Fifteen years ago, our oldest child was preparing to head off to college in a distant state. My wife and I had so many thoughts running through our minds at the time that we thought our heads would explode: Will he be OK on his own? Will the curriculum be challenging enough? Will he figure out what he wants to do? Will he make friends? Is this the right place for him?
College-shopping resources were more limited then. I remember our son clicking through a CD-ROM that gave him (and us) a sense of a school’s selection criteria, academic curriculum, campus life and student-body characteristics, among other things. Still, there was little in the way of the kinds of analytics that are available to applicants and their families these days.
The risk of data overload, however, is high. Many students and their families struggle to know how to translate the hodgepodge of higher education-related statistics into a decision that’s academically, economically and socially right for them.
So it was with keen interest that I read about Money magazine’s ambitious new take on an old process: college-rankings.
The magazine’s editorial team partnered with industry experts and consulting firms to develop a methodology that weighs three categories equally: quality of education, affordability and outcomes. The process takes into effect such things as completion rates, instructional efficacy and appeal, average cost (net of financial aid and other considerations), average debt levels, and projected earnings both upon graduation and 10 to 15 years later.
Other metrics, including entrance-exam scores and certain household demographics (including economic stature) are also taken into account to help predict graduation rates and future earnings.
Although I can’t help but wonder whether the preceding doesn’t skew the rankings in favor of schools that cater to students from economically secure households, I’m more interested in the way affordability is assessed, particularly in light of the impact that higher education costs are having on this generation’s longer-term financial health and well-being.
The magazine’s model calculates that by blending together five variables: net price of the degree, average student borrowing, average parent borrowing, estimated student loan default risk plus a “value added” modifier, which factors in the aforementioned socioeconomics. Pricing is institution-specific and all the other data is drawn from reports that are generated by the U.S. Department of Education. Net prices and total family borrowing (student and parents) constitute 80% of the overall score. The remaining 20% is ascribed to default risk, half of which is influenced by the modifier.
Affordability is relative, though: It’s a function of a variety of factors including some the editorial team rightly assigned to this category, and others that weren’t. Furthermore, in this context, shouldn’t affordability represent that which engenders economic independence—in other words, so that our kids don’t have to move back home after they graduate?
I would want to examine the relationship between net price, average debt-load and average first-year income. Projections of mid-career compensation are irrelevant when student loans continue to be structured with 10-year payback schedules.
I would also scrutinize the relationship between debt and income. Specifically, average student-loan payments shouldn’t total more than 15% of entry-level compensation. Otherwise, it’ll be hard for the grads to afford the preeminent symbols of economic independence—houses and cars—later on.
The final piece of my affordability puzzle is the three-year cohort default rate. The CDR is a relatively new metric that has the potential to prove-out the other calculations, that is, if the government were to shorten the default threshold and include the chronically troubled debts that are being managed from missed payment to missed payment. Even so, it’s better than nothing.
College rankings are a serious business, given the dollars at stake for consumers, and Money’s methodology is an intriguing addition to this body of knowledge. But let’s not lose sight of the proper role these indices play. At best, they’re tools that higher-education shoppers can use to help focus an initial search or to validate a selection they’re inclined to make.
There are no rankings, however, for what is arguably the most important element of the decision process: the right fit.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.
More on Student Loans:
- How Student Loans Can Impact Your Credit
- Can You Get Your Student Loans Forgiven?
- A Credit Guide for College Graduates