"Is community college worth it?" is an intensely personal question. The short answer is "All college-eligible learners should consider community college, along with other non-traditional higher education pathways, as part of their life success path."
Looking back on their past college experience, people's perceptions will vary widely. My wife and I have four adult children. They all had successful college experiences. We feel lucky and blessed. However, not all people have a positive college experience. Dropout rates are significant, especially for first-generation college students. Costs have rocketed, student loan debt is at all-time highs, and great jobs can be elusive. The long-term cost of getting the college decision wrong is massive. As we discuss in the article, the opportunity cost to the student’s retirement could be as high as $3 million. This causes people to take a business-like approach to college decision-making.
Since everyone's situation is different, everyone's answer to the community college question is different. This article provides a decision framework for determining if community college is right for you. Our model presents community college as part of your broader higher education opportunity, encompassing traditional and non-traditional ways to achieve a college education. A straightforward finance and economics approach helps you evaluate the potential benefit of substituting community college for the first two years of a residential college. The model optimizes your college path ROI, whether or not it includes community college. We consider the purchase price of college, like tuition, room, board, books, etc. We also cover often hidden but very important college transaction costs, like the risk of flunking out, the cost of transferring, or the cost of living at home. We conclude with a practical example of how to help a potential college student reveal their difficult-to-interpret transaction costs.
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
Table of Contents
Introduction: Debundling and the 2 big higher education questions
College as an investment
Managing college risk
The hidden "future is scary" costs
Adding it all up - the college model
Skin-in-the-game reveals the hidden "future is scary" costs
Conclusion and Notes
First, the distinction between a two-year community college and a four-year residential college is explored. Community college is explained as the means to de-bundle the academic services of a residential college.
Community college is a lower-cost option to attend college. They provide a two-year associate's degree. Many general education classes are provided, similar to those of a four-year college. Usually, community college students work and commute to the community college for classes. Also, online classes are often provided. Community college can be a stepping stone to residential college. Many community college classes will count toward a residential college degree. Many residential colleges have transfer relationships with feeder community colleges.
Residential college provides four-year undergraduate degrees. In a residential college student's first two years, they will take general education classes similar to community college. Then a more tailored, major curriculum is provided for the second two years. Many residential colleges are research institutions and provide advanced degrees beyond the undergraduate degree. Residential colleges provide an immersive environment, where the students live in a college-provided dormitory or live close by. Residential colleges provide a full suite of life services, such as clubs, food, exercise facilities, and entertainment. Residential colleges are more expensive than community colleges.
Community college de-bundles academic services. A residential college provides a full bundle of academic and life services for learners. The community college de-bundles the first two years of the residential college's academic services. This is like how cable companies bundle many entertainment channels, where you pay for channels you watch and many you do not watch. Streaming services, on the other hand, allow you to de-bundle the shows you wish to watch. As long as you know what shows you want to watch and you do not mind the time to locate those shows, streaming services can save you a bunch of money! Community College is the same. If you know what you want out of your college academic services, community college could save you a bunch of money and get you to the same place.
Why pay more for the same class? To learn attitudes toward different colleges and the prices of general education classes, the following are telling comments from students and parents:
"Is there really a meaningful difference in 'Psyc 101' classes between colleges? The human brain hardly ever changes!"
or
"I don't know why I have to take 'Psyc 101,' I'm not really interested."
These comments suggest a de-bundling attitude. These parents and students are questioning why they should pay more for a similar class delivered at different colleges. The second comment suggests a "check-the-box" attitude toward general education classes necessary to complete to get to the more interesting major classes.
This raises even larger questions regarding the importance of higher education.
1. To what degree does higher education contribute to the fundamental education of the student?
- AND -
2. To what extent does higher education function as an employer signal that the student will excel as an employee?
These two college value effects are powerful and interact. However, it is not clear whether a particular college is any better or worse than others at delivering the core education component. There are plenty of CEOs from "lowly" state colleges and plenty of dropouts from the Ivy League. [i] As discussed later, the largest risk to college is student readiness, NOT the college's ability to deliver the core educational service. College accreditation ensures the college is fit for college service delivery. However, given higher education provides an employment readiness signal, one certainly does not want to pay more than necessary for that signal.
