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Journal of Education for Business
ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
The Effect of Tuition and Opportunity Cost
on the Pursuit and Completion of a Graduate
Management Degree
Mark Montgomery & Irene Powell
To cite this article: Mark Montgomery & Irene Powell (2006) The Effect of Tuition and
Opportunity Cost on the Pursuit and Completion of a Graduate Management Degree, Journal
of Education for Business, 81:4, 190-200, DOI: 10.3200/JOEB.81.4.190-200
To link to this article: http://dx.doi.org/10.3200/JOEB.81.4.190-200
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The Effect of Tuition and Opportunity Cost
on the Pursuit and Completion
of a Graduate Management Degree
MARK MONTGOMERY
IRENE POWELL
GRINNELL COLLEGE
GRINNELL, IOWA
ABSTRACT. In this study, the authors
used multivariate statistical analysis to
examine the impact of cost on the likelihood that a person will both enroll in and
complete a Master of Business Administration (MBA) program. They considered both
the explicit cost of paying tuition and the
implicit cost, or opportunity cost, of earnings foregone while in school. Results suggest that tuition is not a major impediment
to either pursuing or completing an MBA.
However, high opportunity cost tends to
reduce enrollment and degree completion.
Copyright © 2006 Heldref Publications
T
he few studies that exist on the
demand for graduate business
education (Jantzen, 2000; Montgomery,
2002) have focused on the impact of
tuition cost on the demand for a particular institution. We examined the
impact of the cost of obtaining a degree
on one’s decision to enroll in a graduate
management program, and on the likelihood of one completing a program once
enrolled in it. In our analysis, we considered more than just tuition cost.
Tuition is only the explicit cost of pursuing a graduate management degree.
There is also a substantial implicit cost
of lost earnings while attending school.
The latter is usually called the opportunity cost of obtaining the degree. We
considered two questions in this
research: (a) How do the explicit and
implicit costs influence the decision to
pursue a management degree? and (b)
how do these costs affect the likelihood
of completing the degree? The cost
effects were compared across demographic groups and between more competitive and less competitive business
schools. The data for this study came
from a unique longitudinal survey conducted with registrants for the Graduate
Management Admission Test (GMAT).
Review of the Literature
The research that is most relevant to
the present study is that done on graduate school attendance or completion
190
Journal of Education for Business
decisions. The majority of those
researchers focused only on determinants of matriculation (Eide, Brewer, &
Ehrenberg, 1998; Fox, 1992; Weiler,
1994). In two studies (Baker, 1998;
Ehrenberg & Mavros, 1995), the
researchers investigated determinants of
graduate school completion for samples
of students who had already made the
decision to attend. For example, Baker
used a set of applicants for fellowships
for science and engineering graduate
school who all were going to attend
their respective programs. Ehrenberg
and Mavros used data on students
already enrolled in graduate programs
in four disciplines. By using data on students who have already made the decision to attend, sample selection might
result in biased estimates of the effects
of factors, such as ability, gender, or
race, on the probability of completion.
For example, if ability is correlated with
the probability of attendance—which it
surely is—then the effect of ability on
completion for the group of attendees
will be biased. In addition, by using data
only from students who were enrolled,
earlier researchers could not take into
account the effect of cost on the behaviors of people who had abandoned plans
to attend precisely because the costs
were prohibitive. In the current study,
we looked at such people.
The aforementioned researchers analyzed attendance or completion in either
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PhD programs or in both PhD and professional schools combined, but none
considered business schools. They also
used data on individual students. However, Jantzen (2000) attempted to identify the factors that influence the demand
for U.S. graduate business programs
using data on business schools and their
enrollments. He found that enrollment
at individual business schools was negatively affected by tuition costs and positively affected by quality and being in a
generally high-demand area. Even so,
because Jantzen used data on schools,
not individuals, he could say nothing
about the effect of demographic characteristics on demand for business education, especially how they interact with
costs. However, individual data provide
insight on such issues, such as, showing
whether minority students are more sensitive to costs than are White students.
In our research, we took advantage of
a unique longitudinal survey of GMAT
registrants to develop a multivariate statistical analysis of a sequential set of
decisions made by individuals who contemplated attending business school.
We noted students’ choices among three
enrollment alternatives: To pursue a
Master of Business Administration
(MBA) degree full time, part time, or
not to pursue one at all. We also noted
whether, having enrolled in an MBA
program, students decided to complete
the degree or drop out or were still pursuing it at the time of the last interview.
The methodology we used here, multivariate analysis of sequential decisions,
follows that of a small number of previous studies in which researchers examined college-level attendance and completion (Ganderton & Santos, 1995;
Light & Strayer, 2000, 2002; Venti &
Wise, 1983). In particular, Light and
Strayer (2002) used data on individual
students and their schools to focus on
the effect of race on college attendance
and completion in a sequential choice
model. Controlling for other variables,
they found that minorities are more likely than Whites to attend college and
more likely than observationally equivalent Whites to graduate from college.
However, they found that the unconditional likelihood of earning a degree is
lower for Blacks than for Whites. This
finding emphasizes the importance of
using a nested choice model to examine
attendance and completion of graduate
school programs. The GMAT registrant
survey used in this study made it possible to examine more carefully the effect
of both the explicit and implicit costs of
obtaining an MBA degree on the probability of attendance and completion as
compared with previous studies.
METHOD
In this study, we used the GMAT Registrant Survey, sponsored by the Graduate Management Admission Council, the
organization that administers the GMAT.
The Battelle Memorial Institute in Seattle, Washington, designed the survey
instruments and collected the data. The
survey involved individuals who registered to take the GMAT on test dates
between June 1990 and March 1991.
The registrants were surveyed in three
waves between 1991 and 1994. There
were 4,333 registrants who completed
all three waves of the survey. A large
fraction of those interviewed never pursued graduate business education; many
never even bothered to take the GMAT.
In our study, we relied on a subsample of
1,988 GMAT registrants who applied to,
and were accepted by, at least one graduate management program. Table 1
shows the proportion of sample members who applied to, attended, and completed business school.
We supplemented data from the survey questionnaire with information from
the Graduate Management Admissions
Council’s own registration and test
records. We obtained information about
sample members’ undergraduate schools
from Barron’s Profiles of American Colleges (1992). Finally, we took data on
the characteristics of graduate business
programs from Barron’s Guide to Graduate Business Schools (Miller, 1994).
Estimating the Cost of Attending
Graduate Management School
Opportunity Cost Estimates
The explicit cost of going to business
school (the tuition) understandably
might have a direct effect on one’s decision to attend school; however, the theoretical effect of opportunity cost is
slightly subtler. The key element in
opportunity cost is the income foregone
through lost earnings. There are several
ways in which going to graduate school
reduces earnings. Most obviously, of
course, it is quite difficult to be a fulltime student while trying to hold down
a full-time job. However, the majority of
graduate management students do not
attend full time; many pursue the degree
while working a regular job. Even so,
there are still opportunity costs. To the
extent that more time devoted to the job
translates into promotion and pay raises,
TABLE 1. Outcomes of Business School Application and Attendance for
Those Involved in Completing the Graduate Management Admission
Registrant Survey
Status
Applied and accepted
Attended
Full time
Completed degree
Still enrolled
Dropped out
Part time
Completed degree
Still enrolled
Dropped out
Did not attend
NA
Did not apply or were not accepted
n
%
1,988
46
681
502
144
35
806
215
404
187
168
333
2,345
34
74
21
5
40
27
50
23
9
16
54
Note. N = 4,333.
March/April 2006
191
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even part-time students may lag behind
coworkers who are unencumbered by
classes, exams, and homework. Moreover, the decision to take night classes
can constrain the kind of day job available to the student.
