Price Elasticity of Prestige
The relationship between institution selectivity and graduate earnings is real but nonlinear. Tuvelan quantifies exactly where the prestige premium flattens and where paying more stops paying off.
What Is PEP?
Price Elasticity of Prestige (PEP) measures how much additional earnings premium each additional dollar of tuition buys. It adapts the Third Way “Price-to-Earnings Premium” concept into a marginal analysis framework:
A PEP of 1.0 means each additional dollar spent on tuition generates exactly one additional dollar of lifetime earnings premium. Above 1.0, the extra spending is amplified. Below 1.0, you are overpaying for the marginal prestige increment.
The baseline Third Way PEP score (years to recoup net cost) is also computed: PEP_years = net_cost / (median_alumni_earnings - median_hs_earnings). A score of 2.0 means two years of earnings premium covers the full cost. Scores above 10 indicate poor financial return.
Selectivity and Earnings: The Data
Using College Scorecard admission rate data and 10-year post-entry median earnings, we observe a clear but diminishing relationship between selectivity and earnings:
< 10% Admit Rate
Median 10-year earnings: ~$90,000-$110,000. These institutions (Ivy League, Stanford, MIT) command the highest premiums, but net costs often exceed $60,000/year even after aid.
10-25% Admit Rate
Median 10-year earnings: ~$70,000-$90,000. Highly selective universities and top publics. The earnings gap from Tier 1 is smaller than the cost gap, making this the highest-ROI tier for many families.
25-50% Admit Rate
Median 10-year earnings: ~$55,000-$70,000. Strong state flagships and mid-tier privates. In-state tuition at these schools often delivers the best absolute IRR.
> 50% Admit Rate
Median 10-year earnings: ~$38,000-$55,000. Open-admission and less selective institutions. ROI varies enormously by major -- STEM degrees at Tier 4 schools often outperform humanities degrees at Tier 2.
Diminishing Returns Analysis
The critical finding from our cross-institutional analysis is that the marginal prestige premium drops sharply once you pass the ~20th percentile of selectivity. The pattern:
- Tier 4 to Tier 3: Large earnings jump (~$15,000-20,000 at 10 years) for a modest cost increase. PEP > 2.0 for most majors.
- Tier 3 to Tier 2: Moderate earnings jump (~$10,000-15,000) for a significant cost increase. PEP ~1.0-1.5 depending on in-state vs. out-of-state.
- Tier 2 to Tier 1: Small earnings jump (~$5,000-15,000) for the largest cost increase. PEP drops below 0.5 for most combinations. The brand name is worth real money only in finance, consulting, and a handful of other fields where employer prestige-filtering is systematic.
This does not mean elite schools are bad investments. It means the marginal dollar spent on prestige has diminishing returns, and for most families, the financially optimal choice is a Tier 2 or strong Tier 3 institution -- particularly at in-state tuition rates.
Major x Prestige Interaction
The prestige premium is not uniform across fields of study. Tuvelan computes PEP separately for each CIP code cluster to capture these interaction effects:
High Prestige Sensitivity
Finance, management consulting, law (pre-law track). Employers in these fields systematically filter on institution brand. The earnings gap between Tier 1 and Tier 3 can exceed $40,000/year.
Low Prestige Sensitivity
Nursing, engineering (ABET-accredited), accounting, education. Licensing and accreditation standardize quality signals. A nursing degree from a state school pays nearly identically to one from a private university.
This interaction is why blanket advice to “go to the best school you can” or “save money at a state school” is wrong for roughly half of students. The right answer depends on the intersection of your target field and the institution’s selectivity tier.
API Endpoint
The PEP score and selectivity tier data are included in the standard calculation response. You can also query institution-level PEP data directly.
/v1/institutions/searchcurl https://tuvelan-api.smarttechinvest.com/v1/institutions/search?q=Georgia+Tech \ -H "X-API-Key: tuv_your_api_key_here"
The institution response includes selectivity_tier, admit_rate, pep_years, and pep_elasticity fields. The calculate endpoint adds major-specific PEP interaction scores.