There are few more sobering online activities than entering data into college-tuition calculators and gasping as the Web spits back a six-figure sum. But economists say families about to go into debt to fund four years of partying and carousing, as well as studying and learning, can console themselves with the knowledge that college is an investment that, unlike many bank stocks, should yield hefty dividends.
A 2008 study coauthored by Harvard economists Claudia Goldin and Lawrence Katz notes that the "labor-market premium to skill"—or the amount college graduates earned that's greater than what high-school graduates earned—decreased for much of the 20th century but has come back with a vengeance since the 1980s. In 2005, the typical full-time year-round U.S. worker with a four-year college degree earned $50,900, 62 percent more than the $31,500 earned by a worker with only a high-school diploma, according to the College Board's annual College Pays study. Annualize that over a lifetime, and a 2007 college grad will have an extra $800,000 ($450,000 in current dollars) to spend, compared with a high-school grad. "With college as an investment, you're looking at 15 to 20 percent annual rates of return over your lifetime," Katz says. College alumni reap other socioeconomic benefits, according to the College Board. Compared with adults who possess only a high-school diploma, they're more likely to have jobs with health insurance, to exercise more and to smoke less. (On the debit side, my informal surveys show that college grads are also more likely to wear goofy-hooded college sweatshirts well into their 40s).
There's no question that going to college is a smart economic choice. But a look at the strange variations in tuition reveals that the choice about which college to attend doesn't come down merely to dollars and cents. Does going to Columbia University (tuition, room and board $49,260 in 2007–08) yield a 40 percent greater return than attending the University of Colorado at Boulder as an out-of-state student ($35,542)? Probably not. Does being an out-of-state student at CU-Boulder yield twice the amount of income as being an in-state student ($17,380) there? Not likely.
No, in this hyper-consumerist age, most buyers aren't evaluating college as an investment, but rather as a consumer product—like a car or clothes or a house. And with such purchases, price is only one of many crucial factors to consider.
You're skeptical? Consider the terminology. College advisers speak of schools' having images and brands. Parents take their children to "check out" schools. Consultants function like personal shoppers. "Part of our process is educating families about which schools are going to be the best fit for the students," says Katharine Cohen, president of IvyWise, a New York-based educational-consulting firm. On campus tours, there's very little discussion of how much graduates can expect to earn (except perhaps at places like the University of Pennsylvania's Wharton School) and a lot of discussion about the amenities—class size, dorms, cafeterias, libraries—and the overall "experience."
As with automobiles, consumers in today's college marketplace have vast choices, and people search for the one that gives them the most comfort and satisfaction in line with their budgets. This accounts for the willingness of people to pay more for different types of experiences (such as attending a private liberal-arts college or going to an out-of-state public school that has a great marine-biology program). And just as two auto purchasers might spend an equal amount of money on very different cars— a Prius and a Jeep Grand Cherokee cost about the same—college students (or, more accurately, their parents) often show a willingness to pay essentially the same price for vastly different products. The tuition for Bowdoin (a small liberal-arts college in southern Maine) and Northwestern (a Big Ten university outside Chicago) are roughly equivalent.
So which is it? Is college an investment product like a stock or a consumer product like a car? In keeping with the automotive world's hottest consumer trend, maybe it's best to characterize it as a hybrid: an expensive consumer product that, over time, will pay rich dividends.