Higher education seems to have simultaneously become both a mandatory minimum and yet out of reach for so many young adults.  Ron Lieber, a New York Times personal finance columnist and father of two, shares his insights from years of research in his new book published January 2021. The Price You Pay for College: An Entirely New Road Map for the Biggest Financial Decision Your Family Will Ever Make explores every aspect of higher education from gap years to Ivy League schools. He also dives into the costs and discussions around sources of funding.

Merit Aid

The book begins with a behind-the-scenes look at the history of tuition pricing and how we got to where we are today. In the 1980s the competition for students was fierce. In hopes of attracting better students and increasing their perceived institutional quality, Ohio Wesleyan began to discount tuition to certain high caliber students. This discounting was done through merit aid, a term Ron expresses his frustration with. The idea was Ohio Wesleyan would increase the perceived quality of the school and then turn off the discounting valve however, as other schools caught on, they quickly joined in. The pricing wars ensued nationwide.

The fundamental issue with merit aid is it provides discounts to the most desirable students to woo them away from better schools. The aid is not needs based but targets the emotions of applicants who feel accomplished and desired when they get a letter in the mail that offers them money in the form of lower tuition in recognition of their hard work or intellect. Ron provides an example on the competitive discounting cycle from the University of Alabama which “now spends over $137 million on merit aid each year for students with no financial need, up from under $10 million in 2006.” Merit aid is not bad. Schools should be able to compete in all areas including price. The concern is the scale at which merit aid has dominated the landscape and the school’s available resources.

Ron also cites several studies which found that 89% of students at private colleges get a need-based or merit aid discount. In fact, a survey of 366 private colleges found for first-time, full-time students the annual discount was 52.6% off the list price. In other words, the crazy high levels of tuition especially at private schools is not even close to the net cost to the average student. As I read these stats, I could not help but feel like these colleges’ have turned into a department store where everything is 50% of year-round with a big sign out front that says “HUGE sale” just to entice potential buyers. The only difference being, instead of knowing the discount when you walk down the isles you only know the discount after you have loaded up your shopping cart and get to the register.

The Importance of Higher Education

The author does a great job of presenting all sides of higher education. While the book starts off with a negative view of merit aid and the resulting inequality, Ron does highlight the importance of higher education. The Federal Reserve of New York found the average salary of employees with just a bachelor’s degree was $78,000 which is $33,000 higher than the average employee with only a high school level education. This $33,000 premium was then used to calculate the return on investment (ROI) of a college degree to be 14% making it a worthwhile investment for most. However, this ROI dips to 11% if it takes 5 years to graduate and 8% if it takes 6 years.

Not only is attaining a degree important, but where that degree is from matters as well. The largest poll of college graduates in history, the Gallup-Purdue Index, found that only 30% of college graduates feel fully engaged at their workplace. This study also found that when students felt they were mentored by professors who “made them excited to learn, cared about them personally, and encouraged them to pursue their dreams, it doubled the likelihood that they were engaged with their work as adults and doing well overall.” Moreover, 19% of college freshmen do not become sophomores and a 2016 survey of 700,000 students who started at a community college, only 14% of them transferred to a four-year institution and graduated within 6 years.

On the other end of the spectrum, the author gathered up a list of the most selective schools which he defined as undergraduate institutions where the average incoming SAT score was at least 1400. This list of 45 schools included the Ivy League and schools like UC Berkeley, the University of Michigan, and the University of Virginia. Less than 3% of undergraduate students come from this list of schools, however, 33% of the U.S. Senate, 22% of Congress, 21% of Fortune 500 executives, 57% of MLB general managers, and 52% of New York Times staff writers come from these 45 schools. The takeaway, the school you attend matters.

Your Personal Goals

In the end, all that counts is achieving your goals and dreams. If being a senator or a Fortune 500 executive is not on your bucket list, then the $300,000 plus Ivy League price tag and stress and heartache of the academic rigor is probably not worth it. This decision can only be made in context of where you want to go and what you want to do. Talk about a lot of pressure for a 17-year-old and their family. It bears repeating that personal finance decisions (of which this is a very large one) are more personal than they are finance. You must ignore the crowds and the noise and make the best decision for you and your family. So, with the overwhelming amount of information how do you do that?

The Inside Scoop

Much of the frustration with higher education is the learning curve. Prospective students and their parents have a lot to digest with selecting a major, applications, FAFSA, student loan varieties, and cost analysis. If all those variables were not enough to juggle, the “merit aid” is only awarded after the student is accepted meaning the applicant’s family does not even know the true cost of attendance until after the arduous work of applying is completed. This is even more difficult for first generation college applicants given that the public high school average student to guidance counselor ratio is 430:1.

Ron recommends starting the college shopping process by first reading the president or chancellor’s page to get a sense of the school. Second, check out the university’s strategic plan. Ron also references TuitionFit, Edmit, MeritMore, the U.S. Department of Education’s College Scoreboard, and calls the school’s common data set (CDS) “required reading”. Each schools CDS can be found by googling the school and “common data set”. Once you have done your homework, it might make sense to seek the help of a personal college guidance counselor or a qualified financial planner to help think through applications and funding. I will echo Ron, if you are seeking out a financial professional you want to look for a fee-only financial planner with a CFP® designation.

My favorite quote from the book is from David Coleman who runs the College Board which administers the SAT. I think this quote applies to a lot of areas in life but especially in the context of higher education. David said, “You must push the rules of the system. One of the most misleading things we say in education is that a good school will ‘give you an excellent education.’ A great education is never given – it is taken.”