August 2013

“Does College Still Pay Off?” asks  Pat Regnier  over at CNN Money. Of course it does assures the president of Arizona State University.

Our calculations and those of economists say the return on investment for a college education, in terms of additional earnings, is about 12% per year over your lifetime. The answer is unequivocally yes.

Honestly…that doesn’t sound like much, but I thought there was a very interesting statistic about halfway through the article…after 6 years, only 57% of ASU students have managed to graduate. I’m quite curious…are those remaining 43% included in the population included in the calculation? I seriously doubt it.

So a better way of looking at this is…If I take a random 18 year old high school graduate and send her to ASU, there are a handful of potential outcomes.  In scenario 1, the student makes it through the program and earns a degree. Lets just say it takes an investment…five years of her life, plus $60k. For this…she goes on and earns 12% more than she otherwise would have. This is the outcome a little over half… 57% ….of the time. Hooray!!

Now…Scenario 2 is not as pretty. 43% of the time…the student will invest at least a couple of years, and lets just say $30k….and end up with no degree. In the oil business, we call that a dry hole, and while it sure does make your performance numbers look better if you can ignore them and focus on the home runs, odds are, your CEO is going to call BS if he sees you trying to pull that in your annual performance review.

But then…this isn’t the real world…it’s education, where you get to make up whatever statistics you want in order to perpetuate the myth that keeps the money rolling in. More or less, the myth goes like this. Send us your 18 year old kid, and $50-100k…or more….and in 4-6 years we’ll send him back…he will no longer be a dumbass.

Of course..it is just a myth. If you send them your lazy dumbass 18 year old, and $100k…odds are, in 4 years, they keep the $100k and send lil’ dumbass home to live with you (and drink your beer).

So…here is my answer. College does pay off….if the kid already has the right combination of raw intelligence and ambition. Raw intelligence…by itself, is of little use….you need the complete package. It’s the complete package that matters most. A lot of ambition and hard work, plus moderate intelligence could very well be a more successful combination than a lot of raw intelligence and a little bit of ambition.

Furthermore…for these students, perhaps 30% of the population…Whatever success they achieve after college can be 99% attributed to their natural talents…not their education. Employers hire people with college degrees not because of what they think they may have learned in school, but because of the credential. If you have a college degree in engineering from a state university, it tells potential employers something about you they didn’t know before. It tells them you probably have above average intelligence. It tells them you have the ability to set and achieve short, medium, and long term goals. It tells them you have the ability to be taught, and more importantly to teach yourself. And since you have demonstrated these skills….there is a much better chance you will be successful in their organization than some random 18 year old kid….even the same kid 4 years prior.

The college degree itself proves only that you may have potential. The company knows damn well that the 22 year old petroleum engineering graduate knows almost nothing about the real world of petroleum engineering or the oil business. That kind of  valuable knowledge will never be attainable in a classroom. However…they are willing to hire the 22 year old because of what they will be able to do after a decade of training.

Now…it is by no means a fool proof selection system. Plenty of sub par candidates manage to get a college degree and into an entry level  position. If they never had the right stuff in the first place…they are not going to make it in the workplace…regardless of the degree. So…say Ivy League Jr. Gets into Harvard because of Mommy and Daddy’s contacts, but unfortunately for lil’ Johnny…he’s just not college material. When he gets out of Harvard 5 years later thanks to a few hundred k of Daddy’s money and a lot of “tutoring”…he very well may get that first job….but odds are…he’s going to get fired sooner or later. The employer hired Johnny because statistically…hiring a Harvard grad gets you a lot of intelligence and a lot of potential. As soon as they figure out Johnny can’t hack it without a tutor holding his hand…he’s done. So in this case…even though Johnny got the highest “quality” education possible…in the end it didn’t make one bit of difference.

I am quite confident that the inverse is also true. Take a kid who grew up in poverty, but blessed with incredible intelligence and a hard work ethic and send him anywhere…community college…or maybe even ASU 🙂 Ten years after college….this kid is going to be working side by side with the Harvard grads of equal skillset.

So…bottom line, as I discussed here, college is not about education at all, it is about credentialing. Basically, College is a 4(-6) year comprehensive IQ test employers use to identify candidates who have the potential to perform complicated, and thus high $ tasks. So…if you have a smart kid, who is highly motivated to succeed…by all means…send them to college (any college) to get a degree in math, science, engineering, medicine, education…or maybe even accounting 🙂 For them, if they are successful, the degree will get their foot in the door and allow them to prove (or disprove) to the world they have the right stuff.  For these kids…the payoff for a college degree  is huge. However…if the kid just doesn’t have it….you can send them to Harvard for that Liberal arts degree…and in 5 years they will be back at home working at JC Penny or if they are lucky…Starbucks, and they will have essentially wasted 5 years of their lives, and a whole lot of your money.

**Just a quick clarification…obviously we are discussing the monetary return of going to college. It has been my experience in life that intelligence and  certainly income have absolutely zero correlation with character. So, let me be perfectly clear…An individual’s intelligence…be it 80 or 120, is simply a measurement of a physical characteristic..no different than height, weight, shoe size, or beauty. None of these tell us anything about the quality of the character or value as a human being. However…it is naïve to think that our physical characteristics do not influence our earning capability. At 5’8″, and 170#…my odds of ever playing in the NBA, or becoming an offensive lineman in the NFL were infinitesimally small from the moment I was conceived….I simply lack the genetic profile to exceed at these high paying professions. Same goes for countless other professions. Forget the arts…I can’t sing and my six year old son makes fun of the stick figures I draw. Construction…not a chance. About 10 years ago I bought a $10 book with plans for building a shed…and about $1000 of materials to complete the job. A few months later, I had the ugliest most poorly constructed shed in town. As it turns out…about the only thing I am professionally competent to do…is accounting and finance. Fortunately for me, this seems to be a rare talent that happens to pay well enough to keep a roof over my head and a protector in my pocket. Let’s just get it out there…the whole system is screwed up and beyond repair. Companies are to blame, government is to blame, colleges are to blame, and parents are to blame. Sending a kid in the bottom quartile of his class to college to get a degree in liberal arts benefits nobody but liberal arts professors and the colleges that employ them. Not everybody can grow up and become a rocket scientist….We need to start being honest with our 18 year olds about their prospects before we let them become slaves to their student loan debt. There are plenty of paths to financial and nonfinancial success in life that do not require a college degree.