Thursday, May 17, 2012

The College "Investment" Decision

For our young folks and their elders as well, here's some valuable food for thought about the various college related decisions, including which one to attend.

 'Investing in College?' It Pays to Think Like an Investor has this to say:

"College is the best investment you can make, President Obama told students last month at the University of Colorado.

As a metaphor for the benefits of education, that statement is fine. But taken as a claim about the financial returns of a college degree, it poses two problems.

The first is that students and their families still lack sufficient data to estimate long-term returns for specific college degrees the way investors do with stocks and bonds.

The second problem is one of investment risk. Stock investors can manage risk by buying a diverse basket of shares, but a college student bets on a single asset: himself.

That makes it crucial that students and their families understand the factors that affect the risk and return of a college investment in order to swing the math in their favor.

College brings higher pay: $1,053 a week for the median bachelor's degree holder last year, versus $638 for a high school graduate with no college, says the U.S. Bureau of Labor Statistics. Last year's unemployment rate was 4.9% for college grads versus 9.4% for those with no college.

The College Board, a not-for-profit association, calculated in a 2010 report (based on 2008 data) that a typical student who enters a four-year college at age 18 and borrows his way through earns enough by age 33 to make up for his costs, including foregone wages and loan interest.

If a bond paid for itself that quickly, the return would be between 5% and 6% a year. That's a handsome payoff; stocks have historically returned around 7% a year after inflation. And it says nothing of college's other benefits, such as enlightenment, fun and higher job satisfaction.

Two big caveats: The College Board math assumes everyone goes to a public college. Those usually cost less than private ones—often a lot less—and that skews returns higher. The report also doesn't account for dropouts or extra college years. Only 56% of students who enroll in a four-year college earn a bachelor's degree within six years, according to a report last year by the Harvard Graduate School of Education.

PayScale, a Seattle data firm, examines the links between pay and variables like colleges and majors. Its analysis, which also ignores dropouts but accounts for students who take longer to complete their degrees, finds an average yearly return of 4.4% for degrees from 853 schools. That assumes students get financial aid, as most do. . . .

The worst returns tend to come from schools whose programs focus on nursing, criminal justice, sociology and education, says Katie Bardaro, an analyst at PayScale. The best returns are often from schools with strong engineering, computer science, economics and natural-science programs.
There's a flip side: "It's a lot harder to successfully graduate from those engineering programs," says Ms. Bardaro.

PayScale's analysis doesn't show how a specific degree from one school compares with that same degree from another school. "Until we know that, students, school counselors and policy makers are flying blind," says Mark Schneider, former U.S. Commissioner of Education Statistics and vice president of American Institutes for Research, a think tank. . . .

Until we can predict college returns more accurately, students and their families should think in terms of reducing investment risk, says Richard Vedder, an Ohio University professor and director of the Center for College Affordability and Productivity, a Washington-based advocacy group. After all, outstanding student loans now eclipse total credit-card debt, and even bankruptcy filers don't typically get out from under their school loans.

Start with a frank assessment of performance. High school students with high grades and excellent test scores are likely to go to good schools and earn high returns on their investment, says Mr. Vedder. Middling performers can reduce risk by going to low-cost state and community colleges, perhaps transferring to another school after two years if they do well.

For that matter, anything that cuts college costs reduces investment risk, says Jennifer Ma, a College Board analyst. Living at home for the first two years of school won't do wonders for a student's social life, but it's likely to boost his returns.

Mr. Schneider says students should compare net college costs after projected aid. (They can approximate net costs using the government's College Navigator tool) The riskiest investment is a high-cost liberal-arts college that lacks a strong brand name and doesn't offer much aid, says Mr. Schneider. By contrast, a high-cost school with a strong brand and plenty of aid may be a "good buy."

PayScale's Ms. Bardaro says students should research carefully the pay they are likely to secure before deciding how much to spend on college. After all, tuition and fees have increased 184% in 20 years after accounting for inflation, but wages for college grads have risen just 9%, according to Labor Department data.

Mr. Obama's investment tip is well-intentioned, but in college as on Wall Street, returns aren't guaranteed."

Discussion and Recommendation

There's a lot of good stuff in the above referenced article.

Perhaps the biggest gem in the article is the reference to the uniqueness of the "individual asset" under consideration --- the prospective student.

Equally good advice for our "unique asset" is that he should reduce risk by adopting a low cost "investment" approach. That's what I call the lower the water level methodology, aka keep costs low.

Our asset should also pledge that he will do well in college and take courses which will result in a successful and fulfilling career. That often, but not always, means preparing for jobs valued by employers with high pay relative to other positions. That's the raise the bridge methodology, aka make good money.

To lower the water level, aka cost of college, and raise the future bridge quickly, our special asset should resolve to go straight through, including summers, and take a heavy load of courses all twelve months. And plan to graduate in three instead of four years. He should also attend a public college and stay at home, if possible, while doing so.

To raise the bridge of the future, aka get a good job, our asset should consider pursuing a degree(s) in computer science, engineering, or some other science related curriculum. That said, he should enjoy what he's studying.

That will make our unique asset a lifelong learner and an ever increasing valuable contributor in the work place.

My view is that the college student is entirely responsible for the value of the education he receives, regardless of which school he attends. He's the asset. Not the school.

In that regard, if all the kids now enrolled at Harvard transferred to Podunk, those future Podunk graduates would outperform graduates of other schools, no matter where those other graduates previously attended college.

The corollary of this simple "individual as asset" principle is that if the individual is smart enough to go to Harvard but lives near Podunk, he should go to Podunk. He'll be glad he did.

Summing Up

Don't start college if you're not serious about performing well, graduating on or before time and getting on with your career asap thereafter.

If that happens, you can't miss. But even if only most of that happens, you won't miss.

Common sense and the basic rules of economics--scarcity (unique person) and choice (low cost, local college and later high paying occupation)--apply when selecting a college and major.

If high pay is not a goal, lower the water level some more and live at home for sure.

Finally ...

(1) Asset building (the one and only person involved), (2) bridge raising (that one and only person's future career, income and happiness) and (3) water level lowering (that one and only person seeking maximum educational value at the lowest possible cost) are what our unique asset needs to ponder when choosing a college.

Oh, and one more thing. Almost all useful knowledge will be acquired sometime after the formal education process has ended. Just get through the formal schooling quickly, do well while there and get in position to land a good first job for having done so.

The rest will take care of itself.

Thanks. Bob.