2. College as an investment
College is often referred to as an investment. What is usually meant is that college learning helps someone acquire the human capital necessary for a successful life. Human capital consists of the knowledge, skills, and health that people invest in and accumulate throughout their lives, enabling them to realize their potential as productive members of society. Many jobs require or are enhanced by a college education. The U.S. Government shows how college graduates make more money at their jobs and have lower unemployment. [ii]
This article takes a different investment approach. Our approach includes a financial and economic view of college, to help decide between community college and residential college alternatives. We explore using an options framework usually associated with financial options and the framework considers significant transaction costs.
Community College is a powerful college option.
Financial options provide the buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. The premium is the price paid for the options contract. Most publically traded companies have options contracts available for their underlying stock. As we will see with the community college option, over time, if the option is a good deal for the buyer, they will "call" the college value to themselves. However, if the option proves to be a bad deal over time, they will "put" the college risk on the option seller.
Community College (“CC”) has a similar options relationship to Residential Colleges ("RC"). [iii] In this case, the first 2 years of academic college coursework is the underlying asset available for the options trade. A more expensive residential college is "callable" about two years after the CC premium is paid. In this case, the premium is a combination of the lower CC cost and CC good grades.
To help explain, let’s say an “all-in” residential college price is $40,000 per year.
The "all in" Residential Price - Since RC is an immersive experience - you can expect your college bill to have the following categories:
Academic
Tuition and Fees: These are the direct costs charged by the college for instruction, facilities, and services. Tuition varies based on in-state or out-of-state status and the type of institution (public or private). Also, colleges and majors within the school may add fees on top of the standard university tuition.
Books and Supplies: Expenses related to textbooks, course materials, and supplies.
Other
Room and Board: The cost of on-campus housing and meal plans.
Transportation: Costs for commuting or traveling to and from campus.
Personal Expenses: Includes clothing, toiletries, entertainment, and other personal items.
Health Insurance: Some colleges require students to have health insurance.
Miscellaneous Fees: Additional charges for activities, clubs, or special programs.
Chat GPT prompt:
"For [Fill in the blank], what are the typical annual college costs, broken down by academic and non-academic costs?"
Fill in the blank = a residential college, like "James Madison University"
We index that RC price as the residential college par price of 100. Then, let’s say a recent high school graduate can go to the local community college and take the same freshman and sophomore year general education credits for $8,000 per year and live at home. This means the community college option premium is 20 ($8,000/$40,000 * the par price). This assumes that good CC grades will transfer one-for-one to most RCs. This is true in many state public college systems. [iv] The indexing to par approach is used to show the general option trade approach. Everyone's actual RC and CC costs will vary. This college options model excels in its ability to adjust to individual circumstances.
There is a potential downside - if the student does not get good grades after two years, the CC call option expires worthless. In the next section, it is discussed how grades relate to the CC option value. In this CC as a college option example, the downside loss is the CC premium of 20 – or $16,000. However, this is certainly better than going to the RC for two years and "flunking out." This would cause a loss of the $80,000 RC par price. If someone is intent on going to college, going the CC path will limit their possible losses at the 20-option premium – or $16,000. However, if the student is successful in CC and transfers to the RC, they exercise the call option, exercising an option costing 20 (or $16,000) to pay for an RC cost of 100 (or $80,000). By subtracting the CC premium from the RC par price, the CC option trade "calls" 80 points of value at exercise - or $64,000 in this example - while protecting the first two years of RC downside risk by the same amount. If the student is unsuccessful, the buyer of the CC option has the option to "put" 80 points of RC risk on the option seller - or $64,000 in this example.
From both an upside value and downside risk management standpoint, attending community college can be a good trade. But there are other option premium variants to consider:
'Some classes do not transfer' variant - What if the community college student gets mostly good grades, good enough to validate the study skills signal, but a class or two does not transfer? This means the premium price is higher because those classes will likely need to be taken again at the RC for full price. So maybe the premium increases from 20 to 22.