Opportunity cost is difficult to measure. It cannot be observed directly, like
salary or income, because it involves an
alternative that the student did not
choose. Therefore, it is necessary to predict opportunity cost. This is done using
the standard econometric technique of
estimating a multivariate regression
equation that relates earnings to individual characteristics, such as education,
work experience, race, and gender. We
used regression analysis to relate earnings to personal characteristics for fulltime students, part-time students, and
those who were not in school. By estimating that relationship, it was possible
to predict what a given person would
earn in the job market from observing
what similar people tended to earn.
In most studies that involve predicted
earnings, researchers have to estimate
the wage equations with the same sample to which the coefficients are applied.
However, we were able to avoid this by
taking advantage of the 1986 MBA New
Matriculants Survey conducted by the
National Opinion Research Center of
the University of Chicago and also
sponsored by the Graduate Management Admission Council. Regressions
from the New Matriculants Survey provided earnings coefficients that we then
applied to the individual characteristics
of respondents to the GMAT survey to
predict earnings for GMAT registrants.
The predicted earnings created by
applying the regression coefficients to
the GMAT survey data represent our
measures of opportunity cost.
Table 2 shows the predicted opportunity cost for full-time and part-time
study. To attend graduate management
school, a full-time student sacrifices
more than $18,000 per year (in 1994
dollars). This represents about 56% loss
of income when compared with what
the person could expect if not in business school. Part-timers sacrifice much
less, about $3,000 per year, or roughly
9% of what they would be earning if not
a business school student. Average
opportunity cost varies considerably by
sex. Full-time management school costs
men $21,239 in earnings versus $14,215
for women. However, because women
earn less in the job market, their proportionate sacrifice is much closer to
men’s: 51% of nonstudent earnings
compared with 56% for men. Comparing by race and ethnicity, Whites sacrifice more, in absolute dollars, than
Blacks, Latinos, or Asian Americans do,
to attend full time. However, in proportionate terms, Blacks have the highest
opportunity cost of full-time attendance,
but the lowest opportunity cost of parttime attendance.
Tuition Cost Estimates
To estimate tuition and financial aid,
we found tuition cost for each individual averaged over the schools for
which each was accepted for admission. The cost per credit hour was estimated from figures reported in Barron’s Guide to Graduate Business
Schools (Miller, 1994). We then multiplied the cost per credit hour times the
minimum number of credits required
for a degree. For schools that reported
only annual tuition, we multiplied
annual tuition times the number of
years required to obtain a degree. We
similarly used the average financial aid
award for each school to measure the
effect of financial aid.
Table 3 shows that full-time costs are
slightly lower on average than part-time
costs: $10,838 versus $12,195. Why are
part-time costs higher on average than
are full-time costs? One possible explanation is that demand for full-time slots
is more elastic than demand for parttime slots and, therefore, full-time slots
have a lower equilibrium price (this is
consistent with the observation that
part-time attendance is by far the most
popular choice).
Estimating Predicted Effects of
Cost on Graduate Management
School Attendance and
Completion
To obtain estimates of the effect of
cost on the probability of attending
graduate management school and the
probability of completing school, we
estimated multinomial logit models by
maximum likelihood. Table 4 shows
the variables included in the models
TABLE 2. Mean Opportunity Cost of Attending a Graduate Management Program Full Time and Part Time, by Sex
and Race Compared With All Graduate Management Admission Test (GMAT) Registrants
Category
Sex
Women
Men
Race
White
Black
Latino
Asian American
All GMAT registrants
Nonstudent earnings—
full-time student
earnings
Nonstudent earnings—
part-time student
earnings
Full-time student
earnings as a % of
nonstudent earnings
Part-time student
earnings as a % of
nonstudent earnings
14,215
21,239
2,602
3,519
49
44
91
94
19,299
14,214
16,335
14,933
18,336
3,557
5,030
2,846
545
3,140
46
52
48
45
46
90
86
90
98
91
Note. 1994 earnings presented in current dollars as predicted from regression models.
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Journal of Education for Business
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TABLE 3. Mean Tuition, Financial Aid, and Graduate Management Admission Test (GMAT) Scores at Business
Schools Where GMAT Registrants Were Accepted, by Sex and Race Compared With All GMAT Registrantsa
Category
Sex
Women
Men
Race
White
Black
Latino
Asian American
All GMAT registrants
Tuition cost of obtaining
degree by attending
full time ($)
Tuition cost of obtaining
degree by attending
part time ($)
10,569
11,028
11,985
12,343
6,478
7,014
542
549
10,841
12,063
10,090
11,951
10,838
12,337
12,848
10,924
13,235
12,195
6,816
4,067
6,511
7,068
6,788
545
551
551
545
546
Average financial
aid award ($)
Average GMAT score
a
From Miller (1994).
TABLE 4. Variables Included in the Statistical Models
Variable
M
Demographic characteristics
Age
Race/Ethnicity
Black
Asian American
Latino
Married (yes)
Number of kids at home
Work experiencea
1–3 Years
3–7 Years
> 7 Years
Undergraduate education
Degree
BA in humanities
BA in science
BA in social science
GMAT score
% of sample from a less selective BA school
Undergraduate grade point average (4-point scale)
Graduate educationb
School with GMAT cutoff score > 650
School with GMAT cutoff score 600–650
School with GMAT cutoff score 500–600
Cost measures
Tuition to obtain degree full timec
Tuition to obtain degree part timec
Predicted earnings if not in school
%
27
16
10
17
36
0.35
31
27
23
8
26
15
508
37
3.06
11
25
45
$10,471
$11,352
$34,895
Note. Estimation sample differs from that in Table 3 because of some missing variables.
a
Before taking Graduate Management Admission Test. bThese are for the management school
attended, not included in the attendance models. cFor those not attending this was measured for
their first choice school.
along with the mean values for the
sample.
Using these variables, we first estimated the effect of cost on the decision
to attend graduate management school
and the effect on the probability of completing a graduate management degree
conditional upon having pursued one.
We next combined those estimates to
predict the effect of cost on the unconditional probability of completing a
management degree. That is, on the
probability of both entering a degree
program and completing it. To do this,
we estimated models of completion that
were conditional upon attending school
part time or full time. We then multiplied the probabilities from these models by the probability of attending in the
relevant way—part time or full time.
From the products of attendance and the
conditional completion probabilities,
we could estimate the unconditional
likelihood of a particular outcome like
completing or dropping out.
Figure 1 shows a simple schematic
for this calculation. The boxes on the
left-hand side represent probabilities of
attending part time, full time, or not at
all, respectively.
The boxes in the middle represent
probabilities of completing conditional
on part-time or full-time attendance. If
we multiply the left and center probabilities, we can sum over outcomes (boxes
of the same shade) to get unconditional
probabilities (the boxes on the right).
RESULTS
Effect of Cost on Probability of
Attendance and Conditional
Completion
Figures 2 and 3 show the predicted
effect of changes in opportunity cost
and tuition cost on the probability of
March/April 2006
193
Conditional Probablity
of Completing
Did Not
Attend
Unconditional Probability
of Completing
(Boxes of same shade are added together)
Did Not Start
Completed Full Time
Completed
Degree
Still Attending Full Time
Still Working
Toward Degree
Quit Full Time
Attended
Full Time
Not a Degree
Candidate
Completed Part Time
Attended
Part Time
Still Attending Part Time
Quit Part Time
FIGURE 1. Diagram illustrating the calculation of unconditional
probability.
Original Probability
$20K Less Opportunity Cost
$5K Less Tuition
0.6
0.5
0.4
Probability
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Probability of
Attending
0.3
0.2
0.1
0
Not Attend
Attend Full Time
Attend Part Time
Attendance
FIGURE 2. Estimated effect of opportunity cost on the decision to attend
graduate management school, 1991–1994. n = 1555.
attending graduate management school
and of completing a degree once
enrolled, respectively. We considered
two scenarios. In Scenario 1, we
assumed that nonstudent earnings, our
measure of opportunity cost in the statistical model, drops by $20,000 per
annum. In Scenario 2, the tuition cost of
194
Journal of Education for Business
obtaining a degree drops by $5,000.
