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Are Private Colleges Worth The Extra Money?

We've all seen the headlines. College costs more than ever before, and student loan debt is rising at an alarming rate. For students entering college and their parents, it is becoming more important than ever to find the best value in a college education, which means that there are tough choices to be made. Are private schools really worth the extra cost, or do public colleges and universities offer the better return on investment?

Comparing tuition
Tuition is rising at a very rapid pace for both public and private institutions. The difference is substantial, with the average tuition and fees totaling about $9,000 for an in-state public college compared with over $30,000 at a private school. Even out-of-state tuition at public schools is substantially cheaper than private, with students paying around $22,000.

Source: Flickr / Tax Credits.

To get a more accurate picture of the difference, however, we should look at the total cost of attending college, not just the cost of tuition, which is just one of the costs associated with attending college. Total cost takes into account such expenses as room and board, books, school supplies, and pretty much everything else involved with living at and attending college.

Recent data indicates the average total cost of attendance at a public four-year university is around $23,000 per year. In contrast, the annual total cost of attendance at a private institution averaged just under $45,000, and this can vary tremendously among the various types of private schools.

So, it is roughly twice as expensive to go to a private school than to attend an in-state public school. Is it worth the extra cost?

What makes it "worth it"?
There are several factors which can make a private school more appealing to prospective students. Private schools tend to have smaller classes, more involved students, and a very close-knit community. If money isn't much of an object for you, there are many valid reasons why a private school could be a better choice.

For our purposes though, I'm really only worried about the value of education as an investment. In other words, will graduates of private schools earn high enough salaries that make the extra costs worth it? Do they earn significantly more than their counterparts who graduated from public universities?

Source: Flickr / audio-luci-store.

Dollars and cents
A recent study indicates graduates of public schools earned just 80% of what private school grads earned, with starting salaries averaging about $40,000 and $50,000 for public and private schools, respectively.

Remember, this is just an average. If you want to be a teacher, the college you went to plays no role in determining your salary, as the pay scale is based on level of degree and years of experience only. By the same logic, the data may be skewed because those who plan to choose more lucrative majors (engineering, computer science) may gravitate toward prestigious private schools, while those in lower-paying fields (education, social sciences) may be more inclined to choose a public school.

Figuring out return on investment
Salary website came up with a complex methodology for calculating return of investment (ROI) for college educations, comparing the total costs of attending a school and the earnings differential between a graduate of the school and a high school graduate who doesn't go to college.

Interestingly enough, when ranking all U.S. colleges to annualized ROI, 13 out of the top 15 are public institutions. However, 10 of the 13 are classified as "engineering" schools, which goes to show that one's major plays a very significant factor in earnings potential.

However, when ranking the schools by total ROI (total earnings power over a high school graduate), nine of the top 15 are private schools, meaning that although tuition is high, total career earnings are high as well. Of the public schools on this list, all six are engineering schools.

Source: Flickr / Kevin Dooley.

So, is it worth it?
Assuming a 40-year working life and 3% annual raises, the average graduate of a public university could expect to earn just over $3 million throughout their career, as opposed to about $3.75 million for a private school grad.

One way of looking at the data is how a private school education costs about twice as much (or 100% more) than a public school education, but will only earn you about 25% more over your lifetime.

However, another way to look at it is an additional $750,000 in earning power over your career, for only an extra $88,000 or so in additional investment. This additional investment will be recouped within the first eight years of employment, on average, meaning the salary gap for the rest of the graduate's career (let's say after age 30) will truly be "more salary."

Of course these are just averages, and everyone's education is different. We already mentioned the choice of major, but other factors such as geographic location and the "prestige" of your particular school also play a significant role in determining starting salary. While public school is definitely the more inexpensive way to get your degree, there are indeed some measurable financial reasons indicating private schools may be worth the extra initial investment.

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Read/Post Comments (11) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2014, at 9:42 AM, raycbee wrote:

    Interesting topic, though the article is a bit oversimplified and I expect better analysis. I don't see any mention of financial aid or time-to-degree in the ROI section. Time-to-degree is generally one year less at private vs. public 4-year institutions. Factor these into ROI analysis and privates look even better.