'Limiting the downside' variant - It may become clear after one year of poor grades that the student is not ready for college. In this case, the premium loss could be limited to 10, which is half the two-year CC premium of 20.
'Living cost' variant - What if the recent high school graduate wants to go to community college and live on their own? If they are working, then this cost is absorbed by the student's income and not as a college cost. If part of their living is considered part of their college experience, then the CC premium could be increased accordingly. This is explored more below in the hidden “future is scary" costs section.
'Transferring high school or super low-cost MOOC credits' variant - Many high schools offer classes with college credits, such as Advanced Placement, International Baccalaureate, Dual Enrollment, and others. Also, MOOCs or "Massive Online Open Courses" are gaining popularity. Classes are provided by MOOCs like EDx, Coursera, or Kahn Academy. In some cases, high school or MOOC learning can transfer to CCs and RCs. This reduces the CC premium. MOOC transfer is relatively new and not available at all CCs or RCs.
3. Managing college risk
This college options trade, like financial options, is impacted by risk and volatility. The biggest risk is going to an RC when the student is not ready. This is the "flunking out" scenario mentioned earlier, where the student leaves the residential college without graduating, costing $80,000 over two years. This scenario could include student loans needing to be repaid, which only increases the total amount owed with interest costs. The flunking-out risk is part of a broader set of hidden and difficult-to-value costs called transaction costs. We will discuss additional transaction costs in the next section.
There are two ways to assess student readiness for managing the flunking-out risk. Those are the student's study skills and motivation.
Study skills: High school grades are a great indication of readiness. Grades signal whether a student has developed the study skills necessary to sustain 4 years of consistent, focused academic effort. [v-a] Grades suggest whether a student can prioritize the hours necessary to study rather than going to a party or other diversions. Grades suggest whether the student will be successful in a less structured college environment than a more closely supervised high school environment. If the student did not demonstrate the study skills in high school, that student is less likely to manufacture them over the summer before their freshman year in college. In other words, whether to go to college is not a “Yes” or “No” question, it is a “Now” or “Not Yet” determination.
A GPA in the top 20-30% of the high school class suggests they are more likely ready for the RC. A GPA in the lower 20-30% of the class suggests they are less likely ready for the RC and the CC is likely the better option between the two. The middle 40-60% is not as clear. In this case, because RC is so expensive, taking a less expensive CC option may be the best path to hedge your college trade.
However, the CC path may still make sense even if the high schooler is in the top 20-30% of their class. Going the CC path saves the student and the family real money. A value-focused, top-GPA student may choose the community college path. In this $64,000 value creation example, the CC trade proceeds could be invested or used to fund their junior and senior year once they transfer to the RC. If invested long-term for the student’s retirement, the future value of $64,000 over 40 years at a 10% yield returns almost $3 million. (Source: Future Value Calculator)
The 'grades-equate-to-study-skills' caveat: Let's say our fearless high schooler has a bunch of siblings and their parents are unavailable to take care of the family. So every day after school, our fearless high schooler returns home to take care of their siblings and works a job to help the family make ends meet. As a result, our high schooler is too exhausted to study. So our fearless high schooler has life discipline associated with study skills, but they have not YET been able to apply their discipline to their studies. In this case, a lower GPA does not necessarily indicate inappropriate study skills, as long as the home responsibilities are removed after they go to college.
Motivation: There is more to college readiness than study skills. Motivation is also essential. Can the student see how their college effort leads to flourishing in the future - like a good job or the kind of life leading to happiness? Related to motivation and flourishing, I address intrinsic-based and future-focused "two-way" decision criteria in this article:
Student motivation is tricky to assess. Generally, students from families with college-educated parents have been shown to have higher innate motivation for college. [i] This happens when parents not only envision a successful future for their children but also guide them on how to achieve success in college as a stepping stone to adulthood. If motivation is in doubt, one way to reveal student motivation is via "skin in the game." If a student is willing to invest their earnings in education, it indicates motivation. Sometimes, a gap year or otherwise being in the non-college qualified work world will help drive motivation.