Each of these values represents roughly
half of the average level of earnings or
tuition, respectively, for the average
sample member.
Figure 2 shows the impact of these
changes on attendance. The effect of the
change in opportunity cost is in the
expected direction; lowering the implicit cost of attendance by lowering opportunity cost tends to encourage a shift
toward full-time attendance. The disincentive to stay out of full-time school
seems to be slightly reduced. The probability of not going to school drops from
about .09 to .07. There is a somewhat
larger migration from part-time to fulltime attendance; the probability of
going part time drops from .55 to .48.
The combination of these influences is
that reducing nonstudent earnings by
$20,000 would increase the proportion
of full-time students from .37 to .45, a
small but nontrivial effect.
The third set of columns in Figure 2
represents the effect of a reduction in
explicit cost, or a reduction in tuition
cost. In contrast to other studies on business schools (Jantzen, 2000) and on college attendance decisions (Ganderton &
Santos, 1995), these results suggest a
small impact. A $5,000 dollar tuition
reduction (about half the average cost)
appears to have minimal influence on
the attendance decision.
Figure 3 shows the effect of a reduction in cost on the probability of completing a degree for those students who
matriculated in a graduate management
program sometime during the survey
period. Here, the predicted effects of
opportunity cost are somewhat surprising. Note from the right-hand side of the
figure that lower opportunity cost tends
to increase the probability of dropping
out. The probability of quitting the program rose from about .16 to about .23.
This increase in dropouts appears to
come at the expense of those who stay in,
but have not finished, rather than those
who finish. In other words, lower job
earnings tend to convert some of those
who take a relatively longer time to earn
their degrees into dropouts. It does not
seem to affect those who get their
degrees relatively more expeditiously.
This result may seem counterintuitive. One would expect those with relatively low forgone earnings to be less
likely to drop out and to be more willing
to keep plugging along in school
because they are sacrificing relatively
less by being there. There are two
potential explanations. The first is that
this result—that low earners are more
likely to drop out—is an artifact of the
$20K Less Opportunity Cost
$5K Less Tuition
0.6
0.5
0.4
Probability
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Original Probability
0.3
0.2
0.1
0
Will Finish
Will Not Complete On
Time
Will Drop Out
Completetion Status
FIGURE 3. Effect of opportunity cost on the probability of completing a
graduate management degree conditional upon having pursued one,
1991–1994. n = 1487.
way we have measured completion. For
our study, completing a degree means
completing it within the 4 years of our
survey period. It is possible that our
higher earners are less likely to have
dropped out by the time of the second
follow-up interview. If higher earnings
cause them to postpone entering management school, it could appear that
those with high opportunity cost drop
out less frequently. In this case, among
the lower earners we would observe
more students who have been in school
long enough to know they do not want
to continue.
A second potential explanation for
why low nonstudent earnings increase
the drop-out rate is that opportunity cost
is likely to act as a screen. Some students are more motivated than others to
work hard and to complete management
school. Presumably, those with lower
motivation are more likely to quit, but
they are also less likely to enroll in the
first place. It is plausible that high
opportunity cost keeps less motivated
students out of business school and
therefore, indirectly reduces the quit
rate. For example, one can imagine
some low earners, especially those who
are not employed, attending school
because they have little else to do. Such
low incentive may not sustain them
through a rigorous graduate program, so
they would more likely drop out. This
view is consistent with our finding that
lower earnings do not increase the proportion that completes the degree.
Those who finish in a timely fashion are
presumably more highly motivated than
those who do not (especially those who
attend full time) and higher opportunity
costs do not tempt the highly motivated
students to drop out of school.
In contrast to previous studies on
graduate school completion (Ehrenberg
& Mavros, 1995) and college completion (Light & Strayer, 2000), Figure 3
suggests that tuition appears to have little impact on the completion rate. This
is consistent with the attendance results.
Effect of Cost on Unconditional
Completion
Figure 2 shows the estimated effect of
opportunity cost on the decision to attend
graduate management school; Figure 3
considers the effect of opportunity cost
on the probability of completing a gradu-
ate management degree conditional upon
having pursued one. In Figure 4, we
combined the estimates in Figures 2 and
3 to predict the effect of opportunity cost
on the unconditional probability of completing a management degree (i.e., the
probability of both entering a degree program and completing it).
Lowering opportunity cost appears to
substantially improve the likelihood of
obtaining a degree (in a given time period) from about .24 to .40 (see Figure 4).
It also reduces the chances of still being
enrolled and increases the chances of
dropping out. However, given the way
in which we calculated the unconditional probabilities, they may not add up to
one. Given the results in Figures 2 and
3, the implication of Figure 4 is that
opportunity cost reduces the unconditional expected completion rate by shifting some potential full-timers into parttime programs or by causing some
students to delay entry into school.
Also, with high opportunity cost, more
people choose not to be candidates for
the degree. This finding is consistent
with the expectation that opportunity
cost discourages attendance, particularly
among less motivated students.
The Effect of Opportunity Cost
by Sex, Race, and Part-Time or
Full-Time Status
Next, we examined whether and how
the effect of opportunity cost varies
among students of different race, gender, or full-time or part-time status. Figure 5 shows the effect of opportunity
cost for women compared with men.
The differences between men and
women appear to be very small; for both
sexes, lowering opportunity cost
increases the proportion of full-timers,
mainly at the expense of part-timers.
The effect for men is slightly larger. It is
interesting to note that, when we segregate the sexes, both models predict a
larger effect of opportunity cost than did
the joint model for the two sexes. This is
because the joint model imposes the
restriction that all variables have the
same effect for men and women, an
assumption that may be too restrictive.
Figure 6 shows differences between
two aggregate racial groups: (a) Blacks
and Latinos, and (b) Whites and Asian
March/April 2006
195
lower opportunity cost shifts a larger
fraction of students into full-time attendance (a proportion of about .2 as
opposed to .12 for Blacks and Latinos).
Moreover, for Blacks and Latinos,
lower opportunity cost increases fulltime attendance by pulling more people
Original Probability
$20K Less Opportunity Cost
0.5
0.45
0.4
Probability
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Completed Degree
Not a Degree
Candidate
Working Toward
Degree
Degree Status
FIGURE 4. Effect of opportunity cost on the unconditional probability of
completing a management degree, 1991–1994. n = 1988.
Original Probability
from the “not attend” category and less
from the “attending part time” category
than occurs with Whites. Apparently,
higher opportunity cost tends to discourage proportionately more minority
candidates from pursuing graduate business education than it does for White
students.
Figures 7–9 show the predictions for
completion, differentiated by part-time
or full-time status (Figure 7), by sex
(Figure 8), and by race (Figure 9). Note
that, as in Figure 2, these completion
rates are conditional upon having
enrolled in a program. Figure 7 shows
that opportunity cost affects full- and
part-time students in somewhat different ways. In both cases, opportunity
cost moves a relatively small proportion of people out of the category of
“still attending.” Among full-timers,
these people tend to finish whereas,
among part-timers, they tend to drop
out. This finding reinforces our earlier
interpretation of the impact of opportunity cost on completion: it acts partly as
a screen. Surely less motivated students
will disproportionately attend part time,
so a screening effect should be more
noticeable among part-timers. Indeed,
among the full-timers, higher opportunity cost has virtually no effect on the
dropout rate.
As with the attendance models, the
impact of opportunity cost on completion seems to be noticeably different.
For both racial groups, lowering oppor-
$20K Less Opportunity Cost
Men, n = 1169
Women, n = 819
0.7
0.6
0.5
Probability
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Americans (many empirical studies
suggest similar labor market behavior
and results for Blacks and Latinos and
for Whites and Asian Americans).
Between races, the effect of opportunity
cost has a similar pattern but the magnitude varies somewhat. For Whites,
0.4
0.3
0.2
0.1
0
Not Attend
Attend Full Time Attend Part Time
Not Attend
Attendance
FIGURE 5. Effect of opportunity cost of attendance, by sex: 1991–1994.
