Sunday, 29 April 2012
Saturday, 28 April 2012
Measuring College ROI
Calculating the return on investment (ROI) for a college education is a complex endeavor, with the outcome deeply dependent on methodology, assumptions, and other factors. One of the key factors that sets the PayScale methodology apart is that it results in an ROI figure that reflects not only costs and earnings, but also the likelihood that students will graduate and how long it will take.
The PayScale salary data are self-reported by individuals who use its online pay tools. For each school in the ranking, PayScale collected, on average, about 1,000 pay reports from alumni who graduated with a bachelor’s degree over the past 30 years, from 1982 to 2011. Since the data were reported in the last year, these earnings figures are in 2012 dollars. They include base salary or hourly wage, bonuses, profit-sharing, tips, commissions, and other cash earnings; they do not include stock, the cash value of retirement benefits, or other non-cash benefits. Only full-time employees who work in the U.S. were used for this analysis; self-employed, project-based, and contract employees were not. Graduates with advanced degrees were excluded.
Using these pay reports, PayScale calculates the current 30-year median pay for the graduates of each school. PayScale then calculates the amount that a high school graduate would have earned over the same period. Since a high school graduate would have begun earning a salary immediately (rather than after four to six years of college), PayScale first calculates the pay for those who graduated from high school in 1976, 1977, and 1978 (34 to 36 years of earnings). For this calculation, PayScale used the 75th percentile earnings of high school graduates, rather than the median, which is what was used for the 2011 ranking. The 75th percentile more accurately reflects the higher likely earnings of those who succeeded in being admitted to college, as well as the salary impact of having attended college for a few years before dropping out.
To determine how much more alumni from each college earn over and above what a typical high school graduate makes, PayScale simply subtracts the high school graduate earnings from each school’s 30-year median pay.
This earnings differential is what many consider to be the “value” of a college degree, but to calculate a true return on investment, one must factor in the cost of attending college.
To do that, PayScale first calculates the annual cost of attending each school—tuition and fees, room and board, books and supplies—and uses that to determine the total cost of graduating in four, five, and six years. At this stage, financial aid is factored in: Average grant aid is subtracted from the annual cost to arrive at a net cost. All data on costs and grant aid were supplied by the Integrated Postsecondary Data System (IPEDS), a warehouse for federal education statistics. The most recent data on grant aid available through IPEDS are for the 2009-10 academic year. Those data were used for all years in the calculation.
PayScale then creates a weighted average cost based on the percentage of students who graduate from the institution in four, five, and six years. For example, if the net cost to attend a school is $10,000 a year, it would cost $40,000 to graduate in four years, $50,000 in five years, and $60,000 in six years. If the school’s four, five, and six-year graduation rates are 45 percent, 65 percent, and 80 percent, then among those who actually graduate 56 percent do so in four years, another 25 percent do so in five, and another 19 percent do so in six. To find the weighted average, the percentages are multiplied by the dollar values and summed: ($40,000 x 56%) + ($50,000 x 25%) + ($60,000 x 19%) = $46,250.
Once all the calculations are done, determining ROI is fairly simple. By subtracting the cost of attendance from the earnings differential, we learn the value of the degree for a graduate. If you graduate from college, this is the amount you can expect to earn over and above what a typical high school graduate earns over the same period, after deducting the cost of getting the degree.
But not everyone graduates, and for those who don’t, the financial benefits of a college education are far less. So one last calculation is required. By multiplying the ROI for a graduate by the school’s six-year graduation rate, the result is an ROI figure far closer to the truth, one that reflects not only how much you’ll earn, but the likelihood of graduating.
That said, it’s still an approximation. PayScale maintains that the margin of error on 30-year median pay is 5 percent for most schools, 10 percent for those that have large variations in pay among alumni, fewer pay reports from graduates, or large numbers of graduates who go on to get advanced degrees.
While ROI is calculated for each school, there is wide variation within schools among majors, and schools that produce many graduates in high-paying majors such as engineering will, by necessity, have a higher ROI. The PayScale methodology doesn’t capture the value of a college degree for those who go on to get advanced degrees in law, medicine, or other high-paying fields. And since it deducts average grant aid from the total college costs, regardless of how many students actually receive such aid, ROI for those who don’t receive that amount each year, or don’t receive any aid at all, will be less.
To view the complete 2012 ranking, click here.
Join the discussion on the Bloomberg Businessweek Business School Forum, visit us on Facebook, and follow @BWbschools on Twitter.Student Loan Debt, With Little to Show for It
Kevin Wanek was one semester away from graduation at Western State College in Gunnison, Colo., when he found himself in a bind. He no longer wanted to be an accountant, the field he was studying, but he owed more than $50,000 in student loans. Reluctant to take on more debt, he decided to drop out. “I started adding up what I owed,” he says, “and it really hit me.”
