College is Not Always a Good Investment

April 7, 2011

Today, we released our annual study with Bloomberg BusinessWeek on the return on investment (ROI) in education for 691 bachelor's degree granting schools.

As college costs continue to rise, the justification for paying these costs becomes ever more important. What better justification is there but a measure of their future payoff? In other words, is attending college a good investment in terms of the pay increase it offers over a high school degree?

The PayScale ROI study helps to answer this question, but the answer is not a simple yes or no. Whether attending college is a good investment or not depends upon many factors, such as the cost incurred, graduation rates at the school, major choice, and the typical pay of the school's graduates.

In this post I will briefly discuss the methodology of the study, how it changed from last year, and some key insights from the data.

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How do we measure College ROI?

Our main measure for College ROI is the 30-year Net Return on Investment (2011 Dollars). This ROI calculation takes in four key factors:

Cost of Attending College — tuition and fees, room and board, books and supplies (Investment in College).
Earnings of Bachelor Degree Graduates — this is simply the median pay of bachelor graduates from the school who hold no higher degrees.
Foregone Wages — these are the wages one could have earned if they worked straight out of high school, rather than go to college. This is known as an opportunity cost.
Graduation Rates — The future earnings of attending college strongly depend upon whether you graduate or not.

Taking these four factors, we calculate the 30-year Net ROI using the following steps:

Sum up the median pay for bachelor graduates who graduate between 1981 and 2010 from a given school. Note, we are using data over the last year and so these earnings figures are in current collars.
Subtract the earnings of a typical high school graduate 34-36 years after graduation. Note, the additional 4-6 years incorporates the high school wages forgone by attending college.
Subtract the total cost of attending college for a 2010 graduate.
Lastly, multiply the result by the graduation rate.

See the full methodology for more detail.

For example, assume we have a school where the Earnings Differential (Bachelor Graduate earnings less the High School Graduate earnings) is $1,000,000, the costs of attendance are $200,000 and the graduation rate is 80%. Using the steps above, we arrive at a 30-year Net ROI of $640,000.

Main Changes from Last Year:

There are four main changes from last year's ROI Package:

We included over a 100 more schools mostly based upon requests from schools not included last year.
Rather than just specify whether a school is public or private, we also categorize the schools into the following types, when applicable:
- Arts, Music & Design
- Business
- Engineering
- Ivy League
- Liberal Arts
- Private Research University
Based on feedback, we utilized a weighted calculation of the cost of attending school that factors in the percentage of those who graduate in 4,5, and 6 years
- Last year, we simply defined schools as being 4, 5, or 6 year schools based upon the typical time to graduate and calculated their total cost based on this categorization.
- This year, we instead calculate a weighted average cost based on the number of years it actually took students to graduate.
We produced an ROI calculation that incorporates Financial Aid in the form of average grants (local, state, federal or institutional) received by those who get grants.
- This reduces the cost of attending school by the average amount of grants received.
- Note: Very few people actually receive what is reported as the "average" amount. Typically students will either get a large portion of their education covered by grants, or little to no amount covered.

College: The Million Dollar Return?

The 5 schools with the highest 30-year Net ROI are:

Caltech — $1,713,000
Harvey Mudd College — $1,622,000
MIT — $1,518,000
Princeton — $1,494,000
Stanford — $1,478,000

Unsurprisingly, the top of the list is dominated by well-renowned schools, engineering schools and Ivy League Schools. For these schools, even paying full freight is worth it because they truly offer $1,000,000+ returns.

However, the $1,000,000 return for a college education assured by many is only achieved by the typical graduates of 30 schools on the list — a mere 4% of the total number of schools in the study!

Those in the bottom half of the list are hard pressed to even earn a $300,000 return. In fact, for schools at the very bottom of the list typical graduates will see a return less than $50,000!

The 5 schools with the lowest 30-year Net ROI are:

Shaw University — $15,480
University of North Carolina at Pembroke — $22,500 (for out-of-state students)
Davenport University — $27,790
Chicago State University — $34,860 (for out-of-state students)
University of Arkansas at Little Rock — $35,890

As you can see, these numbers are a far cry from a $1,000,000 return.

It Pays to be an Engineer

The three schools with the highest 30-year Net ROI are Engineering Schools (Caltech, Harvey Mudd, and MIT). In fact, roughly a third of the top 20 schools are Engineering and no Engineering schools are in the bottom half of the rankings.

One thing that can hurt Engineering schools is graduation rates. The average graduation rate across the Engineering schools included on the list is 67% (from 91% at Harvey Mudd and MIT to 28% at Southern Polytechnic State University).

Since our ROI dollar figure is weighted by the graduation rate, a low graduation rate can really hurt. If we instead simply calculate the ROI as the difference between college graduate and high school graduate earnings and subtract the cost of school, in other words the ROI for those who earn a degree, than the picture is even brighter for engineering schools. With this change, now:

6 of the top 10 Schools are Engineering Schools
Over half of the top 20 schools are Engineering
There are no Engineering Schools in the bottom 85% of the rankings

Therefore it pays to be an engineer, especially one who graduates. 🙂

One way to maximize your ROI on college is to earn what you are worth. Unsure of the type of pay you can expect with your job? When you want powerful salary data and comparisons customized for your exact position or job offer, be sure to build a complete profile by taking PayScale's full salary survey.

Regards,

Katie Bardaro
Research Analyst, PayScale, Inc.