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Journal of Education for Business
Attend Full Time
Attend Part Time
$20K Less Opportunity Cost
Black and Latino, n = 352
White and Asian American, n = 1636
0.6
0.5
Probability
0.4
0.3
0.2
0.1
0
Not Attend
Attend Full Time Attend Part Time
Not Attend
Attend Full Time Attend Part Time
Attendance
FIGURE 6. Effect of opportunity cost of attendance, by race: 1991–1994.
Original Probability
$20K Less Opportunity Cost
Attended Full Time, n = 681
Attended Part Time, n = 806
0.9
0.8
0.7
0.6
Probability
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Original Probability
0.5
0.4
0.3
0.2
0.1
0
Completed
Attending
Dropped Out
Completed
Attending
Dropped Out
Completion Status
FIGURE 7. Effect of opportunity cost on completion of degree, by part- or full-time status: 1991–1994.
March/April 2006
197
$20K Less Opportunity Cost
Women, n = 819
Men, n = 1165
0.6
0.5
Probability
0.4
0.3
0.2
0.1
0
Completed
Attending
Dropped Out
Completed
Attending
Dropped Out
Completion Status
FIGURE 8. Effect of opportunity cost on completion of degree, by sex.
Original Probability
$20K Less Opportunity Cost
Black and Latino, n = 352
White and Asian American, n = 1636
0.6
0.5
0.4
Probability
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Original Probability
0.3
0.2
0.1
0
Completed
Attending
Dropped Out
Completed
Attending
Dropped Out
Completion Status
FIGURE 9. Effect of opportunity cost on completion of degree, by race.
tunity cost increases drop-out rates,
which differ very little between the
198
Journal of Education for Business
sexes (Figure 8). However, with race
(Figure 9), the effects are proportionate-
ly greater for minorities. For Whites and
Asian Americans, opportunity cost also
Our final set of figures, Figures 10 and
11, show the influence of opportunity
cost and tuition at top-tier and second-tier
business programs, respectively. Schools
are ranked on the basis of competitiveness of admissions. We used a variable
developed by the Batelle Memorial Institute that reflects the minimum acceptable
GMAT score for a person to be admitted
to the program in question. Using this
GMAT-cutoff criterion, schools were
divided into four categories as indicated
in Table 4. It is clear from the tables that
schools that are more selective tend to
charge higher tuition—indeed, substantially higher tuition. For the average registrant, tuition at a top-tier school (GMAT
cutoff score > 650) was nearly three
times that at a lowest-tier school (GMAT
cutoff score < 500). Students at the toptier schools also faced higher opportunity
cost, presumably because the superior
credentials and abilities required for
acceptance by the top business school are
also rewarded in the job market.
Because elite schools are more expensive, in Figures 10 and 11 we used a much
larger decrement to tuition than we used
in Figure 2 ($20,000 compared with the
$5,000 in the earlier figure). The figure
shows that even this very large change in
tuition cost has a fairly small impact on
the likelihood of finishing a degree at an
elite school. Lower tuition raises the completion rate at the top schools by only
about .06 (see Figure 10). At second-tier
institutions, the predicted completion rate
actually falls slightly with lower tuition
(see Figure 11). The most noticeable
effect in Figures 10 and 11 is that of
opportunity cost on completion at the
highest ranked schools. Decreasing
opportunity cost raises the drop-out rate
very sharply, from .05 to .25 (Figure 10).
Most of the extra dropouts are shifted over
from completers (rather than those still
enrolled). As before, we attribute this find-
$5K Less Tuition
$20K Less Opportunity Cost
0.7
0.6
0.5
Probability
The Effect of Cost at
Top-Tier Schools
Original Probability
0.4
0.3
0.2
0.1
0
Completed
Dropped Out
Still Attending
Attending
FIGURE 10. The effect of changes in cost on completion of degree, by
rank of graduate school. Top Tier Schools (Graduate Management
Admission Test cutoff score > 650). n = 175
Original Probability
$20K Less Tuition
$20K Less Opportunity Cost
0.7
0.6
0.5
Probability
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tends to increase the probability of completing the degree versus still being in
school. For other minorities, the effect
is reversed. Thus, for Blacks and Latinos, higher earnings tend to discourage
completion, partly by extending their
length of study, but more significantly
by increasing their quit rate.
0.4
0.3
0.2
0.1
0
Completed
Dropped Out
Still Attending
Completion Status
FIGURE 11. The effect of changes in cost on completion of degree, by
rank of graduate school. Second tier schools (Graduate Management
Admission Test cutoff score 600–650). n = 364.
ing to the tendency of earnings to screen
out degree aspirants who are not highly
motivated. The effect appears to be even
stronger at elite institutions, where the
rigor of the program might be particularly
discouraging to less motivated students.
DISCUSSION
In this article, we examined the effect
of both tuition and opportunity cost on
the decision to attend graduate management school and, for those who attendMarch/April 2006
199
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ed, on the probability of completing a
degree within a given time period. One
important caveat should be stated
regarding these results. We directed our
survey only at people who registered to
take the GMAT. This limits our ability
to observe the extent to which tuition or
opportunity cost discourage, attendance
in a broader population. Because they
registered for the GMAT, we can presume that our sample members all seriously considered graduate management
school. It is quite conceivable that other
people were sufficiently discouraged by
opportunity cost or tuition and that they
never seriously contemplated business
school. Such people would never show
up in our sample. Our results, therefore,
could understate the influence of cost on
the decision to pursue a business degree.
The statistical models yielded several
interesting results. First, tuition is not a
major impediment to either attending
management school or completing a
degree. This is true even at elite institutions where tuition costs are much higher than average.
A more substantial impediment to getting an MBA (within a fixed period of
time) appears to be the implicit cost of
forgone earnings while in school. These
opportunity costs seem to operate in
three ways to delay or forestall completion of a degree. First, opportunity cost
seems to have a small tendency to discourage attendance. Second, high opportunity cost shifts a modest proportion of
students from full-time to part-time
attendance, thus slowing down completion of the degree within any given time
frame. Third, high opportunity cost lowers rather than raises the drop-out rate
among those who enroll in a degree program. We hypothesize that it does this by
acting as a screen and discouraging stu-
200
Journal of Education for Business
dents with low motivation from entering
programs. This screening effect appears
most pronounced at the elite institutions.
The impacts of tuition and opportunity cost do not vary greatly by gender.
However, higher opportunity cost tends
to discourage proportionately more
minority candidates than White students
from pursuing graduate business education. Also, the screening effect of opportunity cost appears more pronounced
among Blacks and Latinos. For these
minority students, higher earnings seem
to discourage completion, partly by
extending their length of study, but
more so by increasing their quit rate.
What are the implications of these
findings for policy toward graduate management education? One is that dollars
invested in financial aid may have less
impact on student enrollment and completion than was previously believed. A
second is that schools need to recognize
the power of forgone earnings as an
inhibitor of enrollment and completion.
Schools would be wise to find ways to
mitigate the earnings loss for part-time
students. More flexible class schedules
may be one example of a way to accommodate the part-time student. Also, for
an elite school, it may be worth ensuring
that the night (i.e., part-time) program is
not a poor cousin of the day (i.e., fulltime) program. Also, understanding the
effect of opportunity cost is especially
important because it is likely that the
most talented students are the ones with
the highest potential earnings.
ACKNOWLEDGMENTS
The authors are grateful to Jason Bent for valuable research assistance and to Mary Kay Dugan
and Mark Gritz for helpful suggestions. This study
was supported by the Battelle Memorial Institute
in Seattle, Washington, and by a grant from the
Grinnell College Faculty Grant Board.
NOTE
Correspondence concerning this article should
be addressed to Mark Montgomery, Department
of Economics, Grinnell College, Grinnell, IA
50112.
