Should Wealthy Children Attend Top Schools?
There is a pervasive belief in America that attending a top college is the key for financial success. Moreover, the wealthier the family, the stronger this belief tends to be. Is it true?
Academic institutions have increasingly instituted price discrimination based on the wealth of students and their family. Currently, Ivy League institutions cost about 170,000 dollars to attend for four years without any financial aid. With full aid, College is virtually free. At state schools, costs are much less disparate. Four years of college may cost about 60,000 dollars at a state school, and be significantly less in certain areas. This means that the difference in cost for a top student attending a top school versus a state school is diferent depending on the students wealth. Consequently, wealthier students have a much greater incentive to attend local colleges than poorer ones.
Consider that attending a state school saves a wealthy student about 110,000 dollars. In order for an Ivy League education to be worth while, it would need to grant the student more than 110,000 dollars of present value future earnings. There are several different ways a different education may affect earnings. It may affect earnings rate per year (which may also vary at a different rate), it may affect initial earnings but have no affect on future earnings, or it may be some combination of both. Let me examine one possibility.
Using a 8 percent discount rate (the rate of the market, which is more comparable in risk to a persons earnings than the risk free rate), we find that a student would have to earn about 12,000 dollars more a year for attending an Ivy League institution than attending a state school, starting in year 1 (and assuming retirement at age 65).
How likely is it to assume that a student will make more because he attends a better college? Well, it is hard to say. Better students tend to go to better schools because they are thought to provide a better education with better financial prospects. However, if we keep the student constant, an average student a Princeton is likely to be a top performer at a SUNY. In fact, studies suggest that attending better schools provides only small gains in earnings. As the difference between the price of state school and top institutions increases, wealthier students will have more and more incentive to save money and go ‘local’. Poorer students, however, will have greater and greater incentive to attend an Ivy League, as they will continue to pay nothing.
The stopgap of this argument is that there are reasons to attend top colleges that (may) trump financial reward. For example, it is possible that the social benefits derived from attending a top school (such as status) outweighs the financial costs of doing so. Unfortunately students may simply be unaware that the school that is attended is less important than the student who has attended the school. If they become more savvy, top colleges will lose many of their paying students. Since these students are most likely to contribute after graduation, schools will also lose alumni funds.
More tomorrow….
May 30th, 2007 at 9:33 pm
My experience with Penn State and Columbia was that the less prestigious school was also the more difficult of the two. My Penn State GPA was 3.25 and my Columbia GPA was 3.58 with less work (always as a science major). I think that the least prestigious schools have low standards and little work. As prestige grows, the standards increase and the amount of work increases until you get to about the top 10 or 20 schools. From there on, standards increase greatly but the quantity of work declines greatly and the work becomes much more ‘g loaded’ so exceptional intelligence becomes a larger advantage.
Comparisons of average earnings out of school are also misleading because top schools tend to lead to slower starting career paths like academia or government for students who would pursue faster careers like engineering, teaching, or medicine out of less prestigious schools. Those students who attend top schools and pursue money as their main priority will make MUCH MORE than $12,000/year more than their counterparts in less elite schools, for instance, as Investment Bankers instead of Engineers.
June 1st, 2007 at 8:36 am
The difference for choice of schools is entering a career field that has normally distributed earnings versus a school that has log-normally distributed earnings. It is a total waste of money to go undergraduate nursing at Georgetwon, Villanova, or Penn because all entry level nurses earn the same pay. Johns Hopkins Medical Center does not pay more for a Georgetown University nursing graduate versus a Towson State University graduate.
However, if one is entering a log-normal field where a few people make large sums of money but most make little (possibly law, i-banking, acting, academics), the choice of schools is much more important. Attending a third tier law school or majoring in economics at East Carolina are probably a waste of time.
June 1st, 2007 at 11:44 am
If your parents are wealthy enough, attending an Ivy League or other private school has its advantages in that you’ll more likely be surrounded by other rich kids to play and party with. Of course, children of the wealthy tend to dominate the social heirarchy everywhere. Cultural fit is a hugely underestimated factor by many high school seniors. An asian kid would likely have a better time at a flagship UC school or Penn/Cornell than say, NYU or Dartmouth. A jewish kid from LI would feel right at home at Michigan.
June 2nd, 2007 at 7:40 pm
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January 24th, 2008 at 9:27 pm
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March 28th, 2008 at 7:48 am
[...] Swan presents Should Wealthy Children Attend Top Schools? | Grey Swan posted at Grey Swan. First in a series of Blogs about Student Financial [...]