Tuesday, March 27, 2012

In Defense of Obamacare

This week, the U.S. Supreme Court is hearing arguments for and against the Patient Protection and Affordable Care Act, more commonly known as "Obamacare".  The primary issue at stake is whether or not the Government has the right to require that people buy health insurance or else face a fine, otherwise known as the "individual mandate".  Since legal terms such as "interstate commerce clause" and the like tend to make my eyes roll back in my head, I am far from qualified to offer a legal opinion on whether or not Obamacare is constitutional.  However, from a purely economic point of view, requiring people to buy health insurance is one of the only ways to keep health care affordable.  Therefore, if it is declared unconstitutional, it will be a big loss not just for the Democrats, but for the millions who cannot afford health insurance.

In its most basic form, insurance is a way to spread the risk of a catastrophic event among a large group of people.  Everybody pays a little bit into a pool of money and then if something "bad" happens to one of those people, that one person gets the money from the pool.  If you find out that you have cancer, you might be forced to pay for extended hospital stays, surgeries, chemotherapy, and so forth.  The bills would be so big that it would bankrupt most people.  Yes, the odds of being diagnosed with cancer are relatively small, but if the unthinkable happens, it is pretty catastrophic financially (among other things).

To protect against this loss, most people buy health insurance.  You, along with thousands of other people, might pay $5,000 a year towards this insurance.  The insurance company collects money from you and thousands of other people and sets the money aside.  Then, if one person's gets ill, the insurance company takes some of the money they collected and uses it pay for the medical care that you need to get better.

The benefit of this type of arrangement is enormous.  While $5,000 a year is not chump change by any stretch of the imagination, writing that check gives you the peace of mind to know that you'll be able to afford to get the medical treatments that you need.  That, certainly, is worth $5,000 a year.

One of the potential pitfalls of this arrangement is known as "Adverse Selection".  Adverse selection is when a person buys insurance only when they know that they'll need it.

Let's say that you don't have any health insurance whatsoever.  You experience sharp pains in your side so you go to the doctor.  The doctor examines you and says that your appendix is about to burst and that you need to go to the hospital immediately to have it removed.  Faced with a $25,000 medical bill, you immediately dial up your local insurance agent (preferably while you are en route to the hospital) and purchase health insurance so that you can cover your impending five figure bill.

If you could actually do that, one of two things would happen.  Either the insurance companies would go bankrupt, or premiums would be so high that it would be just as expensive to just pay the medical bill out of pocket.  Why is that?  The whole premise of insurance is that you collect premiums from the many and pay claims to the few.  That way, the relatively smaller premiums from the larger group are able to pay for the relatively larger medical bills of the smaller group.  However, if only the sick buy insurance, then this math doesn't work anymore.

To combat this phenomenon, insurance companies do a number of things.  One thing they do is that they don't pay for medical bills on so called "pre-existing conditions".  This prevents you from buying insurance when you need it.  You can't just pick up the phone and buy a policy when you are faced with $25,000 worth of medical bills.  You have to buy it when you are healthy.

Of course, this pre-existing condition clause casts a wide net.  While it does prevent somebody from buying insurance only when they need to make a claim, it also prevents people who might lose their job or who retire early or who are too old to be covered under their parents' health insurance.  In this case what happens is that these people avoid going to the doctor altogether.  In the long run, this might make their medical condition even worse.  Eventually, they might end up in the hospital in a life-or-death situation.  In this case, the hospital ends up footing the bill, since they are obligated to save the patient's life.  The cost of this care isn't free, since it gets added to the hospital bill of each and every one of the paying customers.  Additionally, this care costs more than it would have cost if the person had just been able to go to the doctor for routine checkups. 

To prevent this from happening, one could do away with this pre-existing condition clause.  Now if you did that, then premiums would go up from everybody since now you'd have people only buying insurance when they absolutely needed it.  We have a dilemma here.  There are two options:

  1. Either we have to keep the pre-existing clause clause and let people go uninsured which makes things more expensive for everybody in the long run, or
  2. We get rid of the pre-existing conditions clause which drives up insurance premiums which makes things more expensive for everybody in the long run.
Of course, Obamacare goes off the board and chooses option 3:

Get rid of the pre-existing condition clause so that everybody can access insurance, but require everybody to buy insurance so that people can't buy it when they need it.