E-mail: MONTGOME@Grinnell.edu
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ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
The Effect of Tuition and Opportunity Cost
on the Pursuit and Completion of a Graduate
Management Degree
Mark Montgomery & Irene Powell
To cite this article: Mark Montgomery & Irene Powell (2006) The Effect of Tuition and
Opportunity Cost on the Pursuit and Completion of a Graduate Management Degree, Journal
of Education for Business, 81:4, 190-200, DOI: 10.3200/JOEB.81.4.190-200
To link to this article: http://dx.doi.org/10.3200/JOEB.81.4.190-200
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The Effect of Tuition and Opportunity Cost
on the Pursuit and Completion
of a Graduate Management Degree
MARK MONTGOMERY
IRENE POWELL
GRINNELL COLLEGE
GRINNELL, IOWA
ABSTRACT. In this study, the authors
used multivariate statistical analysis to
examine the impact of cost on the likelihood that a person will both enroll in and
complete a Master of Business Administration (MBA) program. They considered both
the explicit cost of paying tuition and the
implicit cost, or opportunity cost, of earnings foregone while in school. Results suggest that tuition is not a major impediment
to either pursuing or completing an MBA.
However, high opportunity cost tends to
reduce enrollment and degree completion.
Copyright © 2006 Heldref Publications
T
he few studies that exist on the
demand for graduate business
education (Jantzen, 2000; Montgomery,
2002) have focused on the impact of
tuition cost on the demand for a particular institution. We examined the
impact of the cost of obtaining a degree
on one’s decision to enroll in a graduate
management program, and on the likelihood of one completing a program once
enrolled in it. In our analysis, we considered more than just tuition cost.
Tuition is only the explicit cost of pursuing a graduate management degree.
There is also a substantial implicit cost
of lost earnings while attending school.
The latter is usually called the opportunity cost of obtaining the degree. We
considered two questions in this
research: (a) How do the explicit and
implicit costs influence the decision to
pursue a management degree? and (b)
how do these costs affect the likelihood
of completing the degree? The cost
effects were compared across demographic groups and between more competitive and less competitive business
schools. The data for this study came
from a unique longitudinal survey conducted with registrants for the Graduate
Management Admission Test (GMAT).
Review of the Literature
The research that is most relevant to
the present study is that done on graduate school attendance or completion
190
Journal of Education for Business
decisions. The majority of those
researchers focused only on determinants of matriculation (Eide, Brewer, &
Ehrenberg, 1998; Fox, 1992; Weiler,
1994). In two studies (Baker, 1998;
Ehrenberg & Mavros, 1995), the
researchers investigated determinants of
graduate school completion for samples
of students who had already made the
decision to attend. For example, Baker
used a set of applicants for fellowships
for science and engineering graduate
school who all were going to attend
their respective programs. Ehrenberg
and Mavros used data on students
already enrolled in graduate programs
in four disciplines. By using data on students who have already made the decision to attend, sample selection might
result in biased estimates of the effects
of factors, such as ability, gender, or
race, on the probability of completion.
For example, if ability is correlated with
the probability of attendance—which it
surely is—then the effect of ability on
completion for the group of attendees
will be biased. In addition, by using data
only from students who were enrolled,
earlier researchers could not take into
account the effect of cost on the behaviors of people who had abandoned plans
to attend precisely because the costs
were prohibitive. In the current study,
we looked at such people.
The aforementioned researchers analyzed attendance or completion in either
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PhD programs or in both PhD and professional schools combined, but none
considered business schools. They also
used data on individual students. However, Jantzen (2000) attempted to identify the factors that influence the demand
for U.S. graduate business programs
using data on business schools and their
enrollments. He found that enrollment
at individual business schools was negatively affected by tuition costs and positively affected by quality and being in a
generally high-demand area. Even so,
because Jantzen used data on schools,
not individuals, he could say nothing
about the effect of demographic characteristics on demand for business education, especially how they interact with
costs. However, individual data provide
insight on such issues, such as, showing
whether minority students are more sensitive to costs than are White students.
In our research, we took advantage of
a unique longitudinal survey of GMAT
registrants to develop a multivariate statistical analysis of a sequential set of
decisions made by individuals who contemplated attending business school.
We noted students’ choices among three
enrollment alternatives: To pursue a
Master of Business Administration
(MBA) degree full time, part time, or
not to pursue one at all. We also noted
whether, having enrolled in an MBA
program, students decided to complete
the degree or drop out or were still pursuing it at the time of the last interview.
The methodology we used here, multivariate analysis of sequential decisions,
follows that of a small number of previous studies in which researchers examined college-level attendance and completion (Ganderton & Santos, 1995;
Light & Strayer, 2000, 2002; Venti &
Wise, 1983). In particular, Light and
Strayer (2002) used data on individual
students and their schools to focus on
the effect of race on college attendance
and completion in a sequential choice
model. Controlling for other variables,
they found that minorities are more likely than Whites to attend college and
more likely than observationally equivalent Whites to graduate from college.
However, they found that the unconditional likelihood of earning a degree is
lower for Blacks than for Whites. This
finding emphasizes the importance of
using a nested choice model to examine
attendance and completion of graduate
school programs. The GMAT registrant
survey used in this study made it possible to examine more carefully the effect
of both the explicit and implicit costs of
obtaining an MBA degree on the probability of attendance and completion as
compared with previous studies.
METHOD
In this study, we used the GMAT Registrant Survey, sponsored by the Graduate Management Admission Council, the
organization that administers the GMAT.
The Battelle Memorial Institute in Seattle, Washington, designed the survey
instruments and collected the data. The
survey involved individuals who registered to take the GMAT on test dates
between June 1990 and March 1991.
The registrants were surveyed in three
waves between 1991 and 1994. There
were 4,333 registrants who completed
all three waves of the survey. A large
fraction of those interviewed never pursued graduate business education; many
never even bothered to take the GMAT.
In our study, we relied on a subsample of
1,988 GMAT registrants who applied to,
and were accepted by, at least one graduate management program. Table 1
shows the proportion of sample members who applied to, attended, and completed business school.
We supplemented data from the survey questionnaire with information from
the Graduate Management Admissions
Council’s own registration and test
records. We obtained information about
sample members’ undergraduate schools
from Barron’s Profiles of American Colleges (1992). Finally, we took data on
the characteristics of graduate business
programs from Barron’s Guide to Graduate Business Schools (Miller, 1994).
Estimating the Cost of Attending
Graduate Management School
Opportunity Cost Estimates
The explicit cost of going to business
school (the tuition) understandably
might have a direct effect on one’s decision to attend school; however, the theoretical effect of opportunity cost is
slightly subtler. The key element in
opportunity cost is the income foregone
through lost earnings. There are several
ways in which going to graduate school
reduces earnings. Most obviously, of
course, it is quite difficult to be a fulltime student while trying to hold down
a full-time job. However, the majority of
graduate management students do not
attend full time; many pursue the degree
while working a regular job. Even so,
there are still opportunity costs. To the
extent that more time devoted to the job
translates into promotion and pay raises,
TABLE 1. Outcomes of Business School Application and Attendance for
Those Involved in Completing the Graduate Management Admission
Registrant Survey
Status
Applied and accepted
Attended
Full time
Completed degree
Still enrolled
Dropped out
Part time
Completed degree
Still enrolled
Dropped out
Did not attend
NA
Did not apply or were not accepted
n
%
1,988
46
681
502
144
35
806
215
404
187
168
333
2,345
34
74
21
5
40
27
50
23
9
16
54
Note. N = 4,333.
March/April 2006
191
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even part-time students may lag behind
coworkers who are unencumbered by
classes, exams, and homework. Moreover, the decision to take night classes
can constrain the kind of day job available to the student.