The level of study skills and motivation are on a risk premium spectrum. The maximum risk premium is equated to the CC premium since the CC premium is the cost of reducing the RC risk. In this example, a risk premium = 0 means that the student has great study skills and is very motivated. A risk premium = 20 means the student is not remotely ready for college. The GPA and motivation assessment provides an approach to weigh the risk premium between 0 and 20. At the end of the next section, a model is provided to include the risk premium weight in the overall "Is community college worth it" model.
The 529 effect:
529 Plans, named after the U.S. tax code enabling tax-advantaged college savings, impact an individual's college utility. The utility impact is a distortion to assessing college readiness and associated risks. The owners of the 529 plan, who are usually parents of college students, will perceive college expenditure with diminishing marginal utility as compared to those with unrestricted college funding sources. In other words, 529 savings plan owners are likelier to take risks on student readiness because they have limited savings usage alternatives. So, for those affected by the 529 effect, a dollar of 529 savings is worth less than a dollar of unrestricted savings. The 529 plan is like education money "burning a hole in your pocket."
The question for the college funding decision-maker becomes – should a high school student’s readiness for college be considered only related to student factors like study skills and motivation – or – should a high school student's college readiness risk assessment vary because of 529 funding availability? Regardless of their answer, for many, the 529 effect places a hand on the scale of the student’s readiness assessment.
An example would be:
"Tonya did not get good grades in high school and we doubt her readiness for college. But we can't keep her at home forever. Maybe a change of scenery will help. We have this college money set aside for her, so we might as well use it."
From an individual standpoint, taking an outsized risk on college could be considered a good problem to have. In that at least the risk involves more education. From a societal standpoint, this is almost certainly a negative, in that the 529 effect distorts the number of resources going to education that could have been used more efficiently. The 529 plan, along with college loan subsidies, are the main culprits for why the cost of college has grown faster than the inflation rate for decades.
4. The hidden "future is scary" costs
Earlier, college prices were discussed - such as $40,000 / year for RCs and $8,000 / year for CCs. But there are many other college costs beyond the stated college prices. Economists refer to the potential cost of flunking out as a 'transaction cost,' one of many hidden expenses in higher education. Broadly, all the non-purchase costs are transaction costs. Transaction costs are often unable to be directly valued. Plus, transaction costs usually involve a prediction of the uncertain future. As Adam Smith points out: "The real price of everything is the toil and trouble of acquiring it.” My friend and Duke University Economist Mike Munger's observation is "To consumers, all costs are transaction costs."
Munger describes a framework for transaction costs, affectionately known as the "Triple T." The Triple T includes Triangulation, Transfer, and Trust.
“Triangulation” is how potential buyers and sellers find one another. This is the cost of accessing the market.
“Transfer” implies getting the goods from the seller to the buyer within the market. This is the cost of operating within the market.
“Trust” means that the buyer and seller are both assured they will receive what they expect. This is the cost of ensuring market participants comply with their market obligations.
So we know transaction cost considerations are critical, especially for a complex, high-stakes, high-price decision like college. Continuing with the example, if you are scoring the community college alternative from the "Is community college worth it" model, the purchase price is at a CC net positive of 80 (100-20). Then, the risk premium needs to be added. As discussed at the end of section 3, the risk premium can be between 0 and the total CC premium. For this example, let's assume the risk premium is 0. Thus, the "Is community college worth it" model is still at a CC net positive of 80 (100-20+0). Now, the idea is to value the remaining transaction costs and net them against the 80. As per the example, you would need to determine if the other transaction costs are worth at least $64,000 ($80,000 - $16,000) to tip the scales for attending an RC out of high school.
If the risk premium is set to 0, then the risk of "flunking out" of the RC is so low that the CC is still valued at a net positive of 80. Your situation could certainly be different. If there is a higher chance of flunking out, this means the net price favoring the CC option is even higher and approaches 100.
By the way, the flunking-out risk is found in the transfer transaction cost category. This is the cost-generating risk that the good - a college education - is not transferred from the seller - the college - to the buyer - the student.
Other transaction costs - beyond the risk of flunking out:
Next, are other transaction costs impacting our perspective on the college value. Your situation could have other transaction costs.