It is an elegant solution to a tough problem.  Not only does it extend coverage to more people, but it keeps the insurance premiums lower.  From an economic standpoint, this aspect of Obamacare makes perfect sense.

Now I understand and acknowledge that there is something inherently fishy about the Government requiring people to buy a product from a private company.  However, health insurance is something that is unique among most commercial products.  Unless buying a TV or something, there is a public policy component to health care, as its rising cost impacts society as a whole.  If somebody can't afford a TV, well then tough luck.  Not being able to watch the latest reality show really doesn't cause society as a whole any harm.  However, when people cannot afford health care, that's a different story.  People will get health care with or without insurance.  If they don't have insurance and they cannot afford to pay, we all pay for it.  We pay for it through higher premiums.  We pay for it through higher taxes.  Therefore, rather than burying our heads in the sand and not deal it because of some dogmatic belief, we need to somehow figure out a way to solve this issue. 

Saturday, October 22, 2011

Why Every Capitalist Should Support Occupy Wall Street

Some intrepid readers may be wondering why I haven't posted in over a month.  No, it is not because I have been camping out in a park in New York City.   It is because of some increased obligations at my paying job.  Contrary to popular belief, blogging is not a profitable endeavor, so my real job must take precedence.  However, that doesn't mean that my brain hasn't been churning out article ideas. 

Unless you have been living under a rock, you know that there is a protest movement called Occupy Wall Street (OWS) which has taken over New York City.  The goal of the protest is somewhat nebulous.  The general concept is that they are protesting the fact that the greed of the 1% is screwing up the country for the rest of us.  While there seems to be many threads of protest running through this group, one of the recurring themes is that Wall Street greed caused the current economic downturn.  However, those that caused the problem were rewarded with millions in bailout money while the rest of us who tried to live by the rules ended up getting screwed.

You know what?  They are absolutely right.

Some on the right might be snickering at what they see as rabble rousers; however, they aren't far off from those darlings of the right known as the Tea Party Movement.  The Tea Party came about as a protest against... wait for it... the Government bailouts.  Sound familiar?  The difference, of course, is that the Tea Party's prescription for America is that Government was too big and had to be cut back significantly.  We ought to cut Government down to size.  No more tax increases.  No more out of control spending.  We need to cut everything:  education, health care, the arts, welfare.  Is this fair?  Not on your life!

The capitalist system is predicated on survival of the fittest.  Those who work the hardest, have the best ideas, make the best decisions, have the opportunity earn their fortunes.  On the flip side, those who fail go out of business.  The bailouts turned this on its head.  The Wall Street firms that screwed up ended up getting propped up at the taxpayers expense while those who did everything right didn't get a dime.

Whether or not you agree with the bailouts, they are over and done with.  That money has already been spent.  Unfortunately, we cannot go back in time and not spend that money.  The Tea Party proposes to pay back this spending through lower Government spending while not raising taxes on anybody.  That seems wrong to me.  Those who caused the problem should have to foot the bill, while those who paid for the bailouts (i.e. the rest of us) shouldn't be punished.  When Government spending is cut to the bone, who gets hurt the most?  The poor and middle class.  Does it seem fair to you that they should bear the brunt of the bill?  Not to me and not to OWS.

The fair thing is that those who made the bad business decisions should have to accept at least some of the bill.  That is capitalism.  You can't go all Ron Paul on us on the one hand when things are going well, meanwhile going all Fidel Castro on us when you screw up.  In a capitalist society, if you do well, you get the keep the rewards.  However, if you screw up, you have to pay the bill.  Not me.  You!  You have to accept higher taxes.  You have to accept more regulation to keep you from screwing up the economy again.

Maybe I should get the tent out of the closet and camp out, huh?

Monday, September 12, 2011

Financial Planning for a Special Needs Child

For most parents, financial planning consists of a few predictable but key items.  First, and most importantly, you draw up a will to make sure that you get to choose the people who are going to take care of your children and manage their affairs.  Next, you buy some form of life insurance to make sure that your family has the funds to get if something unthinkable happens to you.  Finally, you put aside some money each month in some sort of college savings plan to help your child pay for a higher education.  The playbook is pretty standard for most parents.  However, what do you do if you have a child with special needs.