    Also, does not rank "all U.S. colleges"..they have roughly 1,000 ranked in 2013 or roughly one quarter of higher education institutions in the country.

  • Report this Comment On March 23, 2014, at 7:34 PM, Fauquier wrote:

    This article is obviously skewed in favour of private universities. However, as a graduate of a public university, I would have to agree with the author.

    1) Your opportunities in the private sector with a public degree are extremely limited. Those who are making a significance in private corporations are likely to have a private degree themselves. They are going to hire those with similar backgrounds.

    2) Given the above, that limits those with public university degrees to positions of much lesser significance in private corporations, and they have a much more difficult time rising upwards, only if they are lucky enough to be recognized for their efforts by someone much higher up within the corporation. Or, these public university grads are relegated to the private sector.

    I have been forced to pursue public sector work because I did not know anyone within a private corporation with any pull. I needed employment, and took the only viable job offer. Admittedly, when the Federal government's highest paid employee earns $400K a year (the president), I was, and am, definitely not interested, as I was interested in opportunities that paid far more. But, I had to survive, and I took an entry level public sector job. It is impossible to move upwards, as diversity, and not skills, are rewarded. I expected to be earning far more by now than I am, with a far more glamourous position (travel, bonuses, lots of perks), but I had to do what I had to do. Blame it on my 'common' education. Trouble today is that no one wants to be middle or lower class anymore (including myself), but someone has to be, and these individuals are more likely to be public school educated.

  • Report this Comment On March 23, 2014, at 7:36 PM, Fauquier wrote:

    Section 2, above: Should have said the public university grads are more likely to be relegated to the PUBLIC sector.

  • Report this Comment On March 23, 2014, at 9:17 PM, wredfern wrote:

    I have seen a lot of articles lately about what colleges are or are not worth it. Something I haven't seen addressed, especially as it pertains to the discussion about the Ivies & top Liberal Arts Colleges vs. Large Universities (in state costwise) is the graduation rate. If you compare the graduation rate of students attending the former group vs the latter, it is stark. My son will be in college soon and I am paying $35k a year (he did get some money to attend) and it will be at Haverford. He could have gone to our state university for much less and it is one of the better large state universities, but I like the fact that the 4-5 year graduation rate at Haverford is insanely high. Yes, a lot of things go into this and I suspect my son's chance of graduating from our state school is higher than the average there, but i suspect there is still a lower chance due to the influences and distractions.

  • Report this Comment On March 24, 2014, at 1:23 AM, lesliem wrote:

    This article is so general that it is meaningless. I went to the University of California, Berkeley. It is a public school, and it is consistently ranked as one of the top 20 universities in the US for undergraduates. Many of its graduate programs are consistently ranked in the top 10 in the world. If you can go to Berkeley, or Virginia or Michigan or UCLA or one of the other great public universities, it is just as good as going to an Ivy League school at a much smaller cost. On the other hand, a public school like Cal State Bakersfield, while it may provide a good education, will never have that kind of prestige. The same is true for private universities. If you can get into Harvard or Yale, then obviously it is worth the investment. But some private liberal arts college that nobody ever heard of and that costs a fortune? A degree from Berkeley or Virginia is both much more valuable and much less expensive.

  • Report this Comment On March 24, 2014, at 7:41 AM, SCDuffer wrote:

    Our kids attended private colleges. Way back in 2001, when our oldest was a sophomore in high school, my boss gave me a great piece of advice, "Encourage your kids to go to a private college. In the end, it's the best deal -- excellent education, great endowments, better scholarships & less expense for you!" So, I took him at his word & followed the advice. It proved to be true.

    An example ... our oldest was given an academic scholarship. Tuition his freshman year was $23K + Board & Books. Tuition his senior year was $26K +

    the Board & Books. That's approximately, $100K + for one kid at a private school. What did we get for the investment? All classes were taught by professors -- not TAs! We got smaller classroom-size. Smaller lecture halls. Faculty knew his name. He wasn't just a number. Priority was given to students who were Juniors & Seniors. After his scholarship, we had spent approximately $52K total! He graduated in 4 years -- great too!

