Will College Pay Off?

A Guide to the Most Important Financial Decision You'll Ever Make


By Peter Cappelli

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The decision of whether to go to college, or where, is hampered by poor information and inadequate understanding of the financial risk involved.

Adding to the confusion, the same degree can cost dramatically different amounts for different people. A barrage of advertising offers new degrees designed to lead to specific jobs, but we see no information on whether graduates ever get those jobs. Mix in a frenzied applications process, and pressure from politicians for “relevant” programs, and there is an urgent need to separate myth from reality.

Peter Cappelli, an acclaimed expert in employment trends, the workforce, and education, provides hard evidence that counters conventional wisdom and helps us make cost-effective choices. Among the issues Cappelli analyzes are:

What is the real link between a college degree and a job that enables you to pay off the cost of college, especially in a market that is in constant change?
Why it may be a mistake to pursue degrees that will land you the hottest jobs because what is hot today is unlikely to be so by the time you graduate.

Why the most expensive colleges may actually be the cheapest because of their ability to graduate students on time.
How parents and students can find out what different colleges actually deliver to students and whether it is something that employers really want.

College is the biggest expense for many families, larger even than the cost of the family home, and one that can bankrupt students and their parents if it works out poorly. Peter Cappelli offers vital insight for parents and students to make decisions that both make sense financially and provide the foundation that will help students make their way in the world.




College Myths and College Realities

A FOUR-YEAR college education is one of the most important experiences in adult life. What it looks like today, however, is quite different than what most adults remember from their own experience. It is less likely to be a four-year experience on a campus and more likely to be something spread out over many years, often across different colleges, and frequently delivered in office parks. It costs a lot more than it used to, more than in any other country in the world. Far more students are going to college now, especially those from families with fewer advantages, and they often pay for it by taking out loans, sometimes a lot of loans.

In part because of the costs, the pressure has been on colleges to persuade students and their parents that their students will get good jobs when they graduate. To do that, they have responded with a plethora of degree programs that sound just like job titles, such as “international hospitality management,” especially at the new and growing for-profit colleges.

At the same time, the message from the media, from the business community, and even from many parts of the government has been that a college degree is more important than ever in order to have a good career. As a result, families feel even more pressure to send their kids to college. This is at a time when more families find those costs to be a serious burden.

For those families, sending their kids to college is a huge investment, and they are making that decision with almost no information as to whether it will pay off or bankrupt them. No one should think that is a good idea. Even the most strident advocates for college education recognize that the experience these days can be wildly different depending on which school and degree program one attends. The graduates of some programs move on to do fabulously well in their careers, although how much of that success is the result of attributes they had even before college is rarely discussed. Graduates of other programs do so poorly afterward that there is no chance they will ever pay off the investment they made to attend these colleges.

We should not kid ourselves about the risks associated with the biggest financial decision many families will ever make. Investments in college fail to pay off because students fail to graduate or when those who do take many years to finish as most now do. They fail when students who graduate with substantial loans cannot earn enough to pay back those loans, many of which come with substantial fees, with interest that compounds the day they are issued, and at interest rates up near the level of car loans. They fail when the good jobs promised by the admissions offices do not materialize. They also may fail even when graduates get a job but when their years on campus were so oriented to job training to get them that first job that they learned nothing that will help them later in the workforce.

Public policy plays a role in these developments. The cutback in funding for public colleges, which most U.S. students attend, pushed the problem of paying for college onto families and continues to do so as the run-up in state college tuition vastly exceeds that of their private school counterparts. The more serious concern going forward may be the effort at state and local governments to make college increasingly vocational, to push students toward degrees that sound like jobs employers are trying to fill.

What is so troubling about this move toward making job training the mission of four-year college programs is that there is no evidence that it works. Employers are certainly interested in what college grads know, but the evidence is striking that what matters most to them are the general abilities and skills that one learns in any serious degree program, including liberal arts. They are least interested in the job-specific knowledge that the new vocational programs are pushing. When students are taking courses in the fine points of healthcare administration, classes that taught more general skills that might be useful over a lifetime, such as logic and problem-solving, are pushed aside.

What prompted me to write this book was the unqualified statements about the big payoff to a college degree that are pushing so many students and their families who can’t afford to do so to jump into the deep end of college expenses, taking on debt that they cannot afford for experiences that are unlikely to pay off. While there are lots of guides to tell us whether a particular school suits the temperament of our child, there is almost nothing that helps us decide whether a college experience will lead to financial ruin. That is what I try to offer here, a guide to the factors that determine whether a particular program will pay off.