You see, I have been thinking about this question because I have a daughter who is special needs.  She is autistic.  Autism (or more formally autism spectrum disorder) manifests itself differently in every child.  There is a quote I once heard which goes something like this, "If you've met one person with autism, you've met one person with autism."  In my daughter's case, she is non-verbal, does not respond to social cues, exhibits repetitive behavior, has both gross and fine motor delays, and has hyposensitivity to sensory stimuli.  However, she is a wonderful child with lots of spunk and personality, but in her own unique way.

One thing that I've been thinking about recently is what is going to happen to her once my wife and I are gone.  With most children, you only have to answer this question for the first 20 or so years of a child's life.  After that, you assume that your child will be able to take care of himself or herself.  However, in my daughter's case, there is a possibility that she will require care and supervision for the rest of her life.  That means that we will not only have to provide for her until she is 20, but until potentially until she is 80.  That requires a different type of financial planning than what you would do for a regular child.

To be honest, this is something that my wife and I really haven't started thinking about.  We've been so focused on getting her the services that she needs (physical therapy, occupational therapy, speech therapy, etc) that we haven't had time to think about the long term.  I am by no means an expert on the subject, but here is what I have gathered so far.

1. It is key to keep the assets in your child's name small.

If a special needs adult has more than a certain amount of assets in their name, they are disqualified from receiving certain government benefits such as Medicaid.  Therefore, it makes sense to think twice before making your special needs child the beneficiary of any life insurance policy or retirement plan.

2. Set up a special needs trust for your child.

Because you can't leave money directly to your special needs child doesn't mean you can't leave your child out in the cold.  Instead, you can set up a special needs trust, which is a financial account set up for your child's benefit, but which is not counted as part of your child's assets.  Instead of leaving an inheritance to your child directly, you leave it to the trust.  Then the person responsible for the trust (usually a trusted friend or family member) can use the money for the benefit of your child.  The other benefit is that your child may not have the mental capacity to manage this money properly, so it allows his or her financial affairs to be managed by a capable person.  There are some restrictions for what you can use the money, but generally it can be used for extras which are not provided by government services.  Obviously I am not an expert in this area, so you should consult one before you do anything.

3. Consider permanent life insurance.

Remember when I said that most people should consider only term life insurance.  This could be a situation where the other types of insurance are applicable.  In most cases, people require life insurance only during their earning years.  This is because once you hit retirement, you're retirement is paid for and your kids are out of the house, so if you meet an untimely death, your spouse and children won't need the coverage at that point.  Therefore, term insurance covers your needs nicely.

However, in the case of a special needs child, you might want to have life insurance coverage for your entire life, rather than just until you retire.  The premium of term insurance jumps significantly once the "level term" period expires.  For many people, that jump in premium puts the coverage out of reach.  One way around this problem is to buy whole life insurance.  Initially, the premium of whole life insurance is higher than term.  However, the premium you pay in year one is the same as the one you pay for the rest of your life.  Therefore, there are no unexpected premium resets.  Therefore, keeping the insurance in force for your entire life is much easier.

I have also read more "exotic" life insurance strategies, like buying universal life to maximize your insurance amount.  Another is to buy what is called joint life policies, which pay only after the death of both you and your spouse.  The advantage here is that the premiums are less than a traditional policy because you are covering two people instead of one.  Since your child might only need the money when both parents are deceased, this could make sense.

Of course, no matter which type you buy, you should think about leaving the money to a special needs trust instead of your child directly (see above).

There are many challenges to raising and caring for a special needs child.  Because you focus so much on the day-to-day stuff, sometimes you neglect the long term planning.  However, the long term is just as important, if not more so, because you won't be around to implement your plan.  Therefore, you need to be as prepared as you can so your child's needs will be met.  I am going to continue to explore this area of financial planning so that my daughter will be taken care of when my wife and I are gone.

