Don't Flunk Your Retirement

Twenty years ago, I sunk my parents deep in debt.

"How?" you ask. Simple. I turned down a free ride at my father's college, choosing instead to go to a "brand-name" university. By the time I graduated four years later, my parents had taken out a second mortgage to help finance the $25,000 in tuition, room, and board. Sound bad? It gets worse.

That $25,000, invested 20 years ago in an S&P 500 index fund, would be worth $140,000 today. Sound bad? It gets worse still: None of this had to happen.

What's in a name?
Shakespeare had a point. Like a rose, a diploma with any other name on it would likely have smelled as sweet as the one I earned -- and for a much smaller price tag. This goes against the accepted wisdom, so bear with me for a moment while I make my point.

Begin with what "everyone knows" -- that a Harvard graduate will, by virtue of possessing a Harvard diploma, get better job offers, earn a higher salary, and become more of a success in life than a graduate of ACME University. But according to a landmark study published in 1999 by Princeton economist Alan Krueger and Mellon Foundation researcher Stacy Dale, the accepted wisdom has the facts completely backwards. Elite colleges don't make successful students -- successful students apply to elite colleges.

To dig down to the truth of the matter, Krueger and Dale collected admissions data from students who entered college in 1976 at a range of schools, both prestigious and less so, from all across the nation. Fast-forwarding 20 years, the researchers examined the salaries that these students were earning in 1996. They focused their study on two groups of students, both of which had applied to and been accepted by elite colleges. Students from the first group -- let's call them the "Ivies" -- accepted the offers, graduated, and entered the workforce carrying their Ivy League sheepskins. In contrast, the "non-Ivies" were also accepted, but turned the elite colleges' offers down and chose to enter more modest schools (with more modest price tags.)

Result: There was essentially no difference between the salaries earned by the two groups of students. To the contrary, the Ivy student who entered college with a 1,200 SAT in 1976 was, on average, earning about $1000 per year less than the non-Ivy student with the same SAT score. The same non-Ivy student who had turned the elite school down.

Conclusion: Smart kids tend to choose elite schools. But if kids are already smart, whether they choose to "go Ivy" or not makes no difference to their success later in life.

Poison ivy
Of course, money isn't the only standard of success in life. At The Motley Fool, we spend most of our waking hours studying public companies. So let's take a look at a few well-known companies -- and the CEOs who run them. Where did they get their degrees? Is a diploma from an elite college a prerequisite to running one of the leading lights of the United States economy?

In a word, no. See for yourself:

Spend a little time poring over the resumes of America's most powerful CEOs, and you'll be struck by how very few of them graduated from elite schools. Indeed, at 25%, the chart above greatly overstates the presence of Ivy League degrees among the corporate elite. Among the top 500 companies, only about one CEO in 10 held an Ivy League undergraduate degree. In 2005, CEOs of S&P 500 companies were as likely to have graduated from the University of Wisconsin as from Harvard.

In perhaps the ultimate illustration of just how insignificant an Ivy diploma is to a student's success, some of the world's richest tech entrepreneurs, including Apple Computer's (NASDAQ:AAPL) Steve Jobs, Microsoft's (NASDAQ:MSFT) Bill Gates, and Oracle's (NASDAQ:ORCL) Larry Ellison -- didn't graduate from college at all. Each dropped out before graduating, and of the three, Gates alone had the honor of dropping out of an Ivy League school (Harvard).

How much for the roses?
It's about time, though, that we bring this article back to its original subject: your retirement. Many of you reading this article are, like me, looking forward to the day when the apple of your eye (or perhaps a whole crop of apples) will traipse happily off to college -- and send you the bill.

Before that bittersweet day arrives, it behooves you to give some thought to where Little Johnny is going to do his learning, and how much you're willing to pay for it. Because the above example isn't just an academic exercise, you know. College has a cost, and the more "elite" the name of the college, the higher the cost. According to the College Board, tuition at America's colleges has nearly doubled during the past decade. In the 2005-2006 school year, the average private college tuition bill ran to $21,235. In contrast, in-state tuition at the average public university topped out at just $5,491.

Hmm, the carnations look nice, too
That $15,000 per year is a significant premium that the elite private schools charge for their "designer-brand" diplomas. Multiply it by four years and the premium totals $60,000 -- a sum that, if invested in an S&P fund, could grow to $450,000 over 20 years (assuming the market's historical rate of return).

Which brings me to the question of the hour: If sending Little Johnny to an Ivy League school won't give him any more advantage than sending him to a non-Ivy school -- and can put you nearly half a million dollars farther away from retirement and a life of ease -- does Ivy still smell so sweet?

This public-service announcement is brought to you by the friendly, thrifty Fools at Rule Your Retirement -- and over howls of protest from the deans of admission at Harvard, Princeton, and Yale. But ignore the howls. While the Ivies want your money, we're giving away free passes to more great retirement tips and advice. To claim yours, just click here now.

Fool contributor Rich Smith does not own shares of any company named above. If he did, the Fool's Rules would require that he tell you so. Bank of America is an Income Investor recommendation. Microsoft is an Inside Value recommendation.