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May 09

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Geniuses and dropouts must ask: is college worth it?

More school is not for everyone.

In 1973, Paul Simon–the son of a college professor and elementary school teacher–recorded a lesser known song called “Kodachrome” with the lyrics:

“When I think back on all the crap I’ve learned in high school
It’s a wonder I can think at all
Though my lack of education hasn’t hurt me much
I can read the writings on the walls”

Although Mr. Simon earned a degree in English from Columbia University, few would suggest in hindsight that he was wrong to drop out of Brooklyn Law School. Courses on contracts, torts, and legal writing would do little for his talent as a singer and songwriter. More importantly, recording hit songs makes a lot more money than writing legal briefs.

A recent study by Brookings finds that, as with Mr. Simon, a college degree is not always the answer for those who want to maximize their earning power. The study argues that tuition, books, fees and opportunity cost associated with attending college clearly outweigh the incremental earnings of a college degree for some people at some schools. In many cases, college is a bad investment. It leads to less financial wealth, not more.

As a starting point, the study confirms the widely accepted fact that, on average, those who obtain a bachelor’s degree earn far more money than those who finish with only a high school diploma. But the study is more concerned about what the averages hide.

Most notably, the study observes that nearly 200 schools out of 1,248 on the 2012 PayScale list have a negative return on investment. In other words, on average, graduates from these two hundred schools would have been financially better off if they had skipped college altogether and instead went straight into the workforce or to a vocational school instead. By and large, these schools tend to be the non-competitive, easy-to-get-into type of schools. The study draws this conclusion by comparing wages for these graduates with wages for those with high school degrees only. But the challenge that the study does not address is in knowing what wages would have been for lower-tier graduates if they had not gone to college. After all, some portion of the non-college degree population consists of people who started their own business and make great money as a result, something the lower-tier graduates may not have done.

The study has another flaw, one which, to be fair, the authors likely recognize. Its focus is on those who attend and complete college but fail to make much money after doing so. But college may be a terrible investment for another group of people as well: the smart, ambitious, and attractive people who get accepted to highly competitive programs and would be brilliantly successful with or without a college degree. Some true geniuses–Bill Gates, Steve Jobs, Larry Ellison, Michael Dell, Mark Zuckerberg, and so on–seem to recognize this before graduating.

Of course, it’s a difficult task for the researcher to identify those who didn’t need college to achieve their high earning potential. The task is at least as difficult for the current or potential student who considers whether college is a worthwhile investment. The Wall Street Journal reported in April that more than a dozen Stanford students dropped out to form a startup called Clinkle. Since Clinkle is still far from a household name, it’s a tough call whether the students made the right decision.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2013/05/geniuses-and-dropouts-must-ask-is-college-worth-it/

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