Friday, September 9, 2011

Remembering 9/11: America's Decline Is Greatly Exaggerated

As the 10th anniversary of 9/11 approaches, many are in a reflective mood.  Many news outlets are running stories in remembrance of that fateful Tuesday morning.  Besides the usual "where were you" memories (at work in upstate New York) of that day, my strongest impression of that time was how, in the aftermath, we heard stories of greatness that rose above that tragedy.  We heard about the brave first responders who went into the building when most people's natural inclination would be to leave.  We heard about the search and rescue workers who spent hours upon hours combing through the wreckage, putting themselves at great personal risk.  We heard about the ordinary Americans aboard Flight 93 who averted a fourth attack on that day.  We heard about the millions upon millions of individuals all over the country who put aside their differences to contribute to the relief effort.  In the wake of the tragedy, the best of American came to the forefront and was put on display for all to see.

Ten years later, the mood is much more pessimistic.  We have seen our young men and women die on the battlefield half a world away.  We all felt the effects of an economic collapse the likes of which hasn't been felt in most of our lifetimes.  Jobs which were once done by Americans are done cheaper by people overseas.  Our leaders seem to be at each others' throats, putting politics ahead of the good of the nation.  Our creditworthiness as a nation has been called into question.  Our national debt continues to mount.  Our standing in the world as superpower is being challenged by a rising China.  All the news about American seems so dark that people are wondering aloud whether or not America has passed its prime and is in decline.

Those people are wrong.  In my mind, there are two things that make America great and will continue to keep America great:  opportunity and freedom.

America has always been a Land of Opportunity.  It is a place where hard work and smarts are generally rewarded.  There are stories like that of Andrew Carnegie, who came to this country at age 13, worked as a teenager in a textile factory, and through his hard work ended up as one of the richest men of his time.  However, the bigger story in my opinion is that, for every Carnegie, there are millions of people who came to this country and found a better life, a more comfortable life, for them and their families.  They came here because in their homes, they would have languished in poverty despite their hard work.  However, here in the U.S., our meritocracy allows people who work hard and work smart to get ahead.  Yes, they may not end up billionaires, but they are able to carve out a comfortable life consummate with their efforts.

American remains that land where you generally are rewarded based upon your skills, savvy, and sweat.  Yes there are exceptions as there always are.  Cynics will point to those exceptions and claim that they are the rule.  However, I can't think of many cases where people who are hard workers don't end up rewarded in some way, shape, or form.  Consider the immigrants from all over the world who still come to America to seek their fortune.  In my field (engineering), I work with a lot of people who chose to come to America.  If you ask them why, one huge reason is that America generally is a place where you have the opportunity to make a good living should you chose to take advantage of it.  It is a place where hard work truly is rewarded.  If America wasn't that place, then why do some want to build a fence to keep illegal immigrants out.  If America were that bad, we wouldn't be creating barriers to entry.

The second characteristic that makes America great is our freedom.  We generally have the ability to express our own opinions, worship our own gods, associated with whomever we want, without the Government trying to stop us.  That freedom of expression fosters a vibrant marketplace of ideas.  We are free to debate ideas vigorously without fear that the thought police will knock on our doors and steal us away in the middle of the night.  As such, all ideas are exposed to the light of day where the best can be adopted and the worst can be debunked under the scrutiny of the masses.  By allowing people to say and believe what they want, ideas are subjected to Darwinism, where the worst ideas are cast aside by vigorous debate and the best are adopted.  Obviously, there is still room to disagree, and that's okay, too.  We as a society accept that there will always be differences, but at least by talking about them, we can reach some understand, if not agreement.  Isn't a better to talk about your differences than go to war over them?  When you aren't allowed to express yourself freely, all of that disagreement boils over in civil unrest.  Because we can express ourselves freely, we can influence the course of our nation.  Every few years, we get an opportunity to revolt (peacefully of course) by voting out our old leaders and voting in new ones.  There are many countries where such dissent can only be expressed through a bombs or rifles.

Freedom and opportunity by themselves don't make a country great in a vacuum.  They are facilitators for what really makes a country great:  its people.  After all, a country is just a collection of people.  Freedom and opportunity do two things.  First, they help to attract the best people.  If you are looking for a place to live, wouldn't you want to move to the place where hard work is rewarded and where you can express yourself how you want?  Second, they reward those with the best ideas and the best work ethic, and that helps to elevate the entire nation.  Take the entrepreneur who builds a company from the ground up.  That company not only benefits its owner, but also those who work for the company, and by extension, the community where the company is located.  Consider Mr. Carnegie whom I mentioned earlier.  The foundation which he started over 100 years ago is still benefiting America through its philantropy.

