College Planning: Is the ROI in the College or the Major?
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In the 1990s, a college rankings list initiated an arms race that would last for decades. Year after year, the colleges that dominated the top 20 of the list represented less than 2% of all new college enrollments. That same list convinced students and parents to chase something that was unattainable for all but the most elite students – SAT’s over 1450. Consultants were hired, kids crammed for “the test,” second mortgages were taken out and everybody was on board. A degree from an elite college was a guarantee of future success. It was the ultimate lock on your kids’ future.
We analyzed college rankings over decades and ironically, SAT scores at those institutions are almost perfectly correlated with the ordering of the college ranking lists. It begs the question: Are the elite colleges creating winners – or are they picking them?
Requiring students to have an SAT score over 1450 to even be considered for enrollment is evidence that the elite colleges are basically picking all-star teams. Employers know this, and many of the top tech firms actually recruit freshman from elite colleges! What the recruiters know is that the computer science departments at those colleges have done a great job of identifying the best math students in the country, and all of these kids already know how to code. The same is true for artificial intelligence (AI).
Colleges started hiring luxury branding consultants to justify their 7% annual tuition increases. Stories about colleges offering climbing walls and campus sushi bars are now legendary for all of the wrong reasons. It took over 20 years for families to begin realizing that they were chasing something that didn't matter. When Hollywood celebs are buying entry into a system, surely the signaling function to employers is broken. And it is.
Exceedingly few employers care about the label on the diploma. They're looking for technical skill sets. Employers aren’t searching resumes for the keywords like “Harvard” or “Princeton.” They’re sorting recent graduates by academic major. We know this because we provide them with recruiting data. They are looking for science, technology, engineering and math (STEM) skills that match the job they're trying to fill. What they’re not looking for are soft majors: liberal arts and humanities. The fact that starting salaries for STEM grads are typically 2.5-times higher than those with soft degrees tells you what the labor market values.
The road of college planning is strewn with expensive potholes. As actuaries for student lenders, we’ve determined the pathways that lenders will fund and those to avoid. College can be an incredible investment by creating a future earnings stream, and that’s one key way you and your clients should look at it. As advisors, you are financially literate and that is enormously beneficial in running a cost/benefit analysis on an education plan. As the family fiduciary, you can guide them towards college tracks that will provide a high return for 40 years!! What other areas of your business enable you to save clients’ thousands annually (tuition expenses), and then add tens of thousands annually in future earnings? The peace of mind that comes with knowing that a child will have a stable and self-sufficient future is one of the highest value services you can offer your clients. If you’re thinking that this isn’t a significant concern for parents, Sallie Mae commissions a survey of family sentiments each year regarding college costs and outcomes. It takes a full 98 pages to fully convey the angst and worries that parents face.
What is the net-net of all of this? Over the course of 20+ years, families have been bamboozled into spending trillions on top-end colleges, while overlooking the fact that it's actually the academic major that is far more important – and that the nearby state college can provide a degree in that major, and they already paid a lot of that state college tuition through their tax dollars.
Let’s look at where advisors can add specific value:
If the student is good in STEM – They’re in a good position regarding an eventual career track. You can help with the college selection process and save them a lot of money. You can assist them with budgeting and setting up a 529 plan. The FAFSA and other applications paperwork can be confusing to first timers and many families will offload this to competent hands when possible. (Side note – if you’ve got an assistant in your office who is good with administrative functions and paperwork, doing FAFSAs and college applications is a really nice, value-added service to offer your clients. We can help get you started.)
If the student is weak in STEM – A strategic discussion with the family may be necessary. Soft majors in almost all cases lead to retail, hospitality and service sector jobs. While there’s no such thing as a “bad job,” why spend a fortune and four, five or six years in college, only to end up with a job that requires a high school diploma? Most colleges will advise that you get a masters in the soft degree to improve the kids’ employment prospects (it won’t appreciably). But for that, you can add another $100,000 to the education tab.
What good options exist for a student who isn’t strong in math or science? Glad you asked – all hope is not lost! In our research, we’ve discovered that students who graduated with a soft degree and were tagged as having minored in business, or studied “some business administration” had wages that were 35% higher than those who did not study business. Here’s what has played out in the real world…let’s say that the kid with the soft degree ends up in a customer service job. He/she will have some familiarity with accounting, marketing and Microsoft Office. Guess who ends up being the shift manager of those who didn’t study business administration? Or, the boss needs an Excel spreadsheet or PowerPoint cleaned up – if the kid can do that, guess who gets called on repeatedly to help with business admin-related tasks?
Want to know more about the value of a business administration degree? A barista is a metaphor for a dead-end job. The territory managers of large, well-known coffee chains are people who started out as baristas, showed ambition, and have a degree in business administration. Rental car companies, hotel chains, restaurant chains and the like all hire tens of thousands of entry-level managers who have business administration degrees. They’re not looking for MBAs from the London Business School to help them restructure a division. They need young people with a basic business education to run single franchises and outlets. These recent graduates start out at $30,000 to $35,000, and they can move up from there.
Also, there are entrepreneurial opportunities galore. If a student has a passion in a soft field, encourage them to study that passion, passively. Passively means reading the books while focusing on business administration skills that will help them to be involved as a manager of others in the art or craft. There are many “hacks” that are very meaningful in terms of creating job opportunities. If a family has a kid who loves art, design and drawing – have the student focus on CAD training, which leads to excellent job opportunities creating product designs and drawings for manufacturers. Ditto for kids who enjoy writing and journalism. Technical writers are the folks who draft the manuals, user guides, web text and so forth for software companies, pharma, and any other product category you can think of. These are excellent paying jobs with big companies that provide good pay and benefits.
