<p>Timmy2 â here are some problems with your analysis (in post #194)</p>
<p>1) Anyone who can qualify for entrance into MIT can probably also get admission into a top 20 school that will offer substantial merit money or a lower cost education, including many public schools. I donât know what the rankings of engineering schools are â when I mentioned Georgia Tech in a previous post you indicated that it was ranked pretty well. What about Cal Poly? What about Olin? </p>
<p>Before someone takes on X amount of debt, they need to consider alternatives. Any rational economic analysis looks at cost differentials â that is, not what is the ânet present valueâ of the MIT education - but âis MIT worth $100K in debt as opposed to $30K debt for X university or no debt for Y university?â The answer may also depend on whether the individual has a clear idea of where they want to live after college. A public university that as a weak reputation nationwide may be well regarded in the studentâs home state. </p>
<p>2) The real issue is the individualâs earning capacity, not averages reported by the school. MIT accepts only the best and the brightest â so the question is not, how does the typical MIT graduateâs employment prospects compare to the employment prospects of the typical Missouri grad â but rather, how does an MIT degree enhance the employment prospects of a given student with a 2300 SAT score and a 4.0 high school GPA? Outside the engineering field â where the question is what happens to Harvard admitted students who elect to go elsewhere â the answer seems to be ânot muchâ in most cases. </p>
<p>Thatâs important because when you look at the overall earning capacity of MIT grads, you canât conclude that it is the DEGREE as opposed to the individualâs innate abilities. Many firms include some sort of aptitude testing of their own design as part of the hiring process â and it may be that top 20 grads fare better on those tests largely because of their innate abilities rather than the name on their degree. Of course they should have learned something more in 4 years of college â but it may be that the differential between the Missouri and MIT grad is only 20% quality of instruction and 80% a matter of how smart the student was to begin with. </p>
<ol>
<li> You fail to factor in risk into your analysis. That is â you have calculated a ânet present valueâ but you are assuming that the individual grad will in fact be earning whatever median figures you have come up with. Itâs that kind of risk-blind thinking that led to the current economic crisis, the out-of-control BP oil spill, and the sinking of the Titanic.<br></li>
</ol>
<p>Itâs also the exact type of thinking that leads to the type of situation the liberal arts major in the NY Times article faces: itâs making plans on the assumption that everything will go right, instead of factoring in, and planning for, the possibility that things might go wrong. You have substituted the variable of âtop 20 engineeringâ degree â but that doesnât change the analysis. The girl and her mom in the article were simply under the impression that âNYU degreeâ was the functional equivalent of the type of degree you think is most valuable. </p>
<p>Your analysis is appropriate to large-scale, statistical problems â where it is useful to consider group data and averages - but it is inappropriate to apply group analysis to individual problems. Every group has a statistical tail â and any given individual may fall into the bottom end of the tail. Of course we all like to believe that we will end up on the top end ⊠but Iâm one of those people who follows the adage, âhope for the best and plan for the worst.â</p>
<p>I think it is reasonable for a student to take on some debt â but as I posted above, I think the amount should be keyed to one yearâs earning capacity â and I also think it should be keyed to present earning capacity, not anticipated future capacity. When my son with a liberal arts major dropped out of college after 2 years, he soon got a job that paid roughly $25K a year. So I think itâs fairly reasonable to assume that a smart high school graduate who could get into a top school, is capable of earning $25-$30K a year, even without their college degree. </p>
<p>Yes, of course the college degree increases earning capacity⊠but life events might get in the way, and the debt will still be there. (My kid didnât plan to drop out when he started â but his student loan debt for the first 2 years came due with or without a degree). </p>
<p>Itâs not a matter of computing the ânet present valueâ of the degree. I can compute the âpresent valueâ of a new Mercedes, but that doesnât mean I can afford one. </p>
<p>Maybe I am just a risk-averse person â but I look at debt as something that requires a foundation to take on. When I was deciding how much I could afford to take on in PLUS loans â I looked at my own annual earnings, and I looked at the value of my home and the amount of assets I had sitting in my retirement account. I donât want to pull money out of retirement in order to pay for my kidsâ college â which is why I chose the PLUS loan â but I can tell you that if my earning capacity were compromised in the future, there is more than enough money sitting in the retirement account to pay off the college debt. The only ânet present valueâ I am looking at is the net present value of me â which, even taking into account all debt that I have taken on, comes out to a positive number.</p>