The Economics of Education

27lede-600In this week’s New York Times Magazine—“The School Issue”—there is a short piece debating whether or not a college education is “worth it.” David Leonhardt outlines various schools of thought: On the one hand, people who earn a college degree earn substantially more than those who do not, far more than the cost of the degree itself. On the other hand, though, college-bound high school graduates are likely a more intelligent/driven bunch than those who don’t go to school at all; this group would probably be more successful even without college.

While it seems obvious to me, and to Leonhardt by the end of the piece, that a college degree is worth the hefty price, it’s less clear to me how the price should affect the choice of a particular school.

What helps complicate the matter is how the prices are arranged in general. Unlike most commodities, in which there is a range of prices that goes from “cheapest” to “most expensive,” colleges basically exist within one of two realms: public or private. Now, there is certainly wide variation within each group, but this is nothing compared to the differences between them; depending on your state, a private college can cost ten times as much as a public school. Those discrepancies are extreme, but private schools that cost four or five times as much as public universities are quite common. Considering the cost of some private schools, these differences can amount to a difference of several years’ full salaries.

There are definitely many substantive differences between cheaper state schools and more expensive private schools. The former often have many disadvantages: bigger class sizes, fewer resources, smaller rooms, etc. But looking at it from a purely economic perspective, it seems hard to argue that going to private school will be ten times better (or even four or five) than going to a public university. Certainly there are scenarios where this is the case—Harvard is probably ten times better than your state school, particularly if you just go by future earning abilities—but the vast majority of private schools are not in the U.S. News and World Report Top 10, yet many carry similar price-tags.

Evaluating colleges in such a price-to-earnings manner may seem reductive. For one, students expect things out of a college experience that aren’t really quantifiable in dollars-and-cents; how much more are you willing to pay for prestige? Or to go to a school near home (or far from home)? Or one of your friends are going to?

Paying for education is not like buying an iPod. It’s not just one aspect of your life; it is your life for four years, and for many after. Who your friends are, what you do in your spare time, what you talk about, where you eat, etc., is all essentially defined by your school while you are a full-time student. It seems silly to pinch pennies in a decision so all-encompassing.

Non-economic reasons should certainly play a role—something so big shouldn’t be based purely on finances and future monetary gain. The problem is that finances are one of the few things about colleges that students can actually know going in. It’s impossible to choose a school because you think you’ll meet your fiancée there, or because your freshman roommate is going help land you your dream job (unless you have some sort of weird flashforward situation going on). It’s even hard to tell whether the academic appeals of a school will be suitable for you; high school students often have very little idea of what they want out of a college (at least, that was the case for me). In other words, the things that make college so important are more often than not unknowable. Prices, on the other hand, are easily attainable, and while predicting future earnings is impossible, you can at least get a sense of what career paths could be enhanced by a particular school.

There are certainly better reasons to choose a school than finances, but there are definitely worse ones. Too often, students end up picking schools for bad reasons, like prestige and name-recognition. You may as well go by the price-tag.

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3 responses to this post.

  1. Posted by janechong on October 6, 2009 at 11:22 PM

    “For one, students expect things out of a college experience that aren’t really quantifiable in dollars-and-cents; how much more are you willing to pay for prestige?”

    Not being quantifiable right down to the dollar and cent is not the same as not being quantifiable in dollars and cents. Why should there be sensible limits to paying for prestige, when “prestige” serves as not a simple vanity marker but a gauge (at least, by popular perception) on future individual earning/power potential?

    Not to mention: what if people envision the public/private question not in terms of smaller/larger salary, but max/min? What are the implications of choosing under the assumption that a state school will put a ceiling on your dough, and going private will give you a floor?

    “Too often, students end up picking schools for bad reasons, like prestige and name-recognition. You may as well go by the price-tag.”

    Why are prestige and name-recognition “bad reasons”? Not that I disagree, but the validity of the position seems far from self-evident. After all, you established that prestige and price-tag are in fact NOT the same thing -an Ivy education can cost the same as a converted chicken coop parading as a private institution. If you think prestige = higher starting salary, doesn’t it pay to make it a major consideration? Isn’t prestige -by definition -an excellent measure of the value of your diploma, if you equate value with perceived value and the advantages perception affords?

    Reply

  2. Posted by John S on October 7, 2009 at 12:43 AM

    There are clear economic benefits to “prestige” schools: A study Leonhardt (mis)interprets in his article makes the point that students from better perceived schools DO make more money in general. So while there is an economic defense of choosing prestige, I was referring to the less quantifiable “pride/vanity” factor. Independent of whether or not it pays off in your future career, there is something to be said for impressing people/having strangers think you’re smart. Whether or not you agree with it, a lot of people do factor this into the decision.

    One problem that comes from going off of prestige or perceived value, of course, is that these things are only valuable for what they refer to: A degree from a good school is only valuable because it signals a good education, but if that education is not actually so good, then the degree loses that value.

    More to the point, though, “prestige and name-recognition” are bad reasons because they refer to something external to the school itself, and college is a very comprehensive personal experience. Those things say nothing about how you’ll fit in at a school, whether you’ll be intellectually stimulated, etc., and those things ultimately have a lot more to do with (most) peoples happiness than impressing strangers and potential employers.

    Reply

  3. Posted by janechong on October 7, 2009 at 9:08 AM

    I find your line of reasoning very interesting. While I don’t necessarily disagree with your conclusion, I question some of your assumptions.

    Why are prestige and name-recognition “external to the school itself”? If these things are of value to the person, their un/satisfactory fulfillment will affect the taste and texture of his “personal” experience of the school, which is, as you say, comprehensive -in both obvious and subtle ways.

    After all, how you fit in, how intellectually stimulated you feel -are these the straightforward product of combining you + X school, as you suggest, or does, for example, your perception of how smart everyone around you is, have a significant impact on your approach to fitting in/finding sources of intellectual stimulation?

    Bottom line: what if prestige is a valuable tool for choosing and assessing your university pick, not simply because of the imagined social utility you derive from the prestige alone (which, I would argue, is not an easily isolated variable), but because of the positive impact that your/others’ “inflated” perception of your college will have on your college experience?

    You could argue that nobody “should” let this have a positive impact on said experience, but 1) is this easier said than done and 2) why not, given the practical benefits? Does this boil down to a normative anti-vanity appeal?

    Reply

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