The counterintuitive economics of choosing a college

This is expensive. But worth it?
This is expensive. But worth it?
Image: Reuters/Shannon Stapleton
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Our daughter is about to go off to university in the US. And that means college applications have been a big feature in our lives since last year. It also means that “National Decision Day” on May 1, the last day for American teens to commit to a college, will mark the end of this process.

At the start, our view was that most important indicator of future success was that a kid falls in love with a college, they can see themselves living there, with great friends and are excited by the opportunity to learn and grow. Considering these “soft” measures and weighing them up against the cold, hard reality of college costs is no easy matter.

By its nature, the whole process makes it difficult to choose a college based on it being the best financial decision. Even deciding how much to commit to the process is non-trivial. We expected that the best choice for our daughter was an in-state option but she aspired to go further afield. The investment in the decision process—both monetarily and emotionally—was always going to be high.

The problem with early decision

One trap is early decision. The idea is that, by declaring a commitment to one college, a student raises their chances of getting in. Our daughter had fallen in love with a small East Coast college. The rejection was harsh when she was denied. Like many early-decision applicants, she had her heart set on this one college and couldn’t imagine an alternative future.

While there is at least anecdotal evidence that early decision has the positive effect on a student’s admission chances, it has a huge downside. According to Terry Connolly, former dean emeritus of Ageno School of Business at Golden Gate University, who is currently writing a book about secrecy in the college-admissions process, says that the “apparent stress-relieving benefits to students of early decision also mask a trifecta of big wins for the colleges: more students on full sticker-price tuition, higher yields, and related lower admission rates that pump up the schools’ rankings, and many students losing any tuition bargaining leverage.”

If our daughter had been successful with her early-decision application, we would have been stuck with zero negotiating power in an uneven contest. The attraction of her application process being over and the appeal of being able to emotionally commit to a future would have made it hard to assess the value of a certain outcome against the option value of multiple uncertain outcomes, each of which was going to take work to assess. We would likely have signed up for something that was a poor economic decision, simply because we would have given up too many other options, too soon.

Rankings have their own problems

To narrow down a list of options, many students turn to the US News rankings, which Connolly says are “hardly more reliable guides to higher education quality than the opinions of the bond-rating agencies were when it came to subprime mortgage securities.”

For our daughter, developing a set of options necessarily meant dealing with the slick marketing messages of exclusive colleges and targeted advertising from colleges using more direct methods. The marketing is powerful. The message that an elite education is the only route to a successful life is entrenched, even though there is plenty of research that says this is wrong. The hardest message to resist is a subtle one; if you are right for this college, then the money will take care of itself.

But because information on the actual cost of any given college isn’t available until after a student has invested a lot of their time and emotional energy into figuring out whether the college is a good fit—creating a kind of emotional “sunk cost”—it makes it harder to stay objective once the true cost is known.

What happens when you start to get accepted…?

In March, the results came in; either deny, accept or waitlist. We observed a fascinating phenomenon; our daughter’s emotional reaction to an acceptance or denial was correlated with her expectation of whether she would get in, which in turn, had been directly shaped by the published admit rate of the college.

The lower the published admit rate, the more rejected she felt. The higher the admit rate, the less she felt a validation of her own worth and any desire to accept. Rationally, she knew that low-admit rates are a strategy designed to ramp up selectivity rankings, but it was more difficult than it rationally should have been to shrug off rejection from a college where she never really expected to be admitted in the first place. Perhaps this is because, as Nobel-winning psychologists Amos Tversky and Daniel Kahneman discovered, we are around twice as sensitive to losses than to gains, a phenomenon known as “loss aversion,” and strongly influenced by expectations.

As UCLA professor emeritus Alexander Astin said in an article for Forbes (paywall), “the entire process is being driven by the folklore about institutional quality or excellence (and) our shared cultural beliefs about which are the best colleges and universities.”

…or worse?

Which leads us to the purgatory of the waitlist.

The data show that, rationally, a waitlist position is simply a slow rejection so it’s not worth accepting a place on one. (In 2016, for example, the University of Michigan offered 11,197 students a place on the waitlist but only 55 were offered admission.) The real harm of the waitlist is opportunity cost.

Our daughter was far better off directing her time and attention to embracing the places she had been accepted to than to spending time on a whole host of tricks to get off the waitlists. As one educational consultant puts it, “Start wearing the school sweatshirt, start filling out all the stuff that the school sends, get on the entering class Facebook page, start imaging a great life ahead instead of focusing on what will likely not happen.” Nevertheless, it was hard to give up on something that feels suddenly within reach and, perversely, more desirable.

How do you choose?

At this stage of the process, our daughter has perhaps the easiest set of choices possible. We now have all the required financial information, she has visited all the places she has been admitted and has seen them during school session. She has figured out what’s most important to her. She has seen inside a dorm room, either on a formal tour or by making fast friends with a student and asking to see their room. In one case she sat in a class. She didn’t especially like it but she’s rational enough to know that one class is not likely to be representative of life at college.

Her decision has come down to what we always thought it would; close to home, a state school (tuition is around a third of what it would be to move out of state or go private) and finding a small program within a large university. That’s where she figures she will be most likely to meet people she likes, giving her a sense of belonging, which will be what makes her excited to learn.

After spending thousands of dollars on travel, hundreds of hours on paperwork, and more than 40 hours driving to colleges she will never go to, was it worth it?

Rationally, probably not. But to us, absolutely. The real value in the process was the value of choice. Because it was all cheaper than her forever living with wondering, “what if?”