The pay-off for a prestigious college degree is smaller than you think

Prospective college students are trying to gauge whether a given college is worth the cost. This annual ritual is now fraught for students weighing whether to pay big dollars for what may turn out to be a lot of online lectures and Zoom chats. The stakes are especially high for students who’ve received the golden ticket to prestigious colleges where tuition can run $50,000 or more per annum. 

After all, there’s a popular belief that a diploma from a prestigious college is key to future life success. That’s why admissions consultants can charge $200 or more per hour to help students get into elite universities. That’s why last year’s “Varsity Blues” FBI sting found parents paying fixers to get their kids into USC and Georgetown.

Yet, upon a closer look, it’s not clear that the return lives up to the billing.

In fact, four years after graduation, median earnings for graduates from more selective colleges aren’t all that different from those of graduates who attended less venerated schools. We recently used National Center for Education Statistics (NCES) data to examine the experiences of nationally representative cohorts of 1993 and 2008 graduates (the two cohorts for which such data is available).

We looked at post-graduation earnings based upon the selectivity of the college they attended, using the NCES selectivity rankings — which categorize colleges as “open admission,” “minimally selective,” “moderately selective” or “very selective” based upon admissions rates and ACT and SAT scores.

Four years after graduation, median earnings for those who graduated from open admission, minimally selective, and moderately selective colleges in 2008 were similar, hovering around $46,000 a year (in 2019 dollars). Graduates from very selective schools had median earnings of $51,000 — or about a $5,000-a-year premium four years after graduation. That $5,000 is a pretty modest payoff. And it’s not clear that attending a very selective college causes even this modest earnings bump. It may be that students likely to earn more — due to skills, work ethic, or interests — simply choose to attend those schools. 

Moreover, while the earnings of graduates from selective schools are increasing, the earnings of students from less selective schools are increasing more. Between 1993 and 2008, median earnings for graduates from very selective schools increased by 4 percent while those from less selective and open admission schools rose by 7 percent.

What’s going on? Why is there an impression that prestigious degrees are more profitable than they really are? Well, the biggest reason may be that, while graduates of more selective institutions don’t make a lot more money than those from less selective ones, they are much more likely to graduate.

Four of five students who attend very selective schools graduate within six years, compared to three of five students at moderately selective schools and just one of five at open admission institutions. In other words, students who complete their degree at less selective institutions earn nearly as much after four years as their peers at the nation’s most prestigious schools do, but they’re much less likely to graduate in the first place.

As a result, analyses that report outcomes based on where people attended college — without regard to whether they completed — make selective schools look good.

What does all this mean for students and parents?

First, elite colleges are selling more than early-career earnings. They’re selling bragging rights, networks, and more. And such benefits may only show up later on (or in ways that earnings don’t capture). But the return on those perks may be smaller than prospective students imagine, especially at a time when colleges have closed campuses and the promised intimate mentoring has been reduced to the occasional Skype session.

Second, correlation isn’t causation. It’s no surprise that earnings for students who attend elite universities look good: There’s a big payoff for completing a degree — and completion rates are very high at selective colleges. But it’s not clear how much of this is due to terrific teaching and support, or simply to student bodies composed of hand-picked high achievers. The answer, of course, matters immensely.

Finally, a college degree — from seemingly any kind of institution — appears to carry broadly similar weight in the marketplace. That raises questions about just what colleges are selling and what employers are buying. It may be that college completion matters less for what students have learned than for the fact that it identifies the students who did what was required to make it through. If that’s the case, then where a student earns a diploma may matter less than whether they do.

These findings should ultimately be reassuring for parents and students eyeballing the cost of a selective college and wondering whether they can “risk” instead choosing a less prestigious school that might save them $150,000 or more over the next few years. Parents don’t have to break the bank, commit felonies, or take a deep breath and urge their children to take out massive loans. After all, the payoff for attending a selective college turns out to be a lot smaller than you might think.

Frederick M. Hess is the director of education policy studies at the American Enterprise Institute. Joseph B. Fuller is a professor at the Harvard Business School and a visiting scholar at AEI.