Investing to Wealth

Yesterday, I read a fascinating research paper by Stacy Berg Dale and Alan Krueger (you can read the abstract here) which offers up a surprising result. In a nutshell, once you take a student’s pre-existing talents into account (as shown by standardized test scores), the school they attend has almost no impact on their lifetime earnings. In other words, a student’s natural talents lead to career success, not going to the right school.

That’s not to say that students who attend a more selective school don’t earn a higher salary – they do. However, it is the selectiveness that causes the higher income, not the exceptional quality of that school’s education.

What does that mean for saving for our children’s education?

First of all, it shows that setting your children up for success comes much earlier than we might think. Challenging them and encouraging them to solve problems on their own during their earlier years and providing opportunities for them to grow and learn when they’re young sets them up to be ahead of their class during their secondary school years – a lead they’re likely to maintain no matter what they do.

Second, it reinforces the notion that it’s more important for a parent to save for their own retirement than for a college education. Remember, a college education can always be covered with scholarships and loans, but there aren’t loans that will pay for your retirement.

Third, it doesn’t deny that getting into a good school is a wortwhile goal. If a student’s goal is to get into an Ivy League school, the work you’ll have to do to get there – pushing yourself hard in school, involving yourself in intense extracurricular activities – will themselves create the foundation for success in a student’s life.

Here’s the key message behind that paper: if you’re making a choice to spend less quality time with your kids so that they can afford to get into a good school, you might be making the wrong choice. The school doesn’t make the kid – the kid makes use of the school. While quality time and effort are never a guarantee of such success, they’re certainly a strong step in the right direction.

It’s not the school, it’s the student.