I would ask everybody (including our politicians who seem to be stoking this feeling of gloom and doom) to stop dwelling on what is wrong about America, but what is right about America.  Of course, we aren't perfect; no country is.  However, with freedom and opportunity, at least we have the mechanisms to address our problems.  Because of that, America is not going to decline any time soon.

Monday, September 5, 2011

Going to the Extreme (Couponing, That Is)

You've probably heard about the newest rage to hit the grocery stores:  extreme couponing.  Popularized by the TLC television show of the same name, it is where people use various couponing and discounting strategies to purchase loads of groceries for pennies on the dollar.  After watching the show with my wife on a couple of occasions, I must say that I became quite intrigued with the concept.  I like saving money as much as the next person, but the people shown on the show make me look like a rank amateur.  Therefore, I set off to see if I could learn a thing or two from these pros.  Fortunately, there are a lot of websites out there dedicated to this new rage.  I am purposefully refraining from posting links to these sites for reasons that will become apparent later in this article.  However, a quick google search will reveal some of the more popular sites.

Extreme couponing is quite simple in concept.  For the most part, it consists of four key ingredients:

1. Clip lots of coupons:  This one is pretty obvious.  The best extreme couponers can find coupons from all over the place:  the local paper, Internet websites, home mailers, social networking sites, those little printers that print coupons right at checkout, attached to the products themselves, and so on.  What I've learned is that coupons are everywhere!  Not only that, extreme couponers will obtain multiple copies of the same coupon.  Sometimes that means buying six or more copies of the local newspaper, but they claim that it is worth it.

2. Use the coupons when items go on sale:  Most people use coupons as soon as possible.  However, extreme couponers save them for when the product is on sale at its rock bottom price.  Investors will note that this is the "buy low" rule applied to groceries.  Makes complete sense.

3. Take advantage of store policies:  Extreme couponers will take advantage of things like coupon doubling and stacking.  Coupon doubling is where a store will double the savings of a manufacturer's coupon, up to a certain limit.  Stacking is where you use a manufacturer's coupon and a store coupon on the same item at the same time.  In some cases, the value of the coupons might exceed the sale price of the product itself.  Some stores allow you to use this credit balance towards the rest of your purchase, which an extreme couponers dream come true.  Of course, every store has different policies regarding doubling, stacking, and credit balances.  Therefore, it pays to know what they are before you shop.

4. Stock up:  When events converge to offer an amazing deal, extreme couponers stock up.  They use as many coupons as possible to buy as many of the items as possible.  Then they store the extra items away for when they are needed.  Obviously, some items (think toilet paper) are easier to keep for long periods of time than others (think milk).  Therefore, you better be prepared to use the items.  Unless you are getting paid to buy the items, any deal where you can't use the item is not a deal at all.

Armed with all of this information, I set off to find my own extreme coupon deals!

The first one that I tried was a deal where you could get free single serving bottles of orange juice that was on sale for a dollar by using a dollar coupon available on the Internet.  I drink orange juice all the time.  Therefore, this deal seemed like a no-brainer to me.  Since this particular web site only allowed you to print two coupons from any computer, I ended up printing two copies from my computer, my wife's computer, and our netbook.  Armed with six dollar off coupons, I headed off to the store to claim my six bottles of free OJ.  Unfortunately, I wasn't the only one who knew about this deal.  When I got to the store, there was an empty shelf where (I assume) the bottles of orange juice had been.  As a consolation prize, I bought a gallon jug of OJ using my dollar off coupon, and at the register, the machine printed a $1.50 off OJ coupon for my next visit.  I guess it wasn't a total loss!

Lesson #1:  If a deal is posted on the Internet, it is likely that everybody knows about it.  By the time you find out, it is too late!  That is why I am refraining to reveal my sources on these deals.  (Note that this is similar to what I had said about picking stocks in a previous article).

