College quality matters more than ever. Here's why.

  • By Al Root,
  • Barron's
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College education is a hot-button topic these days. Some famous people, after all, are going to jail after committing fraud to get their kids into top-notch institutions. And financing postsecondary education is a daunting task for parents and for prospective students.

But it turns out that the parents involved in the college admission scandal may have had a point. Going to a better school does lead to higher graduation rates and higher incomes down the road, according to a recent study from the St. Louis branch of the U.S. Federal Reserve system.

This isn’t a feel-good story. The Federal Reserve Bank of St. Louis took a look at college quality—sorting schools by freshmen SAT scores—and found the better the school, the higher the graduation rate and the higher graduates’ earnings. In other words, the underdog probably isn’t winning.

Feel obvious? Maybe, but it hasn’t always been this way. The importance of going to a good school has been growing over time. “We found that the importance of college quality as a determinant of graduation rates and postcollege earnings increased, while the importance of aptitude test scores declined,” researchers Oksana Leukhina and Joseph McGillicuddy.

The two researchers looked at national surveys which track the lives of young people entering college around 1980 and 2000. Both surveys contain complete earnings histories for at least 15 years after graduation.

Getting into a good school is beginning to matter more than even overall learning ability. That’s the less obvious finding from the St. Louis Fed’s research.

Leukhina and McGillicuddy posited three reasons for their conclusion.

First, it’s getting harder to get into higher-ranking schools. College enrollment is up and is growing faster than schools’ ability to increase capacity. Students with weaker SAT scores are ending up in community colleges with open-door policies. More severe “student sorting” today versus a generation ago is one explanation the Fed found for graduates from top schools doing better.

Cost is also a factor. Tuition for first-year students grew from less than $5,000 a year in the 1980s to almost $25,000 a year in the 2000s. But borrowing limits for some subsidized government loans haven't kept up. Parental transfers along with grants and scholarships have become the fastest-growing forms of financing. Tuition inflation has placed an increasing burden on families, leaving better schools out of reach for many of today’s college enrollees.

Of course, the third reason could simply be better schools are getting better. The “return from a degree” increased between the 1980s and 2000s. This is the you-get-what-you-pay-for explanation, where higher tuition results in better facilities and teachers. Again it’s hard for an underdog to win.

So this may not be a feel-good story, but at least it can serve as a warning. There is a rising gap between the income outcomes for graduates from good schools versus just OK schools.

Start studying and, more important, start saving now.

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