Along the way, I hope to dispel some of the myths associated with college and the labor market, such as the idea that there is some shortfall of science, technology, engineering, and math or STEM graduates, that college students just won’t major in the fields where jobs are, or that jobs today require more education than in the past. I highlight the bigger issues that underlie the payoff from a college degree, such as how much of the success of college grads comes from the ability to identify students who are already very able, how the job market has changed in ways that make work experience rather than education the key factor, and what is happening with K–12 education in the United States that has changed the college marketplace.

Many people helped with this project. Larry Liu provided extremely thorough assistance identifying sources, my colleagues Bob Zemsky, Pat Rose, and Peter Eckel read early drafts and offered suggestions as did Stephen Sherret. Special thanks to John Wright for putting the project together and to my editor John Mahaney for helpful guidance along the way.


Why Do People with More Education Get Better Jobs?

The Link Between Education and a Good Job

REPORTS IN THE business press about a shortage of engineers and scientists and charges from the president of the United States for every student to commit to at least some college education make it seem downright patriotic to send your kids to college. The problem is, none of those people saying that more kids should go to college are offering to pay for it. For many families, sending their kids to college is a huge expense that taxes their ability to meet other important needs, such as their retirement. Is it going to be worth it?

There are many great things about going to college. We make friends, often find life partners, learn about life and the world beyond us, and oh yes, take away a bunch of things from classes as well. One aspect of college has become increasingly important, though, and that is getting a job afterward. The reason for that is in part because the costs of college have risen precisely at a time when the weak economy has left so many families unable to pay for it and also because prospects for students who don’t go to college have collapsed, at least compared to the previous generation.

While the United States does not lead the world in the proportion of students who graduate from college—the Soviet Union long held that title, and now it is Korea—in no other country do individuals pay so much for college and go in so many numbers. Students in the United States pay about four times more than their peers in countries elsewhere, and more than 70 percent of our high school grads go on to college.

The idea that college is the path to a better life is firmly rooted in the American psyche. Government policies like the GI Bill, the rise of state universities, and federally backed financial aid were all designed to create more opportunity for people with less money to advance in society. The idea that college educations pay off in the form of much higher wages has also been the justification for having individuals and their families pay for it: You should pay because you are going to benefit from it.

In this new environment, college is still accepted as necessary for advancement but also increasingly expensive and increasingly risky in terms of the likely career payoffs. We can attribute a lot of the struggle that new graduates face in getting their careers going to the lingering effects of a weak job market since the Great Recession, but other factors might be at work as well. The sociologists Joseph Arum and Josipa Rocksa interviewed a thousand or so recent graduates and found large numbers of them struggling to get reasonable jobs and more generally to move into adult roles. Arum and Rocksa suspect that something about the preparation the graduates got in college—and perhaps didn’t get—may be a poor match for the challenges of modern life.1

Something profound does seem to be afoot in that transition between college and adult life, and it has to do with jobs. The time when employers would scoop up new graduates and give them the skills that would make them into lifelong employees is over. Instead, employers are now looking for new hires who already have the skills to start contributing, and they are very picky about who they hire. In the process, they are pushing the problem of getting job skills onto the students, and the students are not doing very well at it.

Almost two-thirds of recent graduates report that they don’t have a job that is closely related to their field of study. More than one in five report that they received no information about the job market in college. Almost one in four already believe that their education was not worth the financial costs.2

There has been a huge and puzzling campaign arguing that employers have difficulty getting the skills they need and that the problem is with the education system, including college. Some part of that has been driven by lobbying on immigration, mainly by employers in the information technology industry who want the government to allow them to bring in more immigrant workers from lower-wage countries. Some of the media interest in the idea that skills are in short supply has been driven simply by the “man bites dog” situation that with so many people out of work, the fact that employers would claim to have a hard time finding good applicants to hire is newsworthy. All the stories seem to put the solution to the problem on students: Just get the right degree, and you’re off and running.

That common view is simply wrong. Students are knocking themselves out trying to figure out where the jobs will be, something that no one can predict with any certainty, and employers actually seem relatively uninterested in academic skills. They want the skills that come from experience on the job, the kind that they used to provide with their own internal training programs.