Don’t overlook the trades and vocational jobs
For many families, the idea of their kid getting their hands dirty is unthinkable. Gasp! What would the neighbors say? Don’t push the topic if it’s a nonstarter, but offer this information for those families who are receptive to real-world jobs.
Starting salaries for electricians, electronics technicians, motorcycle repairers, and anything with healthcare in the title are in the mid $30,000s at least, which is 50% higher than retail, restaurant and hospitality jobs. Also, the trades have good long-term career prospects. And there’s that little thing about studying business admin and then being a manager of a team of trades persons.
Burger flippers – In n’ Out is a burger chain in the Southwest U.S. If you’ve had one, you know why they’re so popular. Managers at their top stores earn $150,000 annually. A welder in the shipyards in Louisiana can start at $90,000. It takes 18 months to get a welder’s certificate. If a kid pinched his pennies, he could pay cash for a house after a couple of years, at age 22. New cars are loaded with technology. The guy who changes the oil doesn’t earn much. The guy who understands the electronics does. All of those guys are working towards certification on high-end cars because that’s where the big bucks are.
A typical kid graduating with a soft degree from a state school will have $39,000 in student loans. They might have those paid off by age 40, at which time they can begin saving for a house – and possibly even open an investment account with his local financial advisor. We’ve been doing actuarial work for student lenders since 2013. We’re more concerned about this cohort of graduates not having a home or retirement plan than we are about Social Security and healthcare blowing up the federal deficit.
Managing college costs – increase the college ROI
Families love it when a discussion about college is businesslike. Recognize that they don’t know where to start the discussion. Parents’ number-one fear is that their kid will not leave college with a good career plan and will end up in their basement and be a financial liability. They badly want their kids to become happy and self-sufficient. Their kid may have dug his/her heels in about going to a certain college (which, coincidentally his friends will be attending) without having a career track or notion of the exorbitant costs involved. In simple budgeting, families typically under-estimate the cost of college by 50%, or more. They assume their kid will be done in four years (5.3 is average) and they don’t fully load all of the costs and incidentals that can blow up a budget. That’s one problem.
Another problem is that families look past their local state college, under the assumption that an expensive private college is going to offer a better education, leading to a better job. We don’t ever tell a family what to do – we give them all of the available options. Those options can offer starkly contrasting results. Here are some of those options:
- Four-year college.
- o Private college – plan on $15,000 to $50,000 annually.
- o Public state college – plan on $5,000 to $15,000 annually.
- Two-year college, then transfer to a four-year college (save one-third compared to public state college in total tuition costs).
- Two-year trade/vocational college. $2,000 to $3,000 annually.
At the same time, the family should be looking at occupational outcomes from the academic majors that are being contemplated. This is a sobering exercise and one that should involve the student. When the family sees the jobs that are available, along with starting and mid-career salaries, this is a discussion that brings rationality to the topic.
When the family is informed regarding majors, they should build a list of about 10 colleges that the family is contemplating. Obviously, the colleges being considered must offer the major that is targeted. From there, they should gather data on those colleges regarding net prices, graduation rates, employment rates for recent graduates and a lot more. As we discussed in our last article, the family can become overwhelmed by the college discounts, grants, scholarships and such. They can really use your help in making sense of the college pricing structures. In the process of reviewing the data relating to each school, the list will get cut in half quickly.
This process is a great exercise because the family is engaged and they’re making decisions based on facts and data! They will be looking at the various college costs, the occupational outcomes – and they’ll be thinking about the ROI in a simplistic way, which is fine. They can lean on you to formally ‘run the numbers’.
Living at home – can’t we all just get along? Save $20,000 per year at least. Many parents want their kid to go away for college as a stepping stone towards independence. That’s a family decision of course. You just provide the facts, data, and the ability to crunch it all.
Wrapping it all up
The family should have a short list of about four or five colleges they’ll apply to. The FAFSA should be done, along with the CSS profile. Sometime after the applications have been sent out, colleges will reply with acceptance or denial letters. And then you can begin the negotiation process over final pricing. This is a chance for the family to love you even more!
The value of college is in the skill set that the student develops while in college. The labor market will ultimately decide what the graduate is worth. As an advisor, one of your benefits to the family is to have them understand that the value of the education will ultimately be determined when the kid puts his/her resume into the marketplace. It sounds cold and impersonal – but that is exactly the reality they will face in four to six years.
Any number of colleges can provide an education and degree in the chosen major. The costs of that education will range from a few thousand dollars to over $50,000 annually. The upfront calculus is a function of totaling up the costs of the college degree – and that may add up to tens of thousands to possibly a few hundred thousand dollars. The family can choose once they’re provided with the facts. The back end of the college investment is based on the academic major, understanding the value of the skills associate with the major, and multiplying it out by 30 or more years, plus inflation.
It is all about the major.
This article has been submitted by Educate To Career (ETC) co-founders, Paul Hill and Michael Havis. ETC is a nonprofit, specializing in providing college planning programs and data to over 1,000,000 families, financial advisors, and campus career centers each year. We are the leading vendor of actuarial analysis of college outcomes data to student lenders. Our charter is to help young people get an affordable education, leading to a real job, with no student debt.