Transitioning from a community college to a residential college (Triangulation): Based on the college purchase price only, community college seems like a better deal. However, there could be significant transaction costs to the CC path. Assuming success, which means the student goes the CC path and gets good grades so all their credits transfer to the RC, the student still needs to transfer colleges. This means their social life will be disrupted. Once they get to the new RC, they will need to make new friends and join new social groups. They may feel socially behind and out of place. To the high schooler and their parents, this creates a very real FOMO impact or "Fear of missing out" when they compare to others taking the RC path. There is certainly a cost to the transferring student, but the actual price is more of a difficult-to-value feeling than a number.
Living at home (Transfer): The CC trade may involve the student living at home to save money. Living at home activates another transaction cost. By living at home, the student will need to find alternatives for the learning associated with RC-facilitated independent living. This “college as a living experience” example suggests a broader point. Assuming the objective of “growing up” or “adulting” is learning to flourish, this begs the question: “Is college the best way to learn those flourishing skills?” Science classifies the comparison of two things as being either “causal” or “correlated.” So, does college “cause” flourishing or is college incidental to the flourishing that would likely happen anyway? Concluding that college causes flourishing is a stretch. Given about 60% of Americans do not attend college, we know that most Americans find non-college ways to flourish. However, one may conclude college is correlated with flourishing.
Flourishing relates to finding a community for sharing life experiences with others similarly seeking to flourish. If one lives at home, they must replace a built-in college community with another of their own making. This means joining young adult clubs, church groups, or others in their local community. To the extent social clubs are available at the CC – be a joiner! Thus, there is potentially a cost to the living-at-home student. With the proper local community engagement, the student living at home or living with another local friend may not create as much of a transaction cost as potentially believed.
Access to competitive sports (Transfer): CCs generally do not host competitive sports. This could create a cost for two reasons. 1) If you are an athlete and wish to play sports in college, you will need to find an alternative for the student's athletic desires. Perhaps playing in local young adult clubs is an alternative. 2) For some, sports entertainment is an important part of their college experience. Have you heard of the "Cameron Crazies?" These are the Duke University students who pack their basketball arena for home games. Like Duke, sports entertainment is part of many residential college's living experiences. There is a cost to finding a student's athletic and/or sports entertainment outlet outside the CC. Depending on the student's competitive sports attitude, the CC premium may need to be adjusted upward.
Getting a good job (Trust): Finally, there is a transaction cost myth needing to be dispelled. Some have a negative attitude toward community college. Such as "Successful people do not go to community college" or "Will community college be a 'black mark' to employers when it comes time to get a job?" The answer is "Your chance of being successfully recruited is likely to be enhanced, not diminished, by your community college signal." To an employer, your success in managing these transaction costs and graduating with an undergraduate degree is a strong resilience signal. Employers LOVE the authentic demonstration of resilience!
For the reasoning, based on my decades of experience recruiting new college hires for large firms, please see:
As a high school student, these transaction costs might appear intimidating. You may wonder "How can I begin to understand what these transaction costs are worth?!" If so, you are not alone, especially as a first-generation student. The best thing you can do is talk to people with a credible college perspective. Even if your parents did not attend college, their life experience is important to understand. Beyond your parents, talk to your school counselors, they can really help. Interview people in your community, your church, parents of friends, and others with college experience. You are trying to understand: "How will college help me flourish after I graduate?" and "What are the habits of the successful college student?" Then ask them their thoughts on those transaction costs.
5. Adding it all up - the college model
Because these hidden transaction costs are in the future, fear generated from uncertainty tends to be an invisible hand weighing on this transaction cost’s valuation. Of course, the size of this transaction cost will vary by the individual. Every situation is different and every person's risk profile is different. Fear and uncertainty create a different transaction cost weight for everyone. This "Is community college worth it?" approach helps you properly weigh those fears and uncertainties when assessing your higher education path. Since transaction costs are not directly valued, we need a way for the individual to reveal their transaction costs.
This graphic summarizes the "Is community college worth it" model. In the next section, we will provide an example for revealing those transaction costs and handling the risk of flunking out.
