Many college-bound students and their families face a tough question: Do they try to pay for a college that gave them little financial aid, even if it requires borrowing money or using up their savings, because it is perceived to be better, or do they opt for a less prestigious college that offered a merit scholarship and would require little, if any, borrowing?
"It's not just the sticker price and the net costs," said Sarah Turner, professor of economics and education at the University of Virginia, but "how likely is it that you will get into medical school or law school or have some other opportunities" if you choose the more prestigious college?
That's the rational argument. In these decisions, though, emotion often wins out, and it can lead to the slippery slope of excessive borrowing.
"Families really need to look realistically at what they can afford," said Lynn O'Shaughnessy, author of The College Solution and a blog of the same name. "Sometimes, they'll look at a package and say, 'It's not enough, but we can sacrifice and send our children to the school they really want to go to.' They have to realize this is a four- to five-year commitment."
O'Shaughnessy said she was trying to counsel a father in New Jersey who was on the verge of making a horrendous financial decision. His daughter had received a full scholarship to Rutgers University but her first choice was New York University, which, even with financial aid, would cost the family $32,000 a year. The father, an engineer who was out of work, said he was going to send her to NYU.
"I can't even believe he's considering it," she said. "I was floored. It's irrational."
But, unfortunately, that father is not so unusual. While it is hard not to give our children what they want, here are some ideas on how to think about this financial dilemma without going broke — or at least know why you will be broke.
The competition to get into top colleges is fierce, but nowhere is it more so than at the country's elite institutions. And many parents feel compelled to reward all that hard work.
The debate between paying full tuition at an elite institution or accepting a merit scholarship from someplace less prestigious "is a conversation we have all the time," said James Conroy, chairman of post-high school counseling at New Trier Township High School in Winnetka, Ill. "It's a tough conversation because what it gets down to is the values of the family."
Prestige has always been part of the equation, but he said he expected parents to start looking for value in colleges after the 2008 financial collapse. Instead, parents have come to see the elite universities as the only way to give their children a chance at success. They feel jobs are hard to come by and companies are only going to look to hire at the elite universities.
But in two much-discussed studies about the value of a degree from an elite college — one with people who graduated in the 1970s and the other with more recent graduates — Alan B. Kreuger, then an economist at Princeton University, and Stacy Berg Dale, a senior researcher at Mathematica Policy Research, found that equally smart students had about the same earnings whether or not they went to top-tier colleges. The big difference, their studies found, came from minority and low-income students who went to top-tier colleges: They did better later on.
Lawrence Katz, a professor of economics at Harvard University, said he could envision circumstances where there might be a benefit to attending the more elite institution, but he could see more instances when paying to go to a large, nonelite university was a waste of money.
A private, expensive, nonelite university was not necessarily better than "the flagship campus of a top-notch state university," he said.
For parents willing to pay more for that nonelite, private university, Katz said they should not think about it as an investment but as a form of consumption. "If your kid is dead set on it, you can splurge on it," he said. "But you should view it like a wedding or a vacation."
This spending becomes problematic, of course, when parents can't really afford it and, worse, Turner said, when students borrow heavily without thinking about the life they want after graduation.
"Am I certain I'm going to end up on Wall Street?" she said. "If you know that's what you want to do, borrow and go to NYU. But borrowing does not make a lot of sense if you want to go to culinary school."
For parents and their children trying to make the decision, O'Shaughnessy said they need to be honest with themselves.
If they decide to pay more than they can afford for the coming school year, they need to remember they're looking at a four-year expense and that with increasing tuition, the total cost will be more than four times the cost of freshman year.
Parents and students also need to look at the graduation rates of the colleges they're considering. While taking on a lot of debt is not good, taking on a lot of debt and not graduating is even worse.
And if students receive merit scholarships, they should consider them: They're a sign a college really wants the student.