Choosing a College: Weighing the Return on Education
By Joe Messinger, CFP®
May 1, 2020
We often hear the words “return on investment.” We use those words ourselves all the time. When you invest, you expect a certain return or increase in the value of the amount you invested over a period of time. College should be viewed in the same way. Your family is spending a certain amount of money over a period of four years. Down the road, you expect for that investment to result in an improved financial situation where your child is making a good salary and continues on a upward career path with as little debt as possible. Choosing a college is like choosing the best investment for your money. What is the return on that education?
Which college should their child attend?
Every spring, we talk with clients faced with making difficult choices between two colleges. Choosing a college is all about fit–academic, social, financial. When the final decision is down to College A and College B and both are great schools without a huge difference in quality, the financial fit can become the deciding piece. When we are in this situation, we have an exercise we like to do to put the return on education in perspective.
Let’s look at an example of what we mean.
The Smith Family has an academically talented student. They have narrowed the college choice down to two–each would be a great school to attend. Because of the excellent scholarship offered at College A, the price for all four years would be $80,000. College B does not provide those kinds of merit scholarships and will cost $180,000 for a four year education.
The Smith Family is lucky. They can afford to pay $180,000 over four years. It will be a serious stretch, but they can make it happen.
To reframe the conversation we ask them what if instead of investing all of that money in education at College B you took that extra $100,000 and invested it in from now until their child’s retirement 45 years from now. Growing at 7%, they would have over $2 million. Growing at 8%, they would have over $3 million!
Simple Savings Calculator from Nerdwallet
Will the education at College B result in an additional return of $3 million in their child’s adult life?
Maybe, but probably not. We have written before about those rare times when paying a premium for college is worth it. But for most majors in most situations, College A which also has a great program for their child will be an excellent choice.
Too often, the higher education marketing machine has blinded parents to one important fact. Having success in college is more about what your student does there than about what college it is. If you doubt this statement, read Frank Bruni’s book “Where You Go Is Not Who You’ll Be.”
Choosing a college with some perspective
When you’re faced with a college choice and each ticks off all the academic and social boxes, look at the cost comparison from a different perspective. The long term return on education can be an eye-opening experiment.
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