Though he had limited career options as a college dropout, he found an entry-level job at iTriage, a mobile-health-care-app maker in Denver, and over the past two years he’s become a computer programmer. Now he wants to finish his degree, this time with a focus on computer science. Yet with nearly all his disposable income going toward $600 monthly student loan payments, the 24-year-old worries he’ll never save enough to re-enroll. “It almost feels like the money is going into a black hole,” Wanek says. “It’s frustrating knowing that you’re paying for something you don’t have a tangible return on.”
With tuition up more than sixfold in the past three decades—to $32,000-plus for four years at a state university and $83,000 in a private school—the percentage of people with student loans who quit without a degree is on the rise. Almost 30 percent of borrowers who started college in 2003 dropped out within six years, up from 23 percent of those who started in 1995, according to Education Sector, an independent think tank. Borrowers who drop out are four times more likely to default on their loans as those who graduate, the group says. “As long as college prices keep increasing, the tension students face between trying to minimize debt and maximizing their chances of graduating will continue to grow,” says Mary Nguyen, who authored a report on the topic for Education Sector. In 2009, the median income for borrowers who dropped out of college in the previous six years was $25,000, or $5,000 less than those who graduated in those years, Nguyen says.
Roughly 36 million Americans have attended college without earning a degree, says Anthony Carnevale, director of the Georgetown University Center on Education and the Workforce. The median lifetime earnings of someone who gets a bachelor’s degree today will be about $2.3 million, while those with some college but no degree will earn $1.5 million, the center reports. Those with only a high school diploma will make $1.3 million—but likely won’t have student debt. “The worst case is if you go into a low-earning field, don’t graduate, and accumulate debt,” Carnevale says. “In the end, what you get is the debt and no real increase in earning power.”
About 27 percent of those who started at a four-year institution in 2003-04 but didn’t complete a bachelor’s degree by 2009 have more than $17,000 in student loan debt, and 13 percent have more than $28,000, according to the College Board’s 2011 Trends in Student Aid report. Jim VanNest owes $100,000. He dropped out of Boston’s Berklee College of Music, where he studied voice and audio engineering for three years, in 2005. Since then he has worked as a receptionist, a janitor, and “hit a low point” when he got a job with pet supply retailer Petco. VanNest, 30, is planning to return to San Francisco State University to study economics. “That feeling of not being technically eligible for so many positions bothered me so much,” he says, “that I decided I was going to finish school.”
The bottom line: As more students drop out of college, they often face big student loan bills but lack the earning potential of those who get degrees.
California Schools Get Around an Affirmative Action Ban
For all its popularity among college applicants, the University of California never made much of an impression on Amber Brown. She attended math and science camp each summer, graduated with honors, and last year accepted a full academic scholarship to Jackson State University, a historically black college in Mississippi. UC “just wasn’t on my list,” says the college freshman. “But if they are looking to diversify, I’m going to take advantage of that.”
Brown is vying for one of 25 spots this summer at UC Berkeley’s Haas School of Business reserved for underclassmen at historically black colleges. The new program is the university system’s latest attempt to increase the diversity of its applicant pool—and ultimately its student body. The idea is that if UC recruits at black schools, it will pull more African-Americans into its MBA programs without violating a state ban on racial preferences in college admissions.
After California barred affirmative action in 1996, freshman enrollment of blacks across the UC system fell, from 4.2 percent in the 1995-96 school year to 2.8 percent in 2004-05, UC says. By last fall, that figure had edged back up to 3.7 percent as the system’s 10 campuses have pursued strategies such as wooing lower-income students and those who are the first in their family to go to college, factors that tend to correlate with race. UC has joined with urban high schools to attract undergrads in much the same way it’s now looking for potential graduate students at black colleges. And UCLA and other schools have started working with groups such as the Urban League and the First African Methodist Episcopal Church to find prospective students. “To their credit, they are being creative in trying to promote racial diversity without resorting to racial preferences,” says Richard Kahlenberg, a senior fellow at the Century Foundation, a nonpartisan think tank in New York.
Students in the upcoming pre-MBA program will spend two weeks at Haas this summer. Next summer the group will visit another UC campus as the program rotates annually among the system’s six B-schools. Participants will complete leadership exercises, meet with local executives, and possibly get internships with California employers. It is one of the most comprehensive efforts any graduate school has made to reach underclassmen at black colleges, says John Williams, dean of the division of business and economics at Morehouse College in Atlanta, the alma mater of Martin Luther King Jr. and filmmaker Spike Lee. “They are targeting freshmen, which isn’t something graduate schools usually do,” Williams says.
Students from any of the 105 schools considered to be historically black colleges were invited to apply, and Berkeley received nearly 200 applications from 37 schools. “This would give me a feel for the California system,” says Dorian Kandi, a Morehouse accounting major who was among the applicants. If the concept works for business schools, UC may expand it to law and other graduate programs, school officials say.
Such diversity strategies are grabbing more attention as the U.S. Supreme Court prepares to reconsider the constitutionality of affirmative action in college admissions this fall. The University of Texas at Austin—the defendant in the Supreme Court case—guarantees admission to residents who graduate in the top 10 percent of their high school class. Since many Texas high schools are dominated by one ethnic group, the strategy helps ensure a more diverse student body. The UC system admits anyone in the top 9 percent of their high school class, but university officials say the method isn’t as effective in states such as California where minority students are more dispersed.