Opportunity cost is difficult to measure. It cannot be observed directly, like
salary or income, because it involves an
alternative that the student did not
choose. Therefore, it is necessary to predict opportunity cost. This is done using
the standard econometric technique of
estimating a multivariate regression
equation that relates earnings to individual characteristics, such as education,
work experience, race, and gender. We
used regression analysis to relate earnings to personal characteristics for fulltime students, part-time students, and
those who were not in school. By estimating that relationship, it was possible
to predict what a given person would
earn in the job market from observing
what similar people tended to earn.
In most studies that involve predicted
earnings, researchers have to estimate
the wage equations with the same sample to which the coefficients are applied.
However, we were able to avoid this by
taking advantage of the 1986 MBA New
Matriculants Survey conducted by the
National Opinion Research Center of
the University of Chicago and also
sponsored by the Graduate Management Admission Council. Regressions
from the New Matriculants Survey provided earnings coefficients that we then
applied to the individual characteristics
of respondents to the GMAT survey to
predict earnings for GMAT registrants.
The predicted earnings created by
applying the regression coefficients to
the GMAT survey data represent our
measures of opportunity cost.
Table 2 shows the predicted opportunity cost for full-time and part-time
study. To attend graduate management
school, a full-time student sacrifices
more than $18,000 per year (in 1994
dollars). This represents about 56% loss
of income when compared with what
the person could expect if not in business school. Part-timers sacrifice much
less, about $3,000 per year, or roughly
9% of what they would be earning if not
a business school student. Average
opportunity cost varies considerably by
sex. Full-time management school costs
men $21,239 in earnings versus $14,215
for women. However, because women
earn less in the job market, their proportionate sacrifice is much closer to
men’s: 51% of nonstudent earnings
compared with 56% for men. Comparing by race and ethnicity, Whites sacrifice more, in absolute dollars, than
Blacks, Latinos, or Asian Americans do,
to attend full time. However, in proportionate terms, Blacks have the highest
opportunity cost of full-time attendance,
but the lowest opportunity cost of parttime attendance.
Tuition Cost Estimates
To estimate tuition and financial aid,
we found tuition cost for each individual averaged over the schools for
which each was accepted for admission. The cost per credit hour was estimated from figures reported in Barron’s Guide to Graduate Business
Schools (Miller, 1994). We then multiplied the cost per credit hour times the
minimum number of credits required
for a degree. For schools that reported
only annual tuition, we multiplied
annual tuition times the number of
years required to obtain a degree. We
similarly used the average financial aid
award for each school to measure the
effect of financial aid.
Table 3 shows that full-time costs are
slightly lower on average than part-time
costs: $10,838 versus $12,195. Why are
part-time costs higher on average than
are full-time costs? One possible explanation is that demand for full-time slots
is more elastic than demand for parttime slots and, therefore, full-time slots
have a lower equilibrium price (this is
consistent with the observation that
part-time attendance is by far the most
popular choice).
Estimating Predicted Effects of
Cost on Graduate Management
School Attendance and
Completion
To obtain estimates of the effect of
cost on the probability of attending
graduate management school and the
probability of completing school, we
estimated multinomial logit models by
maximum likelihood. Table 4 shows
the variables included in the models
TABLE 2. Mean Opportunity Cost of Attending a Graduate Management Program Full Time and Part Time, by Sex
and Race Compared With All Graduate Management Admission Test (GMAT) Registrants
Category
Sex
Women
Men
Race
White
Black
Latino
Asian American
All GMAT registrants
Nonstudent earnings—
full-time student
earnings
Nonstudent earnings—
part-time student
earnings
Full-time student
earnings as a % of
nonstudent earnings
Part-time student
earnings as a % of
nonstudent earnings
14,215
21,239
2,602
3,519
49
44
91
94
19,299
14,214
16,335
14,933
18,336
3,557
5,030
2,846
545
3,140
46
52
48
45
46
90
86
90
98
91
Note. 1994 earnings presented in current dollars as predicted from regression models.
192
Journal of Education for Business
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TABLE 3. Mean Tuition, Financial Aid, and Graduate Management Admission Test (GMAT) Scores at Business
Schools Where GMAT Registrants Were Accepted, by Sex and Race Compared With All GMAT Registrantsa
Category
Sex
Women
Men
Race
White
Black
Latino
Asian American
All GMAT registrants
Tuition cost of obtaining
degree by attending
full time ($)
Tuition cost of obtaining
degree by attending
part time ($)
10,569
11,028
11,985
12,343
6,478
7,014
542
549
10,841
12,063
10,090
11,951
10,838
12,337
12,848
10,924
13,235
12,195
6,816
4,067
6,511
7,068
6,788
545
551
551
545
546
Average financial
aid award ($)
Average GMAT score
a
From Miller (1994).
TABLE 4. Variables Included in the Statistical Models
Variable
M
Demographic characteristics
Age
Race/Ethnicity
Black
Asian American
Latino
Married (yes)
Number of kids at home
Work experiencea
1–3 Years
3–7 Years
> 7 Years
Undergraduate education
Degree
BA in humanities
BA in science
BA in social science
GMAT score
% of sample from a less selective BA school
Undergraduate grade point average (4-point scale)
Graduate educationb
School with GMAT cutoff score > 650
School with GMAT cutoff score 600–650
School with GMAT cutoff score 500–600
Cost measures
Tuition to obtain degree full timec
Tuition to obtain degree part timec
Predicted earnings if not in school
%
27
16
10
17
36
0.35
31
27
23
8
26
15
508
37
3.06
11
25
45
$10,471
$11,352
$34,895
Note. Estimation sample differs from that in Table 3 because of some missing variables.
a
Before taking Graduate Management Admission Test. bThese are for the management school
attended, not included in the attendance models. cFor those not attending this was measured for
their first choice school.
along with the mean values for the
sample.
Using these variables, we first estimated the effect of cost on the decision
to attend graduate management school
and the effect on the probability of completing a graduate management degree
conditional upon having pursued one.
We next combined those estimates to
predict the effect of cost on the unconditional probability of completing a
management degree. That is, on the
probability of both entering a degree
program and completing it. To do this,
we estimated models of completion that
were conditional upon attending school
part time or full time. We then multiplied the probabilities from these models by the probability of attending in the
relevant way—part time or full time.
From the products of attendance and the
conditional completion probabilities,
we could estimate the unconditional
likelihood of a particular outcome like
completing or dropping out.
Figure 1 shows a simple schematic
for this calculation. The boxes on the
left-hand side represent probabilities of
attending part time, full time, or not at
all, respectively.
The boxes in the middle represent
probabilities of completing conditional
on part-time or full-time attendance. If
we multiply the left and center probabilities, we can sum over outcomes (boxes
of the same shade) to get unconditional
probabilities (the boxes on the right).
RESULTS
Effect of Cost on Probability of
Attendance and Conditional
Completion
Figures 2 and 3 show the predicted
effect of changes in opportunity cost
and tuition cost on the probability of
March/April 2006
193
Conditional Probablity
of Completing
Did Not
Attend
Unconditional Probability
of Completing
(Boxes of same shade are added together)
Did Not Start
Completed Full Time
Completed
Degree
Still Attending Full Time
Still Working
Toward Degree
Quit Full Time
Attended
Full Time
Not a Degree
Candidate
Completed Part Time
Attended
Part Time
Still Attending Part Time
Quit Part Time
FIGURE 1. Diagram illustrating the calculation of unconditional
probability.
Original Probability
$20K Less Opportunity Cost
$5K Less Tuition
0.6
0.5
0.4
Probability
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Probability of
Attending
0.3
0.2
0.1
0
Not Attend
Attend Full Time
Attend Part Time
Attendance
FIGURE 2. Estimated effect of opportunity cost on the decision to attend
graduate management school, 1991–1994. n = 1555.
attending graduate management school
and of completing a degree once
enrolled, respectively. We considered
two scenarios. In Scenario 1, we
assumed that nonstudent earnings, our
measure of opportunity cost in the statistical model, drops by $20,000 per
annum. In Scenario 2, the tuition cost of
194
Journal of Education for Business
obtaining a degree drops by $5,000.
