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Letter to College Board Asking For Clarification/Corrections

Dear Ms. Baum,

I am writing in regards to the "Education Pays" report that you co-authored for the College Board. I appreciate the College Board attempting to get information distributed about the financial value of a college education. I think this is necessary and valuable that young people and their parents have accurate and objective information so they can make informed choices about their future. Your report concludes that ď[Higher education] yields a high rate of return for students from all racial/ethnic groups, for men and for women, and for those from all family backgrounds." My belief after analyzing your report is that several critical errors were made in the data used to arrive at that conclusion. These errors and assumptions mean that the report does not represent the true financial picture for the average student.

First you assume that the average student graduates in 4 years when your own data says the average is 6.2. This is a meaningful difference because those extra 2.2 years means higher costs for attendance and more years of lost income. According to your web site tuition costs are $12,796 annually x 6.2 years to graduate = $79,310. The impact is significant because 50% higher attendance fees and another 2 years of lost income would have a dramatic effect on the time to repay the investment. The total impact of this inaccurate assumption is $28,151 in additional education costs and $53,010 in lost income for a total earnings impact of $81,161.

Secondly, for your model you use an artificially low interest rate of 6.8%. This is the rate for federal loans, but the maximum amount that can be borrowed under this program is $23,000. Since only $23,000 may be borrowed under the federal program of the total cost of $79,310 that leaves $56,310 which would have to be financed with private loans that have interest rates of 12-17% which is 200-250% higher. Even if one selects the lower end of that range (12%) then the interest paid goes up by about $30,000 and of course even higher if one models the 17% number.

A critically important data point when performing income prediction model is the expected salary and here I believe you selected an incorrect basis from the US Census data of $50,900 annually and $31,500 for the high school graduate. There are several problems with using this number in their calculation. First your model student graduates in just 4 years which would put them at 22 years old. Yet for the income calculations you use the average salary of a 25 and older. A 22 year old is clearly not going to make the average salary of a 25-65 year old straight out of college. They will typically start at a much smaller salary number than $50,900 and any model needs to account for this. Those monies are especially impactful in the early years when there is huge debt repayments which are required.

In addition, you did not use the US Census numbers for all people 25 years and older, but instead selected just those that registered they were working full-time at the time of census. (I made this same mistake in my own initial analysis.) Assuming 100% employment is unrealistic in today's fluid economy. It takes time to get a good paying post-graduation job and there will likely be periods of unemployment so the more accurate numbers to use would be all high school grads compared to all college grads. Using these more realistic US Census numbers for all people accounts for unavoidably low or no employment periods. Doing this narrows the earning gap 14% between high school ($26,505) and college grad ($43,143) income levels. And over a 40 year career this is an earnings difference of $310,280 for a graduate earning $43,143 instead of the higher $50,900 number.


Monetary Impact on College Earning

Incorrect graduation expectation (4 years instead of 6.2)


Artificially low interest rate (6.8% instead of 12-17%)

$30,000 (minimum)

Assuming average adult income for young first time job seeker


Assuming zero unemployment for entire working career


Total decrease in College Earning Power


According to your chart, the net difference in income after 40 years between a high school and college graduate is under $250,000. If one is to adjust the numbers using the changes listed above (-$421,441) then the financial benefit of a college education goes negative. Thus it would make more financial sense for the average young person to bypass college and simply graduate from high school and enter the workforce.

Absent from your analysis is the cost of attending a private institution. According to your web site private college tuition is about $10,000 per year more than a public school. Over a 6.2 year term this would be $60,000 more in costs which must be financed at a high interest rate.

Finally, your report says that college yields a "high rate of return for students from all racial/ethnic groups, for men and for women." Yet when I review the same US Census data your report relied upon I see substantially lower annual wages for women and blacks than used in your analysis. Women earn just $36,532 versus the $50,900 in your report. Hispanic women earn even less at $34,302. Black women earn $41,298 and black males earn $41,871. Over a 40 year career those earning differences can be over $500,000 which is a dramatic difference. I see no data in your report for the claim that college produces a high rate of return for women or blacks which have much lower expected salaries.

Since you did not publish the actual formula or make available the spreadsheet, it is impossible for me to precisely calculate how these issues affect the underlying financial analysis. Perhaps there are other factors which I'm unaware of. However, I believe the issues I laid out more accurately represent the financial experience of the average college student rather than the super student who graduates in 4 years, never spends time looking for a job, is never unemployed, and immediately garners a job making the average of their superiors.

I'm sure the College Board strives to get accurate information out to the public about college. I share in that goal. I would kindly request that you evaluate the points I am bringing to your attention and respond to my inquiry with a reasoned explanation. Getting the most accurate information to the world is extremely valuable when young people every day are being asked to make life changing financial decisions about attending college.

-- MR

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