The U.S. Departments of Education and Justice in December urged colleges to examine new kinds of diversity strategies, including partnerships with historically black colleges. But traditional affirmative action leads to admissions of more academically qualified students than strategies that use other factors as a proxy for race, says Brown University professor Glenn Loury. “Color-blind policies are less efficient at selecting the best students,” says Loury, who co-authored a 2007 report on the subject in the Journal of Law, Economics and Organization.
Efforts such as UC’s can raise the same questions as affirmative action, says Roger Clegg, president of the Center for Equal Opportunity, a Falls Church (Va.) nonprofit opposed to racial preferences. “It depends on what your motive is,” Clegg says. “Are you targeting historically black colleges because you want to achieve a particular ethnic or racial background? Or do you feel they shouldn’t be overlooked because they are a good source of well-qualified students?”
The bottom line: Facing opposition to affirmative action, the University of California wants to increase diversity by recruiting at historically black colleges.
Coaching College Freshmen So They Don't Drop Out
The odds were stacked against Selene Mendez when she enrolled at California State University’s Monterey Bay campus in 2010. She’d moved to the U.S. from Mexico when she was 7 and her father was a migrant farmworker. Her high school guidance counselor seemed to think she’d follow in the footsteps of her older sister and brother, who had dropped out of college in their freshman years. “She told me I wasn’t college material,” Mendez says. “It got me angry.”
Determined to prove the counselor wrong, Mendez participated in a program that helps freshmen stay focused on their studies. Once a week throughout her first year at Monterey, she spoke with a coach who gave her tips on managing her time as she balanced schoolwork with two part-time jobs and a long commute. “I was excited that there was someone who actually took the time to help me out and make sure I succeed,” says Mendez, 19, now a sophomore.
Photograph by Jason Hanasik for Bloomberg BusinessweekMendez's high school counselor said she 'wasn't college material' because her siblings had dropped out. 'It got me angry,' she says
Executive-style coaching is making its way onto campuses across the country as schools struggle to keep students from dropping out. Only 58 percent of full-time freshmen enrolled at four-year institutions in 2004 managed to graduate by 2010, up one percentage point from the year before, according to the latest available data from the Department of Education.
Coaching has helped Monterey Bay beat those odds, says Provost Kathy Cruz-Uribe. Last year 78 percent of freshmen returned to school as sophomores, up from 65 percent in 2006-07, the year before the school added its coaching program. “If you’re the first one in your family to go to college, you may not know how to navigate the university and take advantage of the resources in the best way,” Cruz-Uribe says. “Coaches can really work with us to ensure the success of our students.”
Photograph by Jason Hanasik for Bloomberg BusinessweekMendez says her coach helped her keep up with class assignments and improve her note-taking
In much the same way career coaches help executives reflect on their job performance and goals, student coaches talk with freshmen about studying, financial challenges, family issues, and long-term planning. Eric Bettinger, an associate professor at Stanford University’s School of Education, compared the academic records of more than 13,500 students; half had received coaching and half hadn’t. He found that freshmen in the coached group were 15 percent more likely to still be in school 18 to 24 months later. Coaches “actually call the student and aggressively go after them, rather than expecting the students to come to a service,” Bettinger says. “The information the coach brings into that conversation is pretty dramatic.”
In the past decade a cottage industry of coaching has sprung up because many schools lack the staff to offer such services on their own. The biggest player is InsideTrack, a 12-year-old San Francisco company that employs 300 coaches and has worked with more than 350,000 students at 50-plus schools. InsideTrack charges colleges anywhere from $30 to $120 a month per student who receives coaching. Some of the company’s advice is simple, says InsideTrack President Kai Drekmeier: Visit professors during office hours, get involved in campus activities, and use services most freshmen might not think to take advantage of. “Coaches help students think through and articulate their goals, so they have some sense of direction,” Drekmeier says. “It sounds basic, but it is necessary and can have a profound impact.”
Many universities are starting to build their own coaching programs, says Luke Iorio, president of the Institute for Professional Excellence in Coaching, a training company. Iorio says his group is teaching counselors and career advisers to become coaches at four U.S. schools and is negotiating with about a dozen others. “We are seeing more schools move … to take these coaching services in-house,” he says. “Universities already have a significant investment in student counselors and services, so this is a way of adding on to what they are already doing.”
Carleton College, a private liberal arts school in Northfield, Minn., hired a coach four years ago after efforts to encourage successful students to coach their peers didn’t catch on. About 30 of Carleton’s 500 or so freshmen take advantage of the service each year, says Kathy Evertz, director of Carleton’s Academic Support Center. “We’ll get students who finally admit they have a problem and realize they are not getting the grades they should be getting,” Evertz says. “They come to the coach because they just want to get more out of school and out of their college life.”