With all this attention directed at the employer’s perspective, virtually no one is thinking about what all this means for students thinking about college and their families who have to pay for it. And that will be my focus here.

Students and their parents know something has changed about hiring, and they look desperately to colleges to help them solve the problem. The colleges have been happy to oblige, or at least happy to assure the families that they can get these young students the skills that will lead to good careers when they graduate. The problem is that we do not know whether their assurances are credible.

The evidence is overwhelming that college graduates have earned more money than high school graduates, but that overall, average evidence obscures important facts. There is a huge amount of variation in outcomes across colleges: Students in some programs do spectacularly well after they graduate, but many others would have been better off financially by not going at all. What do we make of that?

The answer is that one size does not fit all, and a lot of judgment calls are required to get a good outcome from college. Think about the analogy with medicine. For every prescription drug, there is clear evidence that it has the desired effects on average, but we still require that every dose be administered by a licensed expert—your doctor—who has to decide whether the benefits of it in your situation are worth the potential side effects and increasingly whether those benefits are worth the financial costs of the treatment. When it comes to college, though, we have none of that expert guidance. We are asked to go with average results for the population as a whole.

We don’t have a good sense of exactly why students who attend college on average do better in the job market after. Is it really because of what they learned and experienced in college, or is it because kids who can get into college already have advantages that those who don’t go won’t have and that graduation demonstrates abilities that are valuable and would have been useful in the job market even if they had not gone to college? If that seems unreasonable, ask yourself how much you grew up between age eighteen and twenty-two: We often attribute that development to college, but a lot of it may have happened anyway. When we compare college grads to new high school grads, we often forget that the former are older, and four additional years at age eighteen make a heck of a difference.

What we do know is that the odds of a good payoff are better in some places than others, and while we cannot guarantee that the bets on a successful career after college will pay off, we can improve the odds with the right decisions.

The focus in this book is to remind us that college is for many people the biggest financial decision they will ever make. It costs a lot, just graduating is far more difficult than most people think, and there are no guarantees about getting a job after. So the risks are big. Many families struggle mightily to pay for the education of their children, often putting other obligations, such as the retirement of the parents, at risk to do so. Paying for college may well mean not paying for something else that also has great value to the family. The relevant question should not just be whether there are benefits with graduating from college—surely there are—but also whether the financial benefits of those degrees are actually worth the cost of attending college.

The recent grad Kyle Laffin, for example, needed his father to cosign a loan to pay for an undergraduate degree in accounting, a pretty marketable field. And he did get a job, one paying $40,000 per year. But he’s got $14,400 in loan payments as well, and his dad is dipping into his retirement to help pay for them.3 We often don’t think about the costs of these loans, but as we will see later, many of them have interest rates that are quite high, the interest accumulates even in college and if you can’t find a job after, and even bankruptcy can’t get you out from under them. Whether college pays off on average is not that comforting to someone about to roll the dice with the family nest egg on an investment that is hard to assess, that many things can go wrong with, and that even in the best circumstances may not really pay off for a decade or more.

For most families, the question is not so much college versus no college. For all kinds of good reasons, they want their kids to go to college. The question, though, is still which degree, which major, and which college to attend, and for that decision, the possible payoff from the degree matters even more. For other students and their families, college is first and foremost about getting a good job afterward. They cannot afford to attend if that doesn’t happen.

Colleges have responded to the concerns about getting a job with a massive shift toward programs that promise to provide job skills that will get students jobs after they graduate. Will employers actually value the increasingly vocational skills in programs like health care administration or construction management? The evidence we will see shortly suggests that they probably don’t.

Whether the job that students want will be there four years (or more) after they start is increasingly unclear. Even if graduates get that first job they want, which is typically all we hear about, what happens later? Will the value of a very applied degree designed to give them the job skills to get their first job dissipate, leaving the graduate with something like a career dead end? Would students have been better off with more traditional academic courses, in which at least they learned some general skills, and less vocational classes targeted to a specific field, especially given that there is no guarantee that there will be jobs in that field years later at graduation? Where can we find evidence about the payoff from a particular degree program to help us decide, and if we see it, can we believe it?

