By David Blobaum, Director of Outreach for the National Test Prep Association
Our post three weeks ago, “Top College Rankings in 2035,” received significantly more views and feedback than any other post we’ve done. So today, because I find it to be an intriguing analogy, I am following up on a response from a reader (who owns a wealth management company).
“Interesting post. Got me thinking how to value a degree. Similar to stocks based on future earning expectations but with an illiquid buy and hold forever asset.”
Let’s unpack that a bit: Stocks are not valued based on present earnings (if a company is bringing in a lot of money but expected to go bankrupt next year, then its stock will go to zero now). Stocks are primarily valued based on expectations of future earnings. In the same way, the relative value of one’s college degree is not based on a college’s present ranking but upon the expectation of its future ranking (people won’t value a college’s present ranking if they expect it to drop significantly in ranking in the future).
Here’s my take on that analogy:
Cons to that analogy
Education has inherent worth
It should be no surprise that I’m a huge fan of education. And, as I have written about here, education is about more than its monetary value. On average, even after controlling for more education typically leading to more income, more education still leads to a longer and healthier life. I would also argue that, equally or more importantly, education can help us to better understand ourselves and others and lead to a more contented, fulfilled life.
College is about more than the education
It’s also about the college experience. College is a time of greater independence while still being on a relatively protected college campus and typically still largely supported by one’s parents. I think it can be a very useful on-ramp to adult life. Not only that, but most people in a professional career had the college experience, so it’s a valuable experience even if only to help a person assimilate into professional peer groups — shared or similar experiences can provide a sense of commonality upon which to build relationships.
So, regardless of a college’s relative worth from its ranking, the education and experience that a college provides have tremendous worth.
Pros to that analogy
It is about future worth
There is value in a college’s ranking. The greater opportunity that comes from a degree from a highly-ranked college is not an illusion. And students don’t want to attend a college because of its current ranking but, instead, implicitly want to attend a highly ranked college because they anticipate it will stay highly ranked. In that way, how the value of a college’s degree compares to that of other colleges is assessed in the same way as a stock — based on expectations of future value.
It is an illiquid, buy-and-hold investment
If you were going to buy a stock that costs $200,000 or more (the cost of many college degrees without financial aid) and you were informed that you cannot trade or sell it, you must hold it for your entire life, and its dividends (the amount it pays out) could vary significantly over that time, I’m guessing you would do A LOT of due diligence before deciding which company’s stock to buy.
You should apply the same due diligence to a college degree because the same rules apply: it costs more than $200,000 (not to mention the opportunity cost of attending college instead of working and earning money for those four years), it is a truly illiquid asset that you cannot sell or trade, you will hold it for life, and its payout could be very different from degrees from other colleges (for better or worse).
Conclusion
Overall, I really like the analogy because it helps clarify what a big decision college is and why significant due diligence is warranted.
However, let’s keep a college degree in a larger perspective: Graduating from a college that has a strong name brand can be helpful, but it is far from a large determining factor in someone’s life. Dramatically more important for a person’s financial success is their work ethic (not to mention who they marry, their frugality, understanding of investing, etc). So, no matter what school a person attends, they can largely reach the same potential, but a college with a strong name brand can simply make it easier to do so.
That said, because a strong brand name carries value and college degrees are partly valued based on their future worth, it is worth thinking about the future ranking of a college before committing to it. (That’s why I think the University of California Schools, which have gone test-blind, are unnecessarily risky bets — even if they don’t drop in value, the uncertainty surrounding the effect on their future rankings from drastically changing their admissions criteria necessitates a discount on their present value.) Just like any other brand, the value of a college’s brand can rise or decline over time.
About the author
David Blobaum is a nationally recognized expert in the entrance exam and college admissions industry and is the Director of Outreach for the National Test Prep Association, which works to support the appropriate use of testing in admissions. He graduated from the University of Chicago with honors both from the college and in his major, and he received his Executive MBA from Quantic School of Business and Technology. In college, he took seriously the University of Chicago’s aim of a “Renaissance” or well-rounded education and took courses in 17 different disciplines, ranging from Statistics and Economics to Philosophy and Art History. Since then, he has devoted himself to helping students reach their potential through education and, more broadly, to help empower them to succeed in life. To do so, he co-founded the education company Summit Prep in 2013 with a classmate from college, Eva Addae. When David is not teaching the next generation of students, he enjoys reading and hiking. His favorite travel spot is Brazil -- his wife's home country.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.