Sundar Kumarasamy, vice president for enrollment management at the University of Dayton, has made coaching services available to the Ohio school’s 2,000 freshmen for the past two years. About 400 students signed up this year, and the school pays InsideTrack about $200,000 annually to work with them, he says. Since hiring the coaches, Dayton’s retention rate has gone from 87 percent to 89 percent, Kumarasamy says. Even a “1 percent increase in the retention rate can translate to multimillion dollars in revenue” for the university, he says. “It makes so much more sense to keep students rather than lose them. It is not only the right thing to do, but it is financially much more viable for the university.”
The bottom line: Coaching freshmen reduces undergraduate dropout rates and ultimately saves millions of dollars for colleges.
A Day In The Life: Investment Banking Associate
“A Day In The Life” is an ongoing series that highlights popular post-MBA job functions, as seen through the eyes of the recent grads in the positions.
What does the typical workday look like for an investment banking associate at a multinational financial services firm? To find out, Bloomberg’s Melanie Danko spoke to Serdj Balach, a graduate of the University of Virginia’s Darden MBA Class of 2010, who holds that position at Citigroup’s (C) headquarters in Manhattan.
Before enrolling at Darden, Balach, 30, was a consultant and analyst at Accenture (ACN). He grew up with a strong international background, living in Serbia, Croatia, the Philippines, and Belgium, and he holds an undergraduate degree from Northwestern University. He currently resides on the Upper West Side of Manhattan.
Here’s a peek into Balach’s daily routine, in his own words:
7 a.m. I get out of bed and get changed for a quick trip to the gym. I don’t do this enough, but every little bit helps, and fitness bragging rights at the office never hurt. I try to avoid the desire to check my Blackberry (RIMM), but the blinking red light beckons. Nothing but internal administrative e-mails for now, so I can work out in peace.
7:35 a.m. I finish a quick swim. I would’ve loved to go longer, but sleep and time are my most valuable commodities, and they’re always in conflict. I double-check the Blackberry, and this time there are a few easy-to-answer questions from clients and colleagues. I jot a few quick responses, and start the mental to-do list: Remember to get European team materials they requested by end of day.
7:45 a.m. I shower, shave, and make myself presentable for another day on the job.
8 a.m. I turn on SportsCenter and hope to catch some basketball highlights from the Chicago Bulls. I read a few daily news e-mails on the Blackberry and forward a couple of articles of interest to my director.
8:30 a.m. On the subway ride into the office, I listen to the Pardon the Interruption podcast and flip through more news.
8:50 a.m. Sitting down at my desk, I write down my to-dos for the day:
1) Review drafted [mergers and acquisitions] discussion materials with my managing director.
2) Review valuation materials for transaction.
3) Send requested materials to Europe team.
4) Discuss.
9 a.m. Conference call to discuss [initial public offering] roadshow presentation.
9:30 a.m. Go to the cafeteria and grab oatmeal and much needed coffee.
10 a.m. I sit down with my director and an analyst to review valuation materials for a live transaction.
11 a.m. I review comments with the analyst and attempt to split the work. We realize that neither of us will be able to get to it until at least 4 p.m.
11:30 a.m. I begin thinking about lunch. I wait in front of my managing director’s office for an opportunity to review materials for an M&A pitch later this week.
11:40 a.m. Managing director hangs up the phone and the window is open; analyst and I swoop in and seize the opportunity to review our materials. We receive comments, review what materials need to be created, and decide what can be leveraged from existing materials.
12:45 p.m. Grab lunch. As is the case almost 100 percent of the time when it is under my own control, the decision is to leave the building. I head out with some guys from the team and grab a sandwich nearby.
1:30 p.m. After eating at my desk—and reading some ESPN.com—it’s time to make headway on my to-dos. Most important: Finish the roadshow edits.
2:30 p.m. I send revised roadshow to the client and start reviewing the valuation materials. Time to spread our M&A comps and make sure our trading comps are up-to-date. Analyst is working on the discounted cash flow and refining assumptions.
5 p.m. Send revised M&A valuation materials to my director. I then check in with another analyst on the materials for our upcoming pitch.
6:30 p.m. We order dinner—the eternal dilemma of health vs. happiness. The office vegetarians make it easier to lean towards health but detract from dinner happiness.
7:30 p.m. After finishing dinner, I receive comments from my managing director on the M&A materials.
11 p.m. I finish a draft of M&A materials and have analyst send it out. I then jump in cab to head home, responding to a few e-mails on the way.
11:45 p.m. I catch up on some Game of Thrones, answer more e-mails, refresh some slides, and send them out.
Join the discussion on the Bloomberg Businessweek Business School Forum, visit us on Facebook, and follow @BWbschools on Twitter.
Why College Isn't for Everyone
A person who compares the annual earnings of college and high school graduates would no doubt conclude that higher education is a good investment—the present value of the college earnings premium (the better part of $1 million) seemingly far outdistances college costs, yielding a high rate of return. But for many, attending college is unequivocally not the right decision on purely economic grounds.
First of all, college graduates on average are smarter and have better work habits than high school graduates. Those who graduated from college were better students in high school, for example. Thus, at least a portion of the earnings premium associated with college has nothing to do with college per se, but rather with other traits.