This model includes both residential college and community college alternatives for making the best higher education decision. But, what if you decide upfront that you will only consider residential colleges? In this case, the risk premium for flunking out grows dramatically and the other transaction costs associated with community college disappear. Instead of college risk being bounded by the CC premium, now it is unbounded to the RC's total price. Thus, the severity risk of flunking out grows from 20 to 100.
6. Skin-in-the-game reveals the hidden "future is scary" costs
As a behavioral economist, I tend to look at the world through two "I's" - those are "Incentives" and "Information." Next is an example of using information and incentives as building blocks to help high school students get the most out of their college experience.
Earlier, it was observed that transaction costs are often unable to be directly valued. This means, there is no stated price tag on most transaction costs. For example, "I know transferring would be tough for my son or daughter, but how much is it really worth? How much should I be willing to pay and risk so they do not need to transfer?" As such, how does one determine how much they should weigh a transaction cost?
Next, an example shows how to reveal the student’s true transaction cost valuation. [v-b] For some, taking the CC path is more obvious. A combination of risks like necessary-to-refine study skills, lower motivation, and/or lower availability to pay for college may make the community college path the obvious alternative. In my children's case, the CC vs. RC path was not obvious. We have four children. As of this article's writing, they are all in their twenties and have all graduated from a four-year residential college. Earlier, when they graduated from high school, each of our children was in the top 20-30% GPA group, suggesting RC readiness. Also, their motivation was high. They were brought up with a clear path to life success after college. This means their risk of flunking out was low. Also, they were fortunate their Mom and I saved enough to pay for their RC college. Importantly, our children were aware they would not have to pay for the RC out of their own pockets. This awareness is important, ex-ante expectations setting can be powerful to ensure our children process their options and make the best decision for themselves. But I still saw that $64,000 CC trade value as something each child should consider - for their benefit and mine!
Next is the deal we gave our children to help each one fairly consider the true transfer transaction cost valuation: "For every dollar our children save on the RC price, their parents will share 50 cents in a cash payment to them." This is called the "reveal deal." In general, this approach seeks to give our children some skin in the game to reveal their college transaction costs. Since everyone's situation is different, your reveal deal could certainly be different. Skin in the game is the "active ingredient" for how the reveal deal is activated to best suit your family's situation.
In the CC path case, our reveal deal could save my wife and me $32,000 ($64k * 50%) and place $32,000 ($64k * the remaining 50%) in our children's pocket. Pretty nice for a 19-year-old! and pretty nice for Mom and Dad's bank account - a great trade. But only if our children take us up on it. Perhaps not surprisingly, none of our four children took us up on the CC trade. All four of them went directly to an RC after high school. By not accepting the $32,000, our children revealed the CC transaction costs, including living at home and then transferring to an RC, were higher than $32,000.
However, this reveal deal did work for pursuing scholarships and grants at the RC. Even though they did not go the CC path, because they were in that top GPA group, they were eligible for performance scholarships. However, it takes work to research and apply for scholarship money. With the reveal deal incentive, the idea was to motivate them to track down, apply for, and be awarded scholarships. It worked for all four of them, especially after their RC freshman year. While we did not get the full CC trade value, we did get part of the value in the form of scholarships. Since our children were at public colleges, these are private scholarships outside the state taxpayer-supported tuition discounting. Plus, beyond the tuition price discounting, there were other significant benefits to our children pursuing scholarships and grants under the reveal deal framework:
Our children received walking around money for college,
Our children were incented to get good grades, since they knew grades would provide them cash, and
Our children built confidence working for themselves and selling themselves, like commissioned salespersons.
In the end, the transaction cost "reveal deal" worked for all four of our children. All four graduated cum laude or higher, they built confidence for pursuing goals, and they all had a successful start to their adult personal and working lives.
Reveal Deal variants:
1. What if my wife and I had NOT declared to our children (ex-ante) that we would pay for college? If our children believed they would have to pay and take out loans, it is VERY possible they would have valued their CC transaction costs differently. They would have been more likely to go to community college to save money. This is tricky, we would never lie to our children, but perhaps holding college payments in reserve until they made their CC v RC transaction costs-revealing college decision would have been a good strategy.
