money, not act as a charity to people incapable of providing a means to be self-employed.
While you bring up several good points, I still have to disagree with you on some things. No, there is not Myth to the $500k lifetime earning of more. Yes there are statistical outliers (Bill Gates, Mark Zuckerberg, etc.) but at the end of the day, you are statistically going to earn more if you have a good college degree. You say it is all drive? Okay I would like to see you become a doctor with NO COLLEGE DEGREE. A Lawyer, Accountant, Engineer, Scientist, etc. All of these require a degree for you even to have access to those jobs. It maybe snobbery, it may not be right, and it may be elitist, that is not that point. You are required to have a degree in those fields prior to you even being able to apply for those jobs. And because of those degrees, you can get access to those higher salaries.
I think the whole bankruptcy thing is a crock anyways. If you can forgive one type of debt, then you can forgive them all. Remember America was founded by England throwing their people who could not pay their debts on boats to work it off here for 7 years, then you were free from your debts (indentured servants). Same with Australia. There should be no way for people to just “forgive” debt and not “forgive” others.
Your final thought about companies “wanting” to pay salaries. Companies “want” to pay zero for labor. They know they cannot and get the work done. Thus that “have” to pay a salary. You also point out companies can afford to pay. This is fallacy. If a company can make millions of dollars in profit, they can afford to pay $1/hr more to their shift line workers. However, it has nothing to do with market value, it is what they can get for replacement costs. If someone does a job with the same skill set and they can do it instead of $10/hr, they can get someone for $5/hr, then the company will jump on that fast. They want the pay the least legally possible to get the job done, and still have the skills and requirements to do the job.
To take this a step further. I am an IT architect. I have two masters degrees, 15 years in industry, and a boat load of experience at major companies. A company that would like to hire me, must pay me around $100k to get me to work for them. To find a person with my skill set, my experience, etc. would be rather difficult, and this means from an economic standpoint, I am rather rare. If a company can find someone who has all my experience and they are willing to work for $60k, then yes, they will hire them. That is a series of compromises each company makes. Employers can afford what their managers are willing to pay for a specific job. If a company is looking for an IT architect position and list it at $60k, then they are going to get a person who only has that much experience or is willing to work for that price. I won’t. Not from snobbery, or anything else but knowing what the market will bear. I don’t think it has anything to do with what the company is willing to afford, just what they are willing to pay against their bottom line for someone to complete that task.
Tommy Z says
“you are statistically going to earn more if you have a good college degree.”
Yes, some professions require a college degree like doctors, accountants, engineers, etc. No argument there. However, my point is that colleges like to take credit for giving people a higher earning potential when those people already had that potential to begin with. Heck, a lot of jobs today that require college degrees only do so to help thin out the resume pile…the work itself can be done without a college education.
“If a company can make millions of dollars in profit, they can afford to pay $1/hr more to their shift line workers. ”
Sure they can…assuming the company is making enough money in other areas to cover that loss. You are right that the company will pay the least amount it possibly can. However, sometimes that amount is still too high for the company because the incremental value the company would get from hiring that extra employee is not enough to offset the cost and then BOOM – you get unemployment.