Each of these values represents roughly
half of the average level of earnings or
tuition, respectively, for the average
sample member.
Figure 2 shows the impact of these
changes on attendance. The effect of the
change in opportunity cost is in the
expected direction; lowering the implicit cost of attendance by lowering opportunity cost tends to encourage a shift
toward full-time attendance. The disincentive to stay out of full-time school
seems to be slightly reduced. The probability of not going to school drops from
about .09 to .07. There is a somewhat
larger migration from part-time to fulltime attendance; the probability of
going part time drops from .55 to .48.
The combination of these influences is
that reducing nonstudent earnings by
$20,000 would increase the proportion
of full-time students from .37 to .45, a
small but nontrivial effect.
The third set of columns in Figure 2
represents the effect of a reduction in
explicit cost, or a reduction in tuition
cost. In contrast to other studies on business schools (Jantzen, 2000) and on college attendance decisions (Ganderton &
Santos, 1995), these results suggest a
small impact. A $5,000 dollar tuition
reduction (about half the average cost)
appears to have minimal influence on
the attendance decision.
Figure 3 shows the effect of a reduction in cost on the probability of completing a degree for those students who
matriculated in a graduate management
program sometime during the survey
period. Here, the predicted effects of
opportunity cost are somewhat surprising. Note from the right-hand side of the
figure that lower opportunity cost tends
to increase the probability of dropping
out. The probability of quitting the program rose from about .16 to about .23.
This increase in dropouts appears to
come at the expense of those who stay in,
but have not finished, rather than those
who finish. In other words, lower job
earnings tend to convert some of those
who take a relatively longer time to earn
their degrees into dropouts. It does not
seem to affect those who get their
degrees relatively more expeditiously.
This result may seem counterintuitive. One would expect those with relatively low forgone earnings to be less
likely to drop out and to be more willing
to keep plugging along in school
because they are sacrificing relatively
less by being there. There are two
potential explanations. The first is that
this result—that low earners are more
likely to drop out—is an artifact of the
$20K Less Opportunity Cost
$5K Less Tuition
0.6
0.5
0.4
Probability
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Original Probability
0.3
0.2
0.1
0
Will Finish
Will Not Complete On
Time
Will Drop Out
Completetion Status
FIGURE 3. Effect of opportunity cost on the probability of completing a
graduate management degree conditional upon having pursued one,
1991–1994. n = 1487.
way we have measured completion. For
our study, completing a degree means
completing it within the 4 years of our
survey period. It is possible that our
higher earners are less likely to have
dropped out by the time of the second
follow-up interview. If higher earnings
cause them to postpone entering management school, it could appear that
those with high opportunity cost drop
out less frequently. In this case, among
the lower earners we would observe
more students who have been in school
long enough to know they do not want
to continue.
A second potential explanation for
why low nonstudent earnings increase
the drop-out rate is that opportunity cost
is likely to act as a screen. Some students are more motivated than others to
work hard and to complete management
school. Presumably, those with lower
motivation are more likely to quit, but
they are also less likely to enroll in the
first place. It is plausible that high
opportunity cost keeps less motivated
students out of business school and
therefore, indirectly reduces the quit
rate. For example, one can imagine
some low earners, especially those who
are not employed, attending school
because they have little else to do. Such
low incentive may not sustain them
through a rigorous graduate program, so
they would more likely drop out. This
view is consistent with our finding that
lower earnings do not increase the proportion that completes the degree.
Those who finish in a timely fashion are
presumably more highly motivated than
those who do not (especially those who
attend full time) and higher opportunity
costs do not tempt the highly motivated
students to drop out of school.
In contrast to previous studies on
graduate school completion (Ehrenberg
& Mavros, 1995) and college completion (Light & Strayer, 2000), Figure 3
suggests that tuition appears to have little impact on the completion rate. This
is consistent with the attendance results.
Effect of Cost on Unconditional
Completion
Figure 2 shows the estimated effect of
opportunity cost on the decision to attend
graduate management school; Figure 3
considers the effect of opportunity cost
on the probability of completing a gradu-
ate management degree conditional upon
having pursued one. In Figure 4, we
combined the estimates in Figures 2 and
3 to predict the effect of opportunity cost
on the unconditional probability of completing a management degree (i.e., the
probability of both entering a degree program and completing it).
Lowering opportunity cost appears to
substantially improve the likelihood of
obtaining a degree (in a given time period) from about .24 to .40 (see Figure 4).
It also reduces the chances of still being
enrolled and increases the chances of
dropping out. However, given the way
in which we calculated the unconditional probabilities, they may not add up to
one. Given the results in Figures 2 and
3, the implication of Figure 4 is that
opportunity cost reduces the unconditional expected completion rate by shifting some potential full-timers into parttime programs or by causing some
students to delay entry into school.
Also, with high opportunity cost, more
people choose not to be candidates for
the degree. This finding is consistent
with the expectation that opportunity
cost discourages attendance, particularly
among less motivated students.
The Effect of Opportunity Cost
by Sex, Race, and Part-Time or
Full-Time Status
Next, we examined whether and how
the effect of opportunity cost varies
among students of different race, gender, or full-time or part-time status. Figure 5 shows the effect of opportunity
cost for women compared with men.
The differences between men and
women appear to be very small; for both
sexes, lowering opportunity cost
increases the proportion of full-timers,
mainly at the expense of part-timers.
The effect for men is slightly larger. It is
interesting to note that, when we segregate the sexes, both models predict a
larger effect of opportunity cost than did
the joint model for the two sexes. This is
because the joint model imposes the
restriction that all variables have the
same effect for men and women, an
assumption that may be too restrictive.
Figure 6 shows differences between
two aggregate racial groups: (a) Blacks
and Latinos, and (b) Whites and Asian
March/April 2006
195
lower opportunity cost shifts a larger
fraction of students into full-time attendance (a proportion of about .2 as
opposed to .12 for Blacks and Latinos).
Moreover, for Blacks and Latinos,
lower opportunity cost increases fulltime attendance by pulling more people
Original Probability
$20K Less Opportunity Cost
0.5
0.45
0.4
Probability
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Completed Degree
Not a Degree
Candidate
Working Toward
Degree
Degree Status
FIGURE 4. Effect of opportunity cost on the unconditional probability of
completing a management degree, 1991–1994. n = 1988.
Original Probability
from the “not attend” category and less
from the “attending part time” category
than occurs with Whites. Apparently,
higher opportunity cost tends to discourage proportionately more minority
candidates from pursuing graduate business education than it does for White
students.
Figures 7–9 show the predictions for
completion, differentiated by part-time
or full-time status (Figure 7), by sex
(Figure 8), and by race (Figure 9). Note
that, as in Figure 2, these completion
rates are conditional upon having
enrolled in a program. Figure 7 shows
that opportunity cost affects full- and
part-time students in somewhat different ways. In both cases, opportunity
cost moves a relatively small proportion of people out of the category of
“still attending.” Among full-timers,
these people tend to finish whereas,
among part-timers, they tend to drop
out. This finding reinforces our earlier
interpretation of the impact of opportunity cost on completion: it acts partly as
a screen. Surely less motivated students
will disproportionately attend part time,
so a screening effect should be more
noticeable among part-timers. Indeed,
among the full-timers, higher opportunity cost has virtually no effect on the
dropout rate.
As with the attendance models, the
impact of opportunity cost on completion seems to be noticeably different.
For both racial groups, lowering oppor-
$20K Less Opportunity Cost
Men, n = 1169
Women, n = 819
0.7
0.6
0.5
Probability
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Americans (many empirical studies
suggest similar labor market behavior
and results for Blacks and Latinos and
for Whites and Asian Americans).
Between races, the effect of opportunity
cost has a similar pattern but the magnitude varies somewhat. For Whites,
0.4
0.3
0.2
0.1
0
Not Attend
Attend Full Time Attend Part Time
Not Attend
Attendance
FIGURE 5. Effect of opportunity cost of attendance, by sex: 1991–1994.
