Journal of Financial Planning: April 2016
For all the talk about outrageous tuition costs and zillionaire dropouts, a college education is still one of the best investments most people could make. The Federal Reserve Bank of New York estimates that a bachelor of arts degree typically increases a student’s earning capacity by about $300,000 (in today’s dollars) over his or her working life.
That is simply an average. But as with just about any other investment, results aren’t guaranteed. Much depends on the student, of course, but colleges also vary widely in their outcomes. An analysis by the salary comparison site PayScale.com found that the alumni of some poor-performing private and public colleges earned so little that they would have done better, financially speaking, by skipping college and putting their tuition money in a no-interest checking account. On the other hand, some low-cost, high-quality colleges gave students an earnings boost equal to annual double-digit returns on the money they invested in tuition.
No wonder the college selection process has become fraught with anxiety for students and parents both. Picking the right school can offer a student a lifelong boost. Picking the wrong one can waste hundreds of thousands of dollars in family resources.
So how can financial planners help their clients make the right college investment? By applying the same rigorous analysis you’d use with any other investment—adapted for the unique aspects of education.
Money magazine spent months interviewing experts and testing data to develop a process for identifying high-value colleges. We publish the results annually in our print magazine and on our Money College Planner website, money.com/colleges. Our methodology draws on 21 data points in three key areas: educational quality, affordability, and graduate outcomes. We give each of those three factors equal weight in our rankings, but FPA members who access the premium portion of our site could adjust the weightings and create their own college rankings, based on what’s most important to them (see the sidebar at the bottom for details).
Here’s how you can use the Money College Planner tool and other resources to help your clients make smart college choices.
1. Educational Quality
A growing body of research is zeroing in on the practices that result in a top-notch college education. In looking for a college, it pays to concentrate on schools that pass these three quality tests, the first two of which figure in the Money college rankings.
Solid graduation rates. Experts say that graduation rates are the single-best indicator of college quality. Students who are unhappy at a school will vote with their feet and drop out or transfer. One quick rule of thumb is to look for colleges that have six-year graduation rates—the standard way of measuring them—above the national average, as virtually all of the high-value colleges in Money’s rankings do. The website CollegeResults.org has four-, five-, and six- year graduation rates for most colleges.
Small classes. Research by Gallup found that successful adults were more likely to say they’d had personal interactions with their college professors. So, as a general rule, the higher the percentage of classes with no more than 20 students, the better. You can find those numbers on CollegeData.com.
Good student fit. This one’s a little harder to quantify, but Gallup also found that adults who are thriving professionally and personally tended to be deeply involved in college activities, such as a sport or club. Campus visits and chats with current students are some of the best ways for students to find out if a school offers the kinds of extracurricular opportunities they’re looking for and whether they feel they’d fit in there.
2. Affordability
Fortunately, most students, even from relatively affluent families, don’t pay the high sticker prices that colleges publish on their websites. Data from the National Association of College and University Business Officers shows that more than 80 percent of students at private colleges, and more than half of public college students, get grants or scholarships that reduce their costs. Money uses a college’s average net price after scholarships and grants, combined with data on the average indebtedness of its graduates, to help judge each school’s affordability.
You can help your clients compare costs and determine which colleges they will be able to afford.
Year one. For a personalized estimate of a single year’s cost, you can consult each college’s net price calculator, a federally mandated web tool intended to give you at least a rough idea of how much grant or scholarship money the student is likely to receive, given your client’s income, the school’s aid policies, and other factors. To avoid spending hours retyping the same information into dozens of colleges’ calculators, you can use a free service called College Abacus (CollegeAbacus.org) that lets you type your information just once and get back estimated annual prices for multiple colleges.
If the student has already received financial aid award letters from colleges, that information will be more precise. However, it will still apply only to the student’s first year. Watch out for colleges that refer to student or parent loans as financial aid and use them to reduce their bottom-line prices. Obviously, loans don’t really lower the price, they just postpone when the bill comes due (and usually result in a bigger bill when it does).
Budgeting for a degree. Many of us still think in terms of a four-year degree, but the reality is that students often take longer than that to graduate. The average today is four and a half years, and many students go well past that. To keep costs in line, it helps to choose colleges with good track records for graduating their students in a timely manner. Money calculates the net price of a degree for each college in our rankings, based not only on their average scholarship and grant awards but also on the average length of time their students take to graduate. That can help families compare colleges and budget for the true price of the one they choose, from start to finish.
For a more personalized estimate, call each college under consideration and ask about its financial aid in the later years, suggests Kalman Chany, author of Paying for College Without Going Broke. Some awards may be for the first year only. The renewal of merit scholarships could be contingent on the student getting certain grades, such as a 3.0 GPA. And changes in a family’s financial situation, such as another child finishing or starting college, can result in changes to need-based grants.
3. Graduate Outcomes
Since college has become so expensive, most families also expect a financial return in the form of enhanced future earnings. Money combines several earnings measures with data on student loan repayment and the quality of each college’s career services office to assess the likely career outcomes for its alumni. Among the factors worth considering:
Alumni earnings. Almost 1.5 million Americans have voluntarily entered their salary information into the PayScale.com database, creating the single most up-to-date estimate of what each school’s alumni are earning. Based on that data, Money publishes the average annual salary within five years of graduation for the alumni of every college in our rankings. The new federal College Scorecard (CollegeScorecard.ed.gov) also reports the average 2011 earnings of all federal financial aid recipients who started as freshmen at each college in 2001.
Student loan repayment. One telling indicator of graduates’ financial situation is whether they are paying back their college loans. The College Scorecard provides data on the percentage of borrowers who have paid down at least $1 in principal on their student loans within three years of leaving a particular school. Currently, just two-thirds of debtors have managed to reduce their principal within that period. The premium portion of the Money College Planner includes average student debt for every school in our rankings.
Money’s ratings also give each college a “value added” letter grade. It reflects how the school’s graduation rates, student loan defaults, and alumni earnings compare against schools that take in students with similar test scores, financial resources, and majors.
Most of us expect kids who go to elite schools to do well after graduation. But how much of that is due to the students’ innate ability and socioeconomic backgrounds and how much to the school itself? Our analysis attempts to tease that out by holding constant the types of kids who go to each college.
In the end, financial issues should be just one part of a family’s college selection decision. The best college for any student will not only be one that the family can afford, but one that inspires an enthusiasm for learning that will help the student to adapt to evolving job requirements, new technologies, and the vicissitudes of life.
Kim Clark, a senior writer for Money magazine, has covered higher education for more than a decade. She reports on the latest college news and trends at the Money College Planner website, money.com/colleges.
Sidebar:
Get the Money College Planner Tool at a Discount
The Money College Planner is a new website and tool designed to help families find high-quality, affordable colleges that help launch students into successful careers. Through the FPA Member Advantage Program, receive a 20 percent discount on the tool for you and your clients.
Features include:
- “Find Your Fit” customized college search tool with 12 filters, including how generous a school is with financial aid and merit scholarships
- A 30-minute session with an independent professional college adviser
- Scholarship search and matching tool
Learn more at OneFPA.org/MyFPA/Member-Discounts.