How to Measure the ROI of a College Education
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- Several organizations have calculated a college education's return on investment.
- All calculations use income to determine ROI, leaving out other measures of success.
- ROI studies don't consider college outcomes based on major and personal fulfillment.
Quick — what college offers students the best return on investment (ROI)?
"Harvard?" you guess. Not even close.
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"Another Ivy?" Nope.
"Must be Stanford or MIT." You're getting warmer but still wrong.
Try Albany College of Pharmacy and Health Sciences. At least that's what the folks at Georgetown University's Center on Education and the Workforce would have you believe.
In fact, the next two institutions on their list are also pharmacy schools — St. Louis College of Pharmacy and Massachusetts College of Pharmacy and Health Sciences. Evidently, if you want a sure path to financial success, become a pharmacist.
But of course it's not that simple.
One Approach to Measuring ROI
Georgetown's experts devised a metric they believe yields useful results. The core element of their analysis is net present value (NPV), or "how much a sum of money in the future is valued today." In other words, this metric shows projected future earnings in terms of today's dollars. They subtract the cost of college from the earnings to determine ROI.
That's not all. Using net price — the average cost of each college after financial aid is subtracted — they examine earnings and debt ratios in relation to that price. (It's complicated.) And they project NPV over 10-year increments, stretching as far as 40 years into the future.
Albany College of Pharmacy and Health Sciences reflected the best ROI at the 40-year mark. If you want the quickest ROI, check out Putnam Westchester BOCES-Practical Nursing Program in Yorktown, New York, which leads the pack in terms of best 10-year ROI.
It should be evident at this point that "return" is measured solely by income.
“[College] really has become a place where you go to get a credential that's going to help you get into the workplace. And I think colleges need to embrace that.” — Martin Van Der Werf, Georgetown Center on Education and the Workforce
"People just don't have the time or the money to go and explore and find themselves in college anymore," said Georgetown's Martin Van Der Werf in a podcast. "It really has become a place where you go to get a credential that's going to help you get into the workplace. And I think colleges need to embrace that."
The center also examined liberal arts colleges as a separate category. They found that the value of a liberal arts degree increases over time. After 10 years, the ROI of a liberal arts college degree is $45,000 below the median, but by 40 years, it's $200,000 higher.
Note, though, that liberal arts colleges in many cases encompass not only humanities and social sciences but engineering as well, which tends to be more remunerative on average. These findings don't disaggregate by major but rather rank institutions as a whole. It's not surprising, then, that Harvey Mudd College in Claremont, California — known for engineering and hard sciences — tops their liberal arts rankings.
Different Kinds of Colleges Offer Similar ROI
Van Der Werf and his Georgetown colleagues examined more than 4,500 public, private, and for-profit colleges awarding associate degrees, bachelor