The second deal that I tried was a buy-one-get-one-50%-off deal on vitamins combined with two $3 off coupons printed from the Internet.  Normally, a 50 count bottle costs $10.  With this deal, I could get 100 vitamins for $9 ($10 for the first bottle of 50 + $5 for the second bottle - $6 for the two coupons).  Armed with coupons in hand, I visited the store.  This time I was in luck because the store still had plenty of the vitamins on sale.  I swiped two just in case the old man behind me was looking to store the same deal, I ran up to the register.  I handed the two coupons to the cashier, and she gave me a look.  She said that since the second bottle was free, I could only use one coupon, not two.  The store didn't allow coupons on free items.  She was an older lady with an air of authority, so I figured that I had misread something and the vitamins were part of a BOGO deal (that's buy-one-get-one free in extreme coupon speak).  I took the coupon back and smiled inwardly at my good luck.  Now I was getting $20 worth of vitamins for $7!  Yippe!  Unfortunately, the authoritative cashier was mistaken.  After I got home and looked at the receipt, I saw that the second bottle was not free - it was 50% off just I had read.

The only consolation was that I got another $2 off coupon for vitamins at the register.  Yay...

Lesson #2:  Don't trust the cashier, regardless of how authoritative he or she might appear.  They don't know all of the sales as well as they think they do.

My conclusion is that extreme couponing is not as simple as it looks.  I'll keep trying to score more deals, but I realize that I still have a long way to go before you see me on TV.

Tuesday, August 30, 2011

4 Tips For Making Sure Your Insurance Is Up To Date

Here on the East Coast of the U.S., we recently were rocked by an earthquake and a hurricane within the span of less than a week.  Hopefully all of my intrepid readers out in cyberspace who live in the affected areas made it through without incident.  In the run up to the hurricane, there were a lot of articles with advice on how to prepare for an emergency.  However, making sure your insurance is updated is something that you have to do far in advance of an emergency.  Many insurance companies won't even issue new policies or updates if there is an impending event.  By the time something is impending, it is too late.  Therefore, it is better to make sure your insurance is up to date before you hear about the next disaster on CNN.  In other words, now is the time to do an insurance checkup.

1. If you are a renter, get renters' insurance

Many renters assume that if their apartment burns down that their landlord's insurance will reimburse them for their loss.  Not true.  Your landlord's insurance will reimburse your landlord for the loss of their property - not yours.  If you want to protect yourself against the loss of your personal belongings, you need to buy your own insurance.  Fortunately, renters' insurance is relatively cheap.  Your first stop should be to the same company through which you have your car insurance.  You might get a discount for having multiple policies.

2. If you are a homeowner, make sure your coverage amounts are up to date

Almost all homeowners have insurance to cover their property and belongings.  Primarily, this is because mortgages require it.  However, many people don't bother to keep it up to date.  The coverage amounts that you had when you bought your house may not be enough ten years later.  It may cost more to rebuild your house now than it did ten years ago.  You may have added an addition, upgraded your kitchen, remodeled your bathroom.   If your coverage amounts don't reflect this, you're going to be in trouble if you need to avail yourself of that coverage. 

Most insurance companies make it easy to update your coverage amounts.  Usually you give them the current characteristics of your house, and they will give you an estimate of how much it would cost to rebuild your house.  Some good insurance companies will even be proactive and ask you periodically if you need to update your coverage.

One thing to keep in mind, however, is that the appraised value of your house may not be the amount of coverage you should buy.  Your appraised value includes the value of your land as well as your dwelling.

3. Make sure you understand your policy's limits and exclusions, and buy extra coverage if necessary:

The biggest exclusion (and the one which affects those affected by the hurricane) is that your homeowners' policy does not cover flood damage.  Flood damage is covered by a separate policy aptly known as flood insurance.  The same insurer who sold your homeowners' policy probably can also sell you flood insurance.

Likewise, most insurance policies don't cover earthquakes either.  If you want earthquake insurance, you will have to buy an add-on to your policy.  Usually earthquake insurance policies have high deductibles, so they will pay in the event of a total loss but not if you just have incidental damage.

Insurance policies also have other limits and exclusions.  Some of the more common ones are limits on claims related to loss of jewelry, computers, collectibles, and other higher value items.  For instance, my policy limits what they will reimburse for jewelry is $10,000.  Therefore, if you have any items which exceed any of these limits, you should consider buying a separate policy to cover the additional value.

4. If you are considering changing or adding to your policy, do it when the sun is shining:

Many insurance companies have waiting periods from the time you buy the insurance to the time it goes into effect.  The most common one is the 30 day waiting period for flood insurance.  That means that you shouldn't expect to rush out and buy insurance just before a disaster the same way you can buy bottled water or D-cell batteries.  You need to buy the insurance that you need when the sun is still shining.