What is becoming the prevailing wisdom, that students should be pursuing practical, job-oriented majors like animation, property management, or invasive cardiovascular technology (yes, these are real undergraduate programs), may well be exactly the wrong advice. These narrow, vocational degrees lock students into a single occupation, and they often have to make that decision at age seventeen when they apply to college. They may change their interests and want to switch fields, which may be hard to do in these practical programs. If the jobs aren’t there at graduation, their narrow degree might make it difficult to do anything else.

We should also care about more than the first job out of college, as it might not last very long. Many of the high-paying jobs for new grads in fields like engineering and information technology have long-term prospects that aren’t very attractive because the skills go out of date quickly and the jobs don’t lead to obvious career progression later on. One reason why these jobs don’t have such good long-term prospects is because employers can go back to campuses every year and hire new grads with even more up-to-date skills.

The fact that college educations are the biggest expense many families will make is not new, although it is increasingly true for more families. What is new is that it can be the riskiest investment they will make, in part because the job market is less predictable and in part because new ways of paying for it—loans—increase the downside risk if there is no good job at the end. The decisions about college don’t have to be guesswork. We can have a much better sense of whether a college degree is going to pay off for any particular student by understanding the important decisions that determine the financial costs and the financial outcomes and what we know from real evidence about them.

The College Context

The United States traditionally sent more kids to colleges than any other country. There are 2,700 four-year colleges in the United States and also almost 4,000 two-year colleges. Under the broad heading of “postsecondary”—after high school—there is now an array of college-like options that did not exist a generation ago, including for-profit colleges, vocational schools that provide all kinds of skill certificates, community colleges and junior colleges with associate degrees, and traditional four-year colleges offering bachelor’s degrees in highly specific fields such as health care finance or casino administration. Our focus here will be on college and four-year degree programs, but it is important to note that a huge proportion of students attend other kinds of college.

Higher education’s advocates like to point out that if we think of survival as being a sign of success, colleges must be doing something right because most of the oldest institutions in the world are colleges and universities. Several like the Universities of Paris and Bologna and Oxford are closing in on their 1,000th anniversary. A business that fails wouldn’t elicit much attention, with the exception of huge corporations like Enron, but it is rare that we see a college close its doors. Many of the ones that do close are the for-profits that only recently started up, like Corinthian Colleges, which shut down a number of its campuses in 2014 under pressure from state and federal regulators.

The business world has undergone rapid transformation over the past several decades. If Tom Rath, the main character of Sloan Wilson’s 1955 bestseller The Man in the Grey Flannel Suit, wandered into the offices of, say, Google or Apple today, he would be bewildered. But plop a student from Yale a century ago onto that campus today and—with the exception of getting used to a lot of electronic gadgets—he would feel right at home: Dormitories, lectures, clubs, and sports and a great many courses where the titles, and in some cases the content as well, have remained largely unchanged for generations. The lack of change is a source of pride for many colleges.

But things are changing around the traditional model of a four-year residential college, where students learn well-established lessons from the academic world as well as life lessons from their peers. Nowhere are the changes more obvious than in the relationship between the college experience and the job market that students experience when they graduate.

Before the First World War, college was a rare experience reserved for the children of families with considerable means. Being a college graduate was a sign that you were already successful, having been born into the right family. Philanthropists began to start new universities and change that model in the late 1800s—John D. Rockefeller and the University of Chicago and a series of eponymous schools like Cornell, Duke, and Carnegie-Mellon. The Morrill Act in 1862 created the idea of state universities, although college enrollments remained relatively small until after World War II when the GI Bill paid the expenses for returning veterans to go to college, ballooning enrollments. Shortly thereafter, the states expanded their university systems enormously, keeping tuition low enough to make college affordable for virtually any high school graduate who had the ability and motivation to go.

The education-to-career model in those days was simple. We might think of it as a pipeline because the path through it was so predictable: Do well in high school, apply to a four-year college and, if lucky, get into the flagship university in your state system, graduate in four years, and line up to meet the employers who hired graduates into careers that would last a lifetime. At least through the 1960s, the number of jobs available for such graduates typically exceeded the number of graduates, so there was a scramble to hire students, especially the good ones. Fortune magazine described the scene in 1948: “Corporate men who work the college circuit for likely executive material—‘ivory hunting’ in the trade jargon—complain that the market has never been so unruly. Prices are up at least 100 percent over 1941, and students … are having a wonderful time playing hard to get.”4 In a hiring frenzy not unlike that associated with the 1990s Internet boom, corporations sent their most impressive executives to recruit students, offering country club memberships and limousine services to lure recruits. This scramble for talent paid off for the companies because those new hires remained with the company for a lifetime, and of course it paid off for the employees as well.