2. What if, instead of framing the reveal deal as a gain - meaning they will gain 50% of the CC savings, we framed it as a loss? Kahneman and Tversky's rich Prospect Theory literature teaches us the perception of losses is significantly more powerful than the same-sized gain. [vi] Perhaps we could have shown our children four years of education funding as being theirs. That way, if they overspent on the RC, they would lose 50% of the excess expenditure.
3. If you are a high school student, you may be wondering how to reveal your own preferences. Finding a way to achieve skin in the game for your education is a good path. Paying for life expenses and budgeting has a way of motivating by focusing the mind. Working a non-college required job could also help motivate you. For example, in high school, I worked for a landscaping company. In the summer, I worked in the fields, which included hoeing weeds from long lines of plants growing for purchase. This was in the southeast United States. Where almost every day the high was in the 90s and it was humid! I worked with older men without a college education. I learned two things from that experience. 1) Hard work is good for the soul. 2) I learned exactly what I did NOT want to do with the rest of my life. My landscaping job experience was motivating to find a way to use my mind more than my back.
7. Conclusion
This reveal deal is provided as an example. Of course, everyone's situation is different. Not all parents have money saved for their children's higher education. Students vary in study skills and high school GPA. It is essential to carefully consider college pricing, potential risks, and other less obvious but significant transaction costs. The community college path could return $3 million for retirement.
Consider community college as a lower-cost and equally effective option to residential college. Develop skin in the game-based "reveal deal" incentives to help your children reveal their true college transaction costs. The model provides a way to keep track of your college options and determine if community college is worth it for you.
The framework we explored helps determine whether the high school student is ready for either residential or community college. Plus, we discuss variants of both. Once the "whether" question is answered, the "which" question is next - that is, "Which college is best for me?" There are about 4,000 colleges and universities in the United States.
In the book "Making Choices, Making Money, Your Guide To Making Confident Financial Decisions", a college decision process plus access to smartphone decision tools are provided.
Are you ready to learn more about why a high school student is best served by going to a college where they are most likely to graduate, get a good GPA, and pay as little as possible for the GPA signal helping them to get a job? Check out the article:
Notes
[i] Shin, A professor has tracked the colleges of Fortune 500 CEOs for 20 years. He was stunned to learn Ivy Leagues don’t matter that much., Fortune Magazine, 2023
Dale and Krueger provide in-depth research on the impact of different colleges on long-term income. To summarize:
After controlling for childhood factors - like family, wealth, access to educational resources, parent involvement, etc - Dale and Krueger determine there is not a significant difference in long-term income between those students attending selective colleges - like the Ivy League and those attending all other non-selective colleges.
However, for the subset of Black, Hispanic, and students who come from less-educated families (in terms of their parents' education), the effect of selective colleges is significant. This means the selective colleges' financial resources - such as large endowments - are used to provide programs compensating for college readiness not otherwise offered by first-generation college families.
Bottom line:
If you are from a legacy generation college family - meaning at least one of your parents went to college - there is likely no difference to your long-term income based on which college is attended. However, paying more than necessary for that college education will certainly reduce long-term wealth.
If you are from a first-generation college family, seek a college with first-generation support. First-generation college families are often remarkable, having faced and overcome challenges to make college a reality for their children. But college is enhanced by understandings potentially unknown to first-generation parents. Today, many colleges offer programming for first-generation families.
Dale, Krueger, Estimating the Return to College Selectivity over the Career Using Administrative Earnings Data, National Bureau of Economic Research, 2011
[ii] The complaint I have for the BLS "College Pays" conclusion is the cherry-picked analytical approach they use to draw that conclusion. The approach is only descriptive of the population achieving college success after the fact. The challenge is - we must make the college decision before we go to college! If we could time travel to the future, the BLS analysis would be more useful.
To help explain the problem of the BLS analysis, let's use a mutual fund example. Let's say you need to buy a mutual fund for your investment portfolio. Similar to the college decision, a significant upfront mutual fund investment is made with the expectation of returns occurring years and decades in the future.
You are considering two alternatives:
Fund A: Over the last three years, this mutual fund earned 15% annually.
Fund B: Over the last three years, this mutual fund earned 4% annually.