The old adage "be prepared" applies not just to making sure your pantry is stocked, but also to your insurance is up to date.  The time to prepare is now!

Saturday, August 20, 2011

In Defense of Elite Private Colleges

I've posted several times about the value of attending college.  I've even written some advice on choosing a college.  At the risk of beating this topic into the ground, I am compelled to respond to what I consider to be an ill-conceived article about why elite private colleges are not worth the money.  The article starts with the following premise:

"If you’re the parent of a high-achieving high school student prepared to spend whatever it takes to send your kid to an Ivy League college, authors Claudia Dreifus and Andrew Hacker have some unlikely advice: Don’t do it."

The main issue that I have with the article is that it perpetuates the dual myths that elite private colleges are more expensive than their public brethren and the education you get at an elite private school is no better.  I am here to inject some logic into this debate.

First of all, many elite private schools don't cost more.  Of course, if you compare what I call the sticker prices, Princeton's total cost($52,670) is higher than Rutgers' ($24,017 for NJ residents).  Therefore, I could see why, on the surface, one might conclude that Princeton costs more than Rutgers.  It doesn't take an Ivy League graduate to know that $52,670 is greater than $24,017.  However, the operative word in this discussion is sticker price.  Just as with car buying, most students don't pay the sticker price at Rutgers.

Princeton has an aid estimator which allows you to put in your financials and get an estimate of how much you will be expected to pay.  I entered information for a hypothetical family of four where the parents make $150,000 combined and $50,000 in non-retirement savings.  According to the aid estimator, such a family would be expected to contribute $28,300 towards college.  The rest would be covered by grants provided by Princeton (no loans, no work-study).  That is a mere $4,000 more than what they would shell out for Rutgers!  My example family isn't what you would call destitute either.  They are probably in the the upper middle class by most peoples' standards.  However, they would end up paying slightly more for a Princeton education than they would for a Rutgers education.  Families earning less obviously would end up paying less.

Princeton isn't alone in offering such lucrative aid packages.  Other Ivies have similar aid structures.  Consider the myth that a elite private college education is more expensive than a public education busted!

As far as the quality of education not being worth the money, the rest of the article gives reasons why the elite schools will not give you a good education.  Most of these reasons are sheer nonsense.  I'll address some of them:

Research universities are no place for undergraduates.  I do agree with this to a certain extent.  Most universities offer tenure based not upon teaching prowess but on the amount of research dollars brought into the school's coffers.  However, this problem is not limited to private elite colleges.  Most large public universities are also slaves to the old publish or perish mentality.  According to the Chronicle of Higher Education, three of the top five universities receiving the most research money are public universities.  Interestingly, there is not a single Ivy League school in the top five.

Colleges are overrun by administrators.  Again, this is not something that is exclusive to private elite schools.  I am not sure how this figures into the discussion at all.

The star professors touted in college brochures probably won’t be teaching your kid.  I don't have any statistics to prove or disprove this specific statement, although I would imagine that a star professor at any school, public or private, probably has a lighter teaching load. 

Your tuition may be subsidizing a college president’s $1 million-plus salary.  Ohio State's president made $1.6 million in 2009.  Harvard's president only made $775K.  Again, this is not exclusive to private schools.

High-powered athletic programs drain money from academics.  This seems like an argument against large public institutions.  How many large public universities have huge athletic departments?  Heck, the University of Texas (a public institution the last time I checked) is in the process of launching its own sports television network.  I don't even know if M.I.T. even has a football team (editor's note:  a quick google search shows that they apparently do).

As far as the overall quality of education goes, there are many good public universities, so it is hard to generalize about the quality.  However, one thing to consider is that public universities are subsidized by the taxpayers of that state.  The news regarding the financial situation of many states is grim.  With public pressure to cut budgets while simultaneous keeping tuitions affordable, something has to give.  That could mean cutting programs, increasing class sizes, and generally trying to do more with less.  I would imagine that the gap between the elite private schools and public universities is going to grow.  I know that if I could pay the same amount to attend Rutgers or Princeton, I would choose Princeton, no doubt about it!