Years ago, economics professors used to enjoy asking their students: What product do consumers spend large amounts of money on but never see?
The answer used to be gasoline. Times change, though, and the right answer today is: higher education.
Apart from buying a house, selecting a college for a daughter or son to attend has become the biggest economic decision many households will ever make. The choice, though, doesn’t involve a product that we can see, really. In fact, other than the degree awarded at the end, higher education can be difficult to define.
We might think that an invisible product that is hard to define would be a marketing nightmare, but it hasn’t been. Instead, we can’t seem to get enough of it, even though the “higher” part of higher education has come to reflect its price more than anything else. Very few families are wealthy enough to ignore the costs of college for their children. Most households will be facing major budgeting issues, and for so many of them college selection comes down to if and how much to borrow.
For some households, the decision is made for them either by economic constraints or other factors. If the son or daughter has chosen a career path that does not involve college, for example, the cost of higher education is not an immediate household financial concern.
For a few high school students who are gifted with outstanding athletic ability in a sport that is supported financially by colleges, the decision comes down to selecting a school from the offers received. That’s pretty easy — and even easier from a financial standpoint if only one school offers a scholarship.
Most families have a bigger decision to make, however, and while higher education is surrounded by oceans of salient data, there are limits to how helpful economics can be. At the heart of a college selection decision, unfortunately, there is an empty box where some essential economic information is supposed to be.
We are told that a college degree increases a person’s earning substantially over a lifetime, and there is ample historical data to support that. This data, in turn, has been used to estimate the present value of both college costs and the income differential. As college degrees increasingly resemble a commodity, though, thoughtful parents comparing the costs and benefits wonder if the financial advantage will erode.
Some parents answer this question by going for the most expensive school that will admit their youngster as a student, using the guideline of “you get what you pay for.” To use this guideline effectively, though, not only do we have to recognize that it isn’t always true, but also we have to know and understand exactly what we are paying for.
There is an element of theater in higher education. It involves the transfer of information, surely, but the way it is transferred can affect, even transform, a person’s life. What parents are paying for, largely, is not just the stage and the sets, but the “name” and reputation of the theater (or movie company), the “stars” in the cast and the type of audience filling the seats.
There are more than 2,700 degree-granting, four-year colleges and universities in the U.S., and they cannot all be “elite.” Experts do not agree on how many elite undergraduate institutions we really have but the number is probably around fifty, and maybe closer to half that if we get really picky.
From an economics standpoint, though, gradients of elitism are not as important as whether paying up for an elite school is worth it. Many parents believe that it is and their willingness to pay the cost has even increased in recent years.
In the past, the data supported that view and the relationship seemed so clear that few questioned it. Recent economic research, though, suggests that in predicting later success a student’s character, personality, and behavior patterns are stronger factors than the school attended.
Bearing that in mind, parents should remember that in addition to four-year institutions, there are more than 1,700 degree-granting two-year colleges, the overwhelming majority of which are publicly supported community colleges. Because of their significant cost advantage they are of great significance to a large number of families trying to fit the best education possible into a household budget. They provide an education that can be complete unto itself or a cost efficient gateway to a four-year institution.
Economics is important, but still only part of a family’s decision on what would be best for a son or daughter. Education doesn’t just increase a person’s market value; it changes them. In the end, parents won’t go wrong if they pick the school that can best guide that change.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.