The college admissions bribery scandal has raised an important question: Is college worth it?
According to the Social Security Administration “Men with bachelor's degrees earn approximately $900,000 more in median lifetime earnings than high school graduates. Women with bachelor's degrees earn $630,000 more.” But that “wage premium” varies depending on which college you attend.
To some extent, the accused scheme was smart to target some of the nation’s elite schools, because those schools tend to offer even greater financial rewards to students. But those rewards differ depending on where you start. A 2014 analysis found that if the student’s family is already at the top of the income heap, the student is not likely to catapult any further with a fancy degree versus a less prestigious one.
As I recounted in my book, THE DUMB THINGS SMART PEOPLE DO WITH THEIR MONEY, too many families “go astray by overestimating the value of a high-priced private college…some schools do open enough doors to justify the high price,” but the boost is seen more dramatically for those students who come from middle to lower income families. The reason is clear: the network and calling card of a fancy school provides access that those families may not have had otherwise.
That’s why it might make sense to assume debt so as to tap into the magic of these schools’ alumni networks and have a better shot at ascending to the top one percent. The good news is that if your household income falls below $250,000 or so, most of these elite institutions have massive endowments, which will provide the funds necessary for you or your kids to attend. But other name-brand schools in the second or third tier may not deliver nearly enough networking gold to make taking on the debt a good deal, and neither will they provide comparable financial packages.
That’s an important point to remember as families begin receiving their college acceptance letters and financial aid packages in the coming weeks. Over half of students will turn to loans, which will contribute to the near $1.5 trillion in outstanding education debt.
Additionally, “Borrowing has shifted from students to parents, especially at higher-cost colleges, because more students are reaching federal student loan limits,” says Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com. (The aggregate loan limit for Federal Direct Stafford Loans is $31,000 for dependent students and $57,500 for independent students.)
And unlike student loans, which don’t require underwriting, parent loans require a credit check. If you have a shaky credit history, you may still qualify for a parent PLUS loan with a co-signer, which may be why some grandparents are now on the hook for education loans.
Unfortunately, all of this borrowing is exacting a terrible toll. Nearly three out of four student loan borrowers ages 23 to 38 delayed at least one major financial milestone, like paying down outstanding credit card and other debt, establishing an emergency reserve fund or saving for retirement, according to a recent Bankrate.com report.
There are no easy answers for those who have already made these decisions, but as each family considers higher education, there needs to be an open and honest dialogue, starting as early as freshman year in high school, as to what the family can afford and how the student will fare at the intended school of choice.
In the end, it is NOT worth consigning your kids to the burdens of big loans to attend a school she can’t afford and it is NOT worth compromising your own future by pumping money into these unaffordable schools rather than into your retirement accounts.