The labor market for graduates softened considerably in the 1970s in part because of the huge influx of baby boom graduates. But the basic model of large employers hiring for potential and training new hires for long-term careers still held. The lifetime-employment model eroded in the early 1980s with the rise of layoffs as the means to restructure companies, but the college-to-career part was still recognizable. Corporations might have been laying off older white-collar workers, but they were still hiring them in from college.

I described what happened next in my book The New Deal at Work. Companies that were downsizing, the ubiquitous expression for layoffs, asked themselves why they were maintaining expensive recruiting, training, and development programs for new hires. The glut of experienced white-collar job seekers caused by these layoffs was a boom to any company that was interested in hiring and an alternative to that earlier “grow your own” model. The new darling of the business world was Silicon Valley and its business model of churning through a workforce, hiring experienced talent only when it was needed and then letting that talent go as soon as it was not needed. Companies like IBM, GE, and Hewlett-Packard that still made big investments in employees became the hunting ground for search firms and recruiters looking for talent for companies that did not want to make those investments. Many of those companies started to ask themselves whether that internal model was still worth it. As one CEO told me at the time, “Why should I train my employees when my competitors are willing to do it for me?”5

There are two effects associated with this change. The first is the general decline of the entry-level career path where hiring took place from college into jobs where graduates really weren’t expected to have any real job skills yet and vacancies in the company were always filled from within. Evidence from large companies a generation or more ago found that 90 percent or so of open jobs were filled from within, through promotions or transfers of existing employees. The other 10 percent were entry-level jobs filled by recent grads, both high school and college. Just before the Great Recession in 2008, however, only about 28 percent of job openings in those large companies were filled from within. When they had openings, they looked outside for candidates who had already done that job or something very similar elsewhere.

With all this outside hiring, it is not surprising that the average time that an employee spends with an employer has fallen. According to the Bureau of Labor Statistics, the number of years a typical employee remains with an employer fell to about 3.5 years in 2000, although it rose considerably after that as the economy slowed, as less-senior workers were laid off and new ones were not hired. As my colleague Matthew Bidwell has shown, the declines in tenure over recent decades have been especially great in the large employers that had provided those long-term careers.6

The other development has to do with training. After World War II, it was common for employers to put new college hires into training programs that lasted years. Those programs began with classroom education on business and management basics or the equivalent in other fields, progressed to short-term job assignments that rotated across fields to give new hires exposure as well as experience, and included along the way coaching, mentoring, and every other practice that seems cutting-edge today.

The information we have on employer-provided training in the United States now is stunningly poor, probably the worst in the developed world. The data we do have suggest that in 1979 young workers received on average about 2.5 weeks of training per year. By 1991, U.S. Census data found that only 17 percent of all employees reported that they received any formal training that year. Several surveys of employers around 1995 indicated that somewhere between 42 percent of employers offered training that could be described as systematic, and 90 percent reported doing at least some training for someone, with the amount of training an individual received per year averaging just under eleven hours. The most common training topic was workplace safety.7

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  • “It's precisely the right moment for a book to help 18-year-olds and their parents make this important educational and financial decision... Cappelli offers some good tips: Student loans are stickier than a mortgage: You can't escape them with bankruptcy, and you may find your wages garnished if you try to walk away from them, never mind your bad credit rating. Don't rely on data released by colleges, particularly employment rates, which are often calculated based on dubious self-reporting surveys. When you visit a school, check out the tutoring center and see if anyone is around to help; it's a good proxy for the campus support system. Most important, finish on time. A surefire way to erode your return on college is to graduate late or not at all.” —Wall Street Journal

    “[A]stutely examines the enduring relevance of a college degree... [I]lluminating statistical and survey data… Cappelli's eye-opening report card on the current state of American education gives mounting tuitions a failing grade... Salient reading for students, parents, and educators on navigating toward a coveted college degree.”—Kirkus Reviews

    “A valuable, commonsensical analysis of an ever-more-important subject.”—Booklist

On Sale
Jun 9, 2015
Page Count
224 pages

Peter Cappelli

About the Author

Peter Cappelli is George W. Taylor Professor of Management and director of the Center for Human Resources, Wharton School, University of Pennsylvania.

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