So Fund A, the 15% yielding mutual fund sounds much better. Right?
But then, the wise investor would ask, what is the risk I am taking to achieve 15%? It turns out that the 15% mutual fund is a VERY high-risk, small-cap, foreign-based fund, and the 4% mutual fund has almost no risk exposure, with investments in U.S. Treasuries and related high-quality bonds. This is different - and if like most people - you are more likely to avoid very high-risk mutual funds or have a strategy for managing the risk.
It would be very irresponsible for a fund manager to tout their fund returns without full disclosure of the fund risks. But, when it comes to the college decision, that is what the BLS is doing in their "College Pays" analysis. Showing the returns of college without a full risk disclosure.
The proper analysis to support before the fact decision-making is called "static pool analysis." Static pool analysis is commonly used by decision-makers when there is a significant gap between the time the decision is made and when the outcome of that decision can be measured. See the following article for the results of the college decision static pool analysis. Compared to the BLS analysis, it paints a very different, not as rosy picture.
Hulett, Higher Education Reimagined, The Curiosity Vine, 2020
[iii] The Black-Scholes options pricing framework is the traditional pricing framework for options pricing. As presented in this article, the community college as a call option framework relates to the Black-Scholes framework.
The key variables in the B-S model and how they are handled in the college model are as follows:
underlying asset’s price -> Residential college price, set at par or 100. Transaction costs are netted against the par price to discount the non-purchase costs of community colleges.
option premium -> the price paid for the options contract, set at 20 in our example.
strike price -> Determines whether the option has intrinsic value. Value for college is difficult to reduce to a single number and will vary across people. However, characteristics include: How much human capital was accumulated and the quality of the employability signal, generally demonstrated by college GPA.
risk-free rate -> set at 0 but could be increased. Since there are 2 years between paying the options premium and exercising the options contract to buy the RC, time discounting could occur. Discounting seemed like overkill for this college model but it could be added.
volatility -> the college risk of flunking out
expiration time -> this is about 2 years or the standard time it takes to complete the community college and transfer to an RC.
Teall, Financial Trading and Investing, 2013,
[iv] According to the Education Commission of the States, over 31 states have associate degree transfer requirements to higher degree public colleges. If you know which undergraduate degree-providing college you wish to attend, it is best to confirm their community college course transfer protocol. Some colleges have "feeder school" relationships making course transfer easier.
Whinnery, Peisach, 50-State Comparison: Transfer and Articulation Policies, Education Commission of the States, 2022
[v-a] French, Homer, Popovici, et al. What You Do in High School Matters: High School GPA, Educational Attainment, and Labor Market Earnings as a Young Adult. Eastern Econ J 41, 370–386, 2015
High school grades matter. Because high schools and local school systems administer grades differently, comparing grades to others in the same graduating class is necessary. Absolute GPAs are not as comparable across high schools. Thus, a 3.1 GPA at one high school is likely not comparable to another high school.
This is as of the writing of this article. However, Goodheart's law suggests ”When a measure becomes a target, it ceases to be a good measure.” This means that now that students and other agents with academic interest know that GPA is used as a college admissions target, the validity of the relationship may decline as those agents figure out how to game their GPA for their benefit.
[v-b] The method provided to reveal a student's true transaction cost valuation is supported by revealed preference theory. In economics, revealed preference theory was introduced by the American economist Paul Samuelson in 1938. The theory holds that consumers’ preferences can be revealed by what they purchase under different circumstances, particularly under different income and price circumstances. The theory entails that if a consumer purchases a specific bundle of goods, then that bundle is “revealed preferred,” given constant income and prices, to any other bundle that the consumer could afford. By varying income or prices or both, an observer can infer a representative model of the consumer’s preferences.
P.A. Samuelson, “A Note on the Pure Theory of Consumer’s Behaviour,” Economica, 5(17):61–71 (1938), and “Consumption Theory in Terms of Revealed Preference,” Economica, 15(60):243–253 (1948).
[vi] Kahneman, Tversky, Prospect Theory: An Analysis of Decision under Risk, Econometrica 47, no. 2, 263–91, 1979
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