Calculating College Degree ROI

With the economy still lagging, jobs in short supply (particularly for recent college grads), and some private schools charging upwards of $50,000 a year to attain an undergraduate college degree, is it all worth it?  Is six figures of debt for that ol’ sheepskin a worthwhile investment, particularly in the current job market?

These are some of the questions that were recently addressed by Bloomberg Businessweek in its June 28-July 4, 2010 edition.  Using data from PayScale, Businessweek set out to calculate the true return on investment for a postsecondary education. And the results were particularly interesting.  (As an aside, it is important to note that Businessweek has really started to step up its coverage of education, both K-12 and postsec, issues.)

First off, Businessweek looked at those schools posting the best ROI.  Not surprising, they are all private institutions.  Tops was MIT, where $189,300 in costs (tuition and fees) to attain the degree nets nearly $1.7 million ROI.  For Businessweek’s purposes, ROI is defined as additional wages earned over a lifetime when compared to a typical high school graduate.  So if you are debating between settling for that high school diploma or enrolling in MIT, siding with MIT will net you $1.7 million more in your wallet in the long term.

Following MIT was CalTech ($1.64M ROI), Harvard ($1.63M), Harvey Mudd ($1.63M), Dartmouth ($1.59M), Stanford ($1.57M), Princeton ($1.52M), Yale ($1.39M), Notre Dame ($1.38M), and UPenn ($1.36M).  Boy, Eduflack is really glad that the Eduwife holds that bachelor’s and master’s from Stanford and that doctorate from UPenn.  I’m just waiting to live that lifestyle to which I could become accustomed.

Perhaps more interesting was the comparisons of types of colleges, looking at their 30-year net return on investment.  Ivies scored highest, at $1.4MROI.  Private colleges offered an ROI of $559,200, with public colleges coming in at $322,500.

And if you truly want to look at a college education as an investment, a college degree ROI offers a 9 percent return.  Compare that with 11.1 percent return investing in the S&P 500, a 4 percent return investing in 30-year Treasuries, and (despite the TV  commercials) a 2.6 percent return investing in gold.

So why is this so important?  First, there is clearly value in obtaining a college degree.  But we’ve always known that.  For years, the College Board has offered that one holding a college degree will earn $1 million more in a lifetime than one with just a high school diploma.  (Though researchers like Mark Schneider have countered that the true ROI is closer to $275,000, when you calculate the cost of attaining that college degree and the lost years of wage earning to go to college).  So yes, a college degree can be worth the time and expense.

But what Businessweek (and Payscale) clearly demonstrate is the type of college chosen is just as important as whether one goes to college.  No surprise, Ivies offer the greatest ROI.  Looking at public colleges in particular, one has to wonder what happens to ROI when you remove the so-called Public Ivies like the University of Virginia, Michigan, Berkeley, and such.  What is the ROI for attending an open-enrollment public institution?  Are there institutions out there that provide little, or no, ROI? 

Of course, all of this is just looking at the ROI for graduating from these institutions of higher education.  What about the ROI for those who complete three years of college?  Or for those who drop out after the first year?  Is there a value to encouraging all to attend college, even if they are emotionally or academically unprepared for the challenge, knowing that they may drop out that first year?  Yes, there is more to college than ROI, and some will argue the lessons learned in even one year of college are worth it, but that is a harder and harder argument to make as student loans come due and that dream job is nowhere to be found in daylight.

These Businessweek numbers raise a lot of questions that the higher education community must begin to address.  We’re all familiar with colleges who market themselves by talking about how low their acceptance rate is and how high their average SAT scores are.  Imagine those marketing efforts if IHEs are able to talk about the ROI for graduates, the percentage of recent graduates who are employed, the average salary for such grads, and other such measures?  It could truly revolutionize the process of choosing a college, while finally refocusing colleges and universities on truly serving the customer — the student.

9 thoughts on “Calculating College Degree ROI

  1. Is it anti-education to calculate the ROI on any degree? Even President Obama in his first speech to the Congress made an aside “and we know how expensive college is in America”. The numbers are changing daily since the market will not reward degree holders as much as in the past. Some companies in Chicago are declining to pay for advanced education or to reward for it. The true calculation of a graduate degree must take into account “pride” or “more likely to vote” as a dollar value only estimable to the student. However the loss of income (opportunity cost) while in school must certanly be calculated. If you become a parent and the woman or man spends more time at home helping to raise their children what economic impact is there for the ROI? Most educational models (offered by universities) are too simple. Most thoughtful models are too complex with dozens of potential variable to value. For most of us, most of the time and increasingly for undergraduate degrees as well as graduate degrees – part-time degrees may be the answer to value education and help the parent’s save their retirement funds.

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