    Now consider ... my cousin's daughter, an honor student, who is in her 6th year at a state college in NC. She will graduate in May. Due to budget cuts, many courses were only given 1 semester per year. Juniors & Seniors were not given priority. Since not every student can be accommodated, it prolongs graduation. That equates to more $$$ out of his wallet, but a sure-fire way to pull $$$ into the school! The only scholarship the kid was offered is $1,200.00 per year! An estimation of expenses, from the college's website, is $13,784.00 incl. Board! Now, do the math. If you are looking at $82,704.00 & gasping, you are not alone! Remember, books weren't included in that estimate. Cha-ching! Cha-ching! Even if you deduct the modest scholarship, it's a mere savings of $7,200.00 over 6 years. My personal guess is that's about the price of the books. So, we are back to $82K +! And what did this Dean's List student get for that price? Education. Board. Books. Huge class-size & lecture halls. An abundance of TAs doing the teaching. A delayed finish. Added stress. Unnecessary financial burden!

    I'll take a private college any day over a screwing like that! And after graduation, it seems having a Private education pays off too! It's a win-win situation!

  • Report this Comment On March 24, 2014, at 11:13 AM, louisdyer wrote:

    Out of high school, I could have gone to a mid-ranked private school or a top-ranked state school when I graduated high school. The private school expected me to take out $13,000/year in loans 30 years ago versus I had a full ride and then some at the state school. Needless to say, I went to the state school and never looked back. I graduated in 4 years, no problem and with no debt. I went to work for a top tech company alongside many public and private school grads. I even did my grad work at a private school. My experience was that the public school grads made better workers because it was so much tougher to graduate because the schools don't molly-coddle their students. It's sink or swim.

    I thought the private graduate school was ridiculously easier than my private undergrad school. In fact, many of the required courses were consider sophomore level classes at my public university!

    This writer forgot to figure in the cost of trying to repay an extra $80,000 to $120,000 in loans after graduating from a private college relative to a public one. Think about the mounting interest payments as well. Most entry level jobs simply don't pay enough to live off of and simultaneously pay off loans amounting to a very nice luxury car. I struggled to make ends meet for the first 10 or 15 years until I really hit my stride mid-career. By then, your students loans are supposed to be paid off.

  • Report this Comment On March 24, 2014, at 3:36 PM, nanguneri wrote:

    I never went to a private school and graduated from abroad and know many more likewise and never had any difficulty finding a job with the private sector.

    The averages are important, however, the variance is also critical. If the average is 50 for public and 60 for private with each of them varying by +/- 5 points, you already have two populations that are not significantly different from each other.

    Don't be swayed by average based statistics as one also needs t pay attention to variance and the root causes for the same.

  • Report this Comment On March 24, 2014, at 5:02 PM, Pancakes22 wrote:

    Buffet specifically states:

    Take someone who learned accounting from the local university here in Nebraska and someone who learned accounting from Harvard.

    There is no difference in their education

    I would take that BET ANY DAY OF THE WEEK!

    True Buffet quote

    They call him a Genius for a reason!

  • Report this Comment On March 24, 2014, at 6:26 PM, sybl wrote:

    For me the advantage was smaller student body and class size. My classes were taught and my papers graded by the actual professors whose names were on the schedule. I could drop in and talk to them at their offices about anything from assignments to professional goals to current events. Public universities aren't all the same, nor are private ones, and the best place for one student isn't necessarily the best for another.

  • Report this Comment On March 25, 2014, at 11:53 PM, litteratus wrote:

    As a college counselor who graduated from UC Berkeley (Public) and Harvard University (Private) I do honestly think that if you go to to the top public or top private schools in the country it won't matter. The education you receive will almost be on par with a few differences. However, if you are going to a 2nd tier private versus a higher ranked public...I can't imagine the private school really being worth it.

    If you care to read more about my views on private vs public more thoroughly, take a look here:

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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