The real return on your college investment

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By Penelope Wang, Money Magazine senior writer

Runaway college costs are a matter of growing concern in Washington. In addition to pushing wealthy schools to spend more of their endowments, Congress recently passed legislation that requires greater disclosure about pricing and encourages states to maintain steady funding for public colleges by promising to withhold federal grants if they don't.

But in the end, no matter what lawmakers do, college costs will continue to defy gravity as long as we parents are willing to pay ever-higher prices to give our kids a head start in life. We assume that an expensive college will provide a superior education (there's that "high price equals better quality" bias) and an inside track to a high-paying job after graduation.

After all, at a brand-name school, your child will hang out with the scions of senators, hedge fund managers and captains of industry, and those connections can only help, right?

Well, maybe not. Says Ohio University economics professor Richard Vedder, author of "Going Broke by Degree": "There's virtually no data that allow families to evaluate the quality of [an elite college's] educational offerings or the outcomes of its graduates."

In theory you could quantify the added value you get from going to a highly selective school - which, in turn, would help determine what a reasonable tuition premium would be - by comparing the salaries earned by its graduates with those of workers who attended less selective schools.

Colleges, however, don't hand out that information. And some independent studies suggest the value is less than people think. Take a well-known 1999 paper by Princeton economist Alan Krueger and researcher Stacy Berg Dale at the Andrew W. Mellon Foundation.

The study compared the salaries of graduates who earned degrees from top-tier colleges with those of graduates who were accepted by these schools but chose to attend less selective institutions.

The research found that the two groups of students ended up with similar incomes. It appears that bright students excel no matter where they get their degree. The one exception: Low-income students did benefit from attending the most selective colleges - in their case, the impact of social networking seemed to pay off.

In today's fast-changing economy, however, the value of those old-boy networks may be eroding. According to a 2004 University of Pennsylvania study, prestigious degrees aren't as valuable at major corporations as they were a generation ago.

The study looked at the top executives at Fortune 100 companies in 1980 and 2001. During that time the percentage of top guns with Ivy League undergraduate degrees dropped by nearly a third, from 14% to 10%, while the percentage who attended other highly ranked schools, such as Williams or Notre Dame, fell from 54% to 42%.

Meanwhile, public university graduates soared to nearly 50% from 32%. Meritocracy in corporate America is a good thing, but it doesn't support the notion that whatever you pay for an elite education is worth it.

Given the steep price tag on the Ivies and similar schools and the uncertainty of the payoff, families need to do a harder-nosed evaluation when determining which college is right for their child. When you compare the best private and public undergraduate programs, says Vedder, you'll find that private schools rarely confer an unbeatable advantage.

If a student is considering engineering, for example, Cooper Union (where tuition is free to all) and the University of California at Berkeley have top-ranked programs. For economics, the University of Texas-Austin, the University of Wisconsin-Madison and UCLA are highly regarded.

There are, of course, situations where the expensive degree may trump the less costly alternative. Maybe Deluxe U. offers the most comprehensive courses in astrophysics or Korean literature. Perhaps a dream employer routinely recruits there and not at other schools. Or perhaps your child simply falls in love with the storied tree-lined campus and fieldstone halls.

Then you'll face some tough decisions. Just keep this in mind if opting for Deluxe U. will force your family to borrow heavily: After decades of steady increases, the median salary for workers with a bachelor's degree fell 4.6% from 2001 to 2006. (College grads still earn far more than workers with only a high school diploma, though, as the chart on page 1 shows.)

Meanwhile, salaries rose 4.3% for workers with professional degrees and shot up 9.4% for those with doctorates. So you don't want the debt from getting that B.A. to make grad school unaffordable.

Mind you, some borrowing can actually be a good thing, giving students a built-in investment in their education. But today many kids leave school with unprecedented amounts of debt - $20,000 on average, up from $9,000 a decade ago - and one in 10 private college students borrows over $40,000.

Moreover, that figure doesn't include parent loans, home-equity loans and credit-card debt. "It remains to be seen whether this kind of borrowing is economically sound or just a form of faith-based financing," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.

One chilling sign: Among students who graduate from four-year schools with more than $15,000 in debt, the default rate is nearly 20%.

As a rule of thumb, financial advisers recommend that student-loan payments not exceed 10% of a young adult's starting salary. At New York University, for example, about 60% of last year's graduates had loans, which averaged a hefty $34,000.

If they took out the maximum in federal loans and made up the difference with private loans, the typical borrower would owe about $460 a month, which is considered affordable if you earn at least $55,000.

That may be no problem for chemical engineers, with an average starting salary of $63,000, according to the National Association of Colleges and Employers. But the typical liberal arts major earns just $33,000, which would make those payments a real challenge.

Of course, for most families, choosing a college is not simply a financial decision; it's a highly personal one as well. Yes, you have to think about what kind of career that degree will lead to.

College, though, is also about forging lifelong friendships, being challenged by professors and students and sharing traditions - all of which are impossible to quantify. Still, there's no reason to overpay for the experience. From a purely economic point of view, the best advice might be this: Save your money; you'll need it for graduate school.

How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family snapshot, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com. To top of page

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