Second, a goodly proportion (more than 40 percent) of those attending four-year colleges full-time fail to graduate, even within six years. At some colleges, the dropout rate is strikingly higher. While college students sometimes still gain marketable skills from partial attendance, others end up taking jobs that are often given to high school graduates, making little more money but having college debts and some lost earnings accrued while unsuccessfully pursing a degree.
Third, not everyone is average. A non-swimmer trying to cross a stream that on average is three feet deep might drown because part of the stream is seven feet in depth. The same kind of thing sometimes happens to college graduates too entranced by statistics on averages. Earnings vary considerably between the graduates of different schools, and within schools, earnings differ a great deal between majors. Accounting, computer science, and engineering majors, for example, almost always make more than those majoring in education, social work, or ethnic studies.
Fourth, the number of new college graduates far exceeds the growth in the number of technical, managerial, and professional jobs where graduates traditionally have gravitated. As a consequence, we have a new phenomenon: underemployed college graduates doing jobs historically performed by those with much less education. We have, for example, more than 100,000 janitors with college degrees, and 16,000 degree-holding parking lot attendants.
Does this mean no one should go to college? Of course not. First of all, college is more than training for a career, and many might benefit from the social and non-purely academic aspects of advanced schooling, even if the rate of return on college as a financial investment is low. Second, high school students with certain attributes are far less likely to drop out of school, and are likely to equal or excel the average statistics.
Students who do well in high school and on college entrance exams are much more likely to graduate. Those going to private schools may pay more in tuition, but they also have lower dropout rates. Those majoring in some subjects, such as education or one of the humanities, can sometimes improve their job situation by double majoring or earning a minor in, say, economics.
As a general rule, I would say graduates in the top quarter of their class at a high-quality high school should go on to a four-year degree program, while those in the bottom quarter of their class at a high school with a mediocre educational reputation should not (opting instead for alternative methods of credentialing and training).
Those in between should consider perhaps doing a two-year program and then transferring to a four-year school. There are, of course, exceptions to this rule, but it is important for us to keep in mind that college is not for everyone.
Join the discussion on the Bloomberg Businessweek Business School Forum, visit us on Facebook, and follow @BWbschools on Twitter.Richard Vedder directs the Center for College Affordability and Productivity and teaches economic at Ohio UniversityIn Defense of Stanford University
This week in The New Yorker we discovered much about Stanford University in a piece by Ken Auletta titled “Get Rich U.” For example, Stanford has produced many rich technology entrepreneurs—among both its professors and students. In fact, Stanford has been so successful at nurturing titans of business that it’s causing some unease among certain faculty and school observers.
There’s a glut of engineering-minded, money-hungry students, and perhaps not enough love of learning for learning’s sake and the humanities.
As the story points out, Stanford’s obsession with engineer-cum-entrepreneurs is by design. Frederick Terman, a Stanford professor, set out in the 1920s to unite local radio and electronics businessmen with Stanford’s students. As a result, undergraduate students such as Bill Hewlett and David Packard found themselves visiting the San Francisco lab of Philo Farnsworth when he was in the process of inventing television.
In the years that followed, Hewlett-Packard (HPQ), along with other electronics and technology companies, would place their headquarters on Stanford land. The arrangement helped Stanford compete against more established schools in the East for local talent and gave the local businessmen access to bright kids, research equipment, and new ideas.
Over the years, Stanford has perfected the art of helping its students and professors start businesses and share in the spoils of their work through favorable licensing deals. As a result, generation after generation—HP to Cisco (CSCO) to Sun Microsystems to Yahoo (YHOO) to Google (GOOG), Instagram, and Palantir—have emerged from the university.
If there’s a light of hope in the U.S. economy, it emanates from Silicon Valley, and, my word, Stanford has done an awful lot to contribute to that fact.
That’s a long way of saying Auletta may have been better served by asking why the nation’s other elite universities have done such a poor job at breeding entrepreneurs. You can, of course, point to people from Harvard, Cornell, and other top schools that have created empires from scratch, but Stanford clearly challenges the combined efforts of these other schools on its own. (Frankly, I can’t recall ever meeting a single startup founder from such places as Yale or Dartmouth.)
With China and India are pumping out engineers by the tens of thousands, it’s not so bad to have at least one school stateside that’s a money-gushing, geek mecca. In fact, Stanford’s rivals should perhaps do some more thinking for thinking’s sake around how they can mimic the Cardinal model.
Public No More: Why the B-School Model Works
Many would argue, and we would agree, that despite global competition, the system of higher education in the U.S. remains the best in the world. Still, American universities face increasing threats on several fronts: an explosion of higher education outlets globally, stagnant middle-class incomes, entry of for-profit providers, and the growing efficacy of alternative delivery modes, especially on the Web.
The biggest threat, however, is the permanent decline in public support. As all universities grapple with the realities of the current economic slowdown, public universities suffer the most as they face dwindling state support.
