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It Pays to Comparison Shop When It Comes to College

College is too costly these days not to shop around.

In his paper, "Is College Worth the Investment?" Mark Schneider, a former official at the U.S. Department of Education and scholar at the American Enterprise Institute for Public Policy Research, finds the answer on the value of higher education varies widely.

Return on an investment from a college degree is higher at more selective universities and at public universities, his research found. And within each level, there was a wide range among individual colleges. Indeed, some simply were not worth the investment when he looked at the price tag, likelihood of graduating, and potential earnings.

"College does many things, but for most people what it really does is get you ready for a job," says Schneider. "Ask any parent and most kids, 'Why doing this?' And they'll say, 'Want a good job.' You are putting a lot of time and often a lot of money into this: The issue is whether or not it is paying off."

Schneider used data provided by PayScale.com for about 550 institutions in the country that it calculated by starting with the median income for new students and the midcareer earnings. Then the length of time and amount of money the student invested in college was measured—including the probability of actually getting a degree from the college—to come up with an annualized rate of return. He acknowledges the limits to the data. They're based on information provided by alumni from schools that supplied PayScale with the data and don't take into account students who go on to earn professional degrees. Yet it's helpful as families sort through all the college options and try to consider value along with other factors.

The takeaway for K-12: Guidance counselors should be aware of the variation in success rates at schools to help students make the best choices, says Schneider. "Students should be sent to schools with high graduation rates," he adds. "It really, truly matters."

In this research, two findings stand out. Attending a more selective school increases the student's payoff by an average of 6 percent to 11 percent. Among the public institutions, there was no big difference among those at the lowest level of selectivity.

Second, public institutions have a consistent advantage over private not-for-profits at every level of selectivity. Any wage boost that students get from private colleges, on average, isn't enough to overcome the high cost of getting that degree, Schneider found.
The findings are based on averages, and there was wide variation among schools at the same level.

Ideally, colleges will eventually provide information linking the earnings of their graduates with unemployment data and other factors to come up with more accurate forecasts for rate of return, said Schneider. In the meantime, this study does provide some guidance. When looking at a school, Schneider suggests families examine the interest rate of unsubsidized federal loans (6.8 percent) as a starting point to analyze the investment. "If the rate of return is lower than the cost of the borrowed money, attending that college does not seem like a prudent choice," he writes in the report.

When parents are aware of the difference in graduation rates, Schneider says it does influence the choice of college. "If we could put more information out there, maybe we could drive better decisions," he says. "All the information is about trying to make consumers smarter and make better choices."

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