196
Journal of Education for Business
Attend Full Time
Attend Part Time
$20K Less Opportunity Cost
Black and Latino, n = 352
White and Asian American, n = 1636
0.6
0.5
Probability
0.4
0.3
0.2
0.1
0
Not Attend
Attend Full Time Attend Part Time
Not Attend
Attend Full Time Attend Part Time
Attendance
FIGURE 6. Effect of opportunity cost of attendance, by race: 1991–1994.
Original Probability
$20K Less Opportunity Cost
Attended Full Time, n = 681
Attended Part Time, n = 806
0.9
0.8
0.7
0.6
Probability
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Original Probability
0.5
0.4
0.3
0.2
0.1
0
Completed
Attending
Dropped Out
Completed
Attending
Dropped Out
Completion Status
FIGURE 7. Effect of opportunity cost on completion of degree, by part- or full-time status: 1991–1994.
March/April 2006
197
$20K Less Opportunity Cost
Women, n = 819
Men, n = 1165
0.6
0.5
Probability
0.4
0.3
0.2
0.1
0
Completed
Attending
Dropped Out
Completed
Attending
Dropped Out
Completion Status
FIGURE 8. Effect of opportunity cost on completion of degree, by sex.
Original Probability
$20K Less Opportunity Cost
Black and Latino, n = 352
White and Asian American, n = 1636
0.6
0.5
0.4
Probability
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Original Probability
0.3
0.2
0.1
0
Completed
Attending
Dropped Out
Completed
Attending
Dropped Out
Completion Status
FIGURE 9. Effect of opportunity cost on completion of degree, by race.
tunity cost increases drop-out rates,
which differ very little between the
198
Journal of Education for Business
sexes (Figure 8). However, with race
(Figure 9), the effects are proportionate-
ly greater for minorities. For Whites and
Asian Americans, opportunity cost also
Our final set of figures, Figures 10 and
11, show the influence of opportunity
cost and tuition at top-tier and second-tier
business programs, respectively. Schools
are ranked on the basis of competitiveness of admissions. We used a variable
developed by the Batelle Memorial Institute that reflects the minimum acceptable
GMAT score for a person to be admitted
to the program in question. Using this
GMAT-cutoff criterion, schools were
divided into four categories as indicated
in Table 4. It is clear from the tables that
schools that are more selective tend to
charge higher tuition—indeed, substantially higher tuition. For the average registrant, tuition at a top-tier school (GMAT
cutoff score > 650) was nearly three
times that at a lowest-tier school (GMAT
cutoff score < 500). Students at the toptier schools also faced higher opportunity
cost, presumably because the superior
credentials and abilities required for
acceptance by the top business school are
also rewarded in the job market.
Because elite schools are more expensive, in Figures 10 and 11 we used a much
larger decrement to tuition than we used
in Figure 2 ($20,000 compared with the
$5,000 in the earlier figure). The figure
shows that even this very large change in
tuition cost has a fairly small impact on
the likelihood of finishing a degree at an
elite school. Lower tuition raises the completion rate at the top schools by only
about .06 (see Figure 10). At second-tier
institutions, the predicted completion rate
actually falls slightly with lower tuition
(see Figure 11). The most noticeable
effect in Figures 10 and 11 is that of
opportunity cost on completion at the
highest ranked schools. Decreasing
opportunity cost raises the drop-out rate
very sharply, from .05 to .25 (Figure 10).
Most of the extra dropouts are shifted over
from completers (rather than those still
enrolled). As before, we attribute this find-
$5K Less Tuition
$20K Less Opportunity Cost
0.7
0.6
0.5
Probability
The Effect of Cost at
Top-Tier Schools
Original Probability
0.4
0.3
0.2
0.1
0
Completed
Dropped Out
Still Attending
Attending
FIGURE 10. The effect of changes in cost on completion of degree, by
rank of graduate school. Top Tier Schools (Graduate Management
Admission Test cutoff score > 650). n = 175
Original Probability
$20K Less Tuition
$20K Less Opportunity Cost
0.7
0.6
0.5
Probability
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tends to increase the probability of completing the degree versus still being in
school. For other minorities, the effect
is reversed. Thus, for Blacks and Latinos, higher earnings tend to discourage
completion, partly by extending their
length of study, but more significantly
by increasing their quit rate.
0.4
0.3
0.2
0.1
0
Completed
Dropped Out
Still Attending
Completion Status
FIGURE 11. The effect of changes in cost on completion of degree, by
rank of graduate school. Second tier schools (Graduate Management
Admission Test cutoff score 600–650). n = 364.
ing to the tendency of earnings to screen
out degree aspirants who are not highly
motivated. The effect appears to be even
stronger at elite institutions, where the
rigor of the program might be particularly
discouraging to less motivated students.
DISCUSSION
In this article, we examined the effect
of both tuition and opportunity cost on
the decision to attend graduate management school and, for those who attendMarch/April 2006
199
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ed, on the probability of completing a
degree within a given time period. One
important caveat should be stated
regarding these results. We directed our
survey only at people who registered to
take the GMAT. This limits our ability
to observe the extent to which tuition or
opportunity cost discourage, attendance
in a broader population. Because they
registered for the GMAT, we can presume that our sample members all seriously considered graduate management
school. It is quite conceivable that other
people were sufficiently discouraged by
opportunity cost or tuition and that they
never seriously contemplated business
school. Such people would never show
up in our sample. Our results, therefore,
could understate the influence of cost on
the decision to pursue a business degree.
The statistical models yielded several
interesting results. First, tuition is not a
major impediment to either attending
management school or completing a
degree. This is true even at elite institutions where tuition costs are much higher than average.
A more substantial impediment to getting an MBA (within a fixed period of
time) appears to be the implicit cost of
forgone earnings while in school. These
opportunity costs seem to operate in
three ways to delay or forestall completion of a degree. First, opportunity cost
seems to have a small tendency to discourage attendance. Second, high opportunity cost shifts a modest proportion of
students from full-time to part-time
attendance, thus slowing down completion of the degree within any given time
frame. Third, high opportunity cost lowers rather than raises the drop-out rate
among those who enroll in a degree program. We hypothesize that it does this by
acting as a screen and discouraging stu-
200
Journal of Education for Business
dents with low motivation from entering
programs. This screening effect appears
most pronounced at the elite institutions.
The impacts of tuition and opportunity cost do not vary greatly by gender.
However, higher opportunity cost tends
to discourage proportionately more
minority candidates than White students
from pursuing graduate business education. Also, the screening effect of opportunity cost appears more pronounced
among Blacks and Latinos. For these
minority students, higher earnings seem
to discourage completion, partly by
extending their length of study, but
more so by increasing their quit rate.
What are the implications of these
findings for policy toward graduate management education? One is that dollars
invested in financial aid may have less
impact on student enrollment and completion than was previously believed. A
second is that schools need to recognize
the power of forgone earnings as an
inhibitor of enrollment and completion.
Schools would be wise to find ways to
mitigate the earnings loss for part-time
students. More flexible class schedules
may be one example of a way to accommodate the part-time student. Also, for
an elite school, it may be worth ensuring
that the night (i.e., part-time) program is
not a poor cousin of the day (i.e., fulltime) program. Also, understanding the
effect of opportunity cost is especially
important because it is likely that the
most talented students are the ones with
the highest potential earnings.
ACKNOWLEDGMENTS
The authors are grateful to Jason Bent for valuable research assistance and to Mary Kay Dugan
and Mark Gritz for helpful suggestions. This study
was supported by the Battelle Memorial Institute
in Seattle, Washington, and by a grant from the
Grinnell College Faculty Grant Board.
NOTE
Correspondence concerning this article should
be addressed to Mark Montgomery, Department
of Economics, Grinnell College, Grinnell, IA
50112.
E-mail: MONTGOME@Grinnell.edu
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