Reactions to reduced appropriations include cost-cutting measures such as delivering the curriculum with lower-cost, part-time faculty and distance technology. The most significant reactions, however, have been to increase tuition rates for resident students and to increase tuition revenue by attracting higher paying nonresident and international students. Controversy abounds, with those affected asking why state-funded institutions are facilitating access to nonresidents and restricting access to residents.
Most protests about rising tuition blame the increasing cost of higher education. There is much confusion here. Tuition is the price of higher education, not its cost. Costs are expenditures on faculty and staff salaries, facilities, quality, and administrative overhead. Net tuition at public universities is substantially below the cost of delivering that education.
Has the cost of higher education been rising? From 1999 to 2009, there was relatively little increase in the real instructional cost per full-time equivalent. Yet over the same period, the students’ share of expenditure on higher education increased more than 33 percent as state funding dwindled. These data suggest that the real debate underlying higher education financing should not be focused on the cost of higher education, but rather on who pays for it: students or taxpayers.
One rationale for society to pay is that the return to higher education is larger than that associated with alternative uses. Why should society invest in higher education rather than in K-12 education, job training, and health care? It’s not clear that it should. More importantly, the recent permanent cuts per student to public universities are an expression of the public’s preferences to spend on other things. Today, shrinking taxpayer support makes the state-funded model unsustainable. The consequences for higher education are profound.
Continued announcements of tuition increases associated with permanent cuts in taxpayer support have led to frequent, sometimes vehement, protests by students, parents, and legislators. In the U.K., riots broke out. By contrast, U.S. business schools have charged higher tuition than many other units at major universities, yet little resistance has accompanied, for example, the significant increases in MBA tuition. Why the difference?
We think that perceived value, which is the difference between cost and willingness to pay, answers most of the question. Understanding this issue can go a long way toward explaining the current plight of public universities and the path universities will need to follow to weather the storm of declining state funding.
Business schools have invested in developing higher-quality services. They have committed to the student with a comprehensive learning environment and life-long engagement. They provide coordinated degree programs, career counseling, professional development, purposeful extracurricular activities, networking, placement, and significant alumni engagement. Few other academic areas offer the same student-focused environment. Students will pay higher costs if they perceive even higher value.
Overall, business schools have become more efficient because they are disciplined by market forces. They are not the only ones that have had to do so. Other professional schools, university hospitals, dormitories, food service providers, and others operate in a similar fashion. These are the “enterprises” of modern public universities. In contrast, many other academic areas have tried to retain the environment of a protected subsidized model that does not focus on students, on transparency, or on accountability.
As state funds continue to diminish, public universities can select a strategic alternative: They can choose to follow an entrepreneurial path to become “public no more,” with more financial self-reliance and less dependence on entitlement and internal subsidy. As business schools and other areas of the university have shown, this path can lead to academic excellence in a financially sustainable framework, but it requires making some tough choices.
Join the discussion on the Bloomberg Businessweek Business School Forum, visit us on Facebook, and follow @BWbschools on Twitter. Andrew J. Policano is dean of the Merage School of Business at the University of California, Irvine, and Gary C. Fethke is professor and former dean of the Tippie College of Business at the University of Iowa. Their book, Public No More: A New Path to Excellence for America’s Public Universities, will be published in April.Obama Wants to Trademark the GI Bill. Good Luck With That
President Obama descended on Fort Stewart in Georgia on Friday to announce that his administration is cracking down on for-profit colleges that allegedly target veterans solely for their GI bill money. Iraq and Afghanistan vets have complained of enrolling in online colleges, only to find out they have to take out sizable loans because their GI Bill money doesn’t cover the cost of the private schools. They say they expected to graduate with improved job prospects but ended up with debt and no job prospects.
“Sometimes you’re dealing with folks who aren’t interested in helping you,” Obama told veterans, soldiers, and their families. “They don’t care about you, they care about the cash.”
Under an executive order Obama signed, colleges will have to provide vets with more information about the cost of their programs, and the Defense Dept. must issue rules on school recruitment at military bases. As part of his effort to protect veterans (whose votes he needs), Obama also ordered the Department of Veterans Affairs to trademark the term “GI Bill.”
Trademark a law? Can you do that?
It’d be an unprecedented step, say intellectual property attorneys in Washington. And one that smacks of better PR than policy. “It’s nonsense,” says William Pecau, partner at Steptoe & Johnson.
Trademarks are for goods and services. They indicate a place of origin. “The GI Bill isn’t selling anything,” says Edward T. Colbert, partner at Kenyon & Kenyon. That’s the first problem. Second problem: Trademarks are for the exclusive commercial use of their owners. The GI Bill—which dates to World War II—”has been used by everybody for a long time,” says Colbert.
The administration says it wants the rights to “GI Bill” because for-profit schools and recruiting websites are using the term to “deceptively and fraudulently” market bad programs to veterans. If that’s the case, attorneys say, officials have another recourse: state and federal laws.
“The Federal Trade Commission could step in. The state attorneys general could step in. You could sue them under the Lanham Act … part of it prohibits false advertising,” says Pecau. “There are a number of ways you could go after deceptive advertisements, but trademarking the GI Bill is not the way to do it.”
Alternatively, Congress could pass a law giving the VA the sole right to use “GI Bill” for commercial purposes. The U.S. Olympic Committee, the American Red Cross, and the Boy Scouts of America all enjoy that privilege, thanks to a federal statute designating them “patriotic and national organizations,” says Colbert, and the same statute could apply to the GI Bill. “It’s rarely used, because it has to be for something of a patriotic nature,” says Colbert. “Clearly our veterans—people who fought and died for our country—clearly they would fit within that category.”
Does It Pay to Study at State?
A college degree usually means higher pay than a high school diploma does, though some schools fail to deliver. After subtracting the cost of getting a degree, here’s the average amount by which the average 30-year earnings of an alum of each state’s public universities differ from those of a high school grad.
Data: PayScale, Integrated Postsecondary Education Data SystemDoes Working Before B-School Cost Grads $112,000?
Is the admissions strategy followed by the world’s most elite business schools cheating MBAs out of a small fortune?
It seems an almost preposterous question, given that the average starting salary for Harvard Business School graduates taking jobs in finance or consulting is now $125,000 and that one 2011 graduate of Dartmouth’s Tuck School of Business earned a pay package at graduation worth a staggering $863,000. But that is exactly the bombshell that a Florida researcher tossed at the B-school ivory tower with a new e-book out this month.
The notion that requiring the vast majority of applicants to have three to five years of work experience does a big financial disservice to MBAs appears in Ronald Yeaple’s MBA Myths Unlocked, but it got its first airing in a little-known paper he wrote with Mark Johnston and Keith Whittingham of Rollins College, published in 2010 in the Journal of Education for Business.
The upshot of their argument is that by delaying graduate business education, students forgo several years of higher post-MBA salaries, while driving up the opportunity cost of attending the program. At the same time, pre-MBA work experience does not command the kind of premium with recruiters that would make waiting worthwhile, something that Yeaple cautions may not be true at top-tier business schools where graduates fetch the highest salaries.
The study, based on a survey of 1,902 Rollins MBA graduates from 1996 to 2006, quantifies just how much you lose when you snooze. Working for two years prior to entering a full-time MBA program resulted in a net loss of income of $112,466 by age 30, an amount with a net present value of more than $80,000. Enrolling in an MBA program immediately after college would, the authors say, leave the graduate in much better financial shape.
“The evidence presented in the present study clearly refutes the claim that students are financially better off in the long run by waiting to acquire significant work experience prior to pursuing an MBA degree, particularly when the opportunity cost of forgone salary is considered,” the authors wrote. “From a financial perspective, the results hold potential significance to prospective students.”
There are good reasons why business schools expect most applicants to have a few years of experience. For one thing, recruiters want it and are willing to pay for it. The fact that higher starting salaries for graduates help schools advance in some rankings (although not Bloomberg Businessweek‘s) surely doesn’t hurt, either.
But all that is starting to change. At some schools, including the University of Rochester’s Simon Graduate School of Business, where 24 percent of the class of 2013 has less than three years’ experience, younger applicants make up a sizable portion of every class. Special programs such as Simon’s Early Leaders Initiative, and Harvard’s 2+2 program, which requires students to get two years of work experience before starting their MBAs, are making it easier for younger applicants to get a foot in the door.
And the growing interest in graduate management education by younger applicants does not appear to be slowing down. Worldwide, 44 percent of GMAT test-takers in 2011 were under 25, up from 37 percent in 2007, a trend driven largely by test-takers in East and Southeast Asia.
If the research is true, maybe all these younger applicants are onto something. But the far more interesting question, at least to me, is whether it should prompt a little soul-searching by B-school admissions committees. Requiring a few years of work experience might make for a better, more rewarding, program, as students bring prior experience to bear on class projects and case studies. And it might help schools compete in the rankings. But is it worth $112,000?
Join the discussion on the Bloomberg Businessweek Business School Forum, visit us on Facebook, and follow @BWbschools on Twitter.College ROI: What We Found
When people talk about the value of a college degree, they mean different things. A report last year by Georgetown University’s Center on Education and the Workforce pegs the median value of a four-year bachelor’s degree at $2.3 million, which is the average earnings for a degree holder employed full-time from ages 25 to 64. The value of a college investment calculated by PayScale, a Seattle-based compensation data company, for Bloomberg Businessweek is a small fraction of that amount, and to understand why, you need to know a little bit about our methodology.
The PayScale methodology differs from most others in several key respects. Instead of using lifetime earnings, it starts with earnings over a 30-year period. From that figure, we deduct the earnings of a typical high school graduate (since most people who don’t go to college would still have earnings, albeit at a much lower amount). In our return on investment (ROI) calculation, the “investment”—or total net cost—is the amount spent on college over the actual time it takes students to graduate, whether four, five, or six years. Finally, our ROI figures are adjusted using each school’s graduation rate. After all, if you don’t graduate, you’ve made an investment with very little financial return. The result is a return that reflects what incoming students can reasonably expect from their investment.
In 2012, both the cost of a college education and graduate earnings took a bite out of the 30-year college ROI, which fell 2.3 percent to an average of $353,182 when comparing the same set of schools in 2011 and 2012, and fell 7.8 percent to $333,455 when comparing both lists in their entirety, 691 schools in 2011 and 853 schools in 2012. (To view the complete 2012 ranking, click here.)
While our methodology underwent significant changes last year and this year, those figures represent an apples-to-apples comparison. On the cost side, they reflect the college sticker price for tuition, room and board, and books, without financial aid factored in, which increased 6 percent. On the earnings side, they reflect the earnings of college graduates (which decreased by 1 percent) in excess of the median pay of a high school graduate.
Two important changes to our methodology in 2011 and 2012 had the net result of reducing ROI dramatically. Since many students receive grant aid from their institutions, starting last year we began deducting average grant aid from college costs, which has the effect of increasing ROI. But starting this year, we made a second change that has the opposite effect: using 75th percentile high school graduate pay (instead of the median) to calculate how much each college’s graduates earned over and above the pay of high school graduates. We believe the 75th percentile more accurately reflects the pay of individuals capable of winning acceptance to college or who spent a few years in college before dropping out.
Looked at that way, ROI is only a fraction of what it was last year: on average, $152,114 for all 853 schools on our list, including two separate ROI calculations for state institutions using in-state and out-of-state tuition. Private schools did far better than publics, with 30-year ROI of $222,047, easily surpassing public schools for students paying in-state tuition ($122,987) and out-of-state tuition ($100,155).
Nearly a third of the top 30 schools were engineering schools, including the top three institutions: No. 1 Harvey Mudd College, No. 2 California Institute of Technology, and No. 3 Massachusetts Institute of Technology. All three schools had 30-year ROI well above $1 million, a claim only 11 schools could make. On average, engineering schools had ROIs of $603,362, more than double the ROI for liberal arts schools ($245,943), more than triple that of business schools ($141,014), and more than 26 times that of arts and design schools ($22,328).
The only schools that fared better than engineering schools were those in the Ivy League. Seven of the eight Ivies are in the top 15, and the average ROI for all eight was more than $1 million. While costs for these schools are high, several factors worked in their favor, including generous financial aid and excellent graduation rates—both in terms of how many students ultimately graduate and how long it takes them to do so. The weighted net cost to graduate was $84,241—less expensive than half the schools on the list, and half the cost of the most expensive.
Schools in New York, California, and Massachusetts dominated the ranking, snaring nine, eight, and eight top-50 spots, respectively, with California and Massachusetts claiming half the top 10. New top schools were crowned in six states: Alaska, California, Florida, Illinois, Iowa, and Montana. In California, Harvey Mudd took over the top spot from Caltech (in the state and the nation). In Illinois, an elite private research institution, the University of Chicago, lost the No. 1 ranking to the University of Illinois at Urbana-Champaign, a state school with far lower costs.
Overall, the cost to receive a degree from the schools on our list averaged $85,276, a figure that reflects not just the tuition sticker price, but also average grant aid and how long it takes the average student to graduate. Private schools ($99,206) and out-of-state students at public schools ($98,538) paid the most, followed by in-state students at public schools ($55,861).
One reason why our ROI calculations differ from many others is that ours incorporate graduation rates in two different ways. First, each school’s ROI for graduates is adjusted, using its six-year graduation rate, to reflect the risk of not graduating. Second, the percentage of graduates who receive their degrees in four, five, or six years is used to determine college costs. All other things being equal, schools that graduate a large percentage of students, and who do so in four years, do a good job of holding down costs and as a result fare well in our calculations. Those who don’t, don’t.
On average, all 853 schools in this year’s ranking only graduate about 59 percent of their students, and less than two-thirds of those receive their degrees in four years. For the top 50 schools in the ranking, graduation rates are a big differentiator. On average, they graduate 88 percent of their students (compared with 51 percent for the 50 lowest-ranked schools) and 84 percent of graduates receive their degrees in four years (compared with 61 percent for the lowest-ranked schools).
Of course, it doesn’t hurt that many of the schools with the best ROI are the kind of highly selective elite private research universities with sterling reputations whose graduates tend to fetch the highest pay. Average annual pay for all the schools on the list this year was $61,426. Of the top 50 schools with the best ROI, 38 also have top-50 graduate pay, with alumni earning $81,000 or more per year. Six of the 10 schools with the highest graduate pay were either engineering or Ivy League institutions.
On the other end of the spectrum, there are 191 schools where graduates had negative ROI. At Fayetteville State University in North Carolina, where only one out of three students graduates in six years, in-state grads earned $289,000 less over 30 years than a high school graduate earning at the 75th percentile, after deducting the cost of the degree. For out-of-state graduates, the figure is $338,000.
At all 191 schools with negative ROI, graduates actually fared worse than those who dropped out after a few years—the financial benefit of earning a degree was so meager that the added expense it entailed was simply not worth it. At these schools, at least from an ROI perspective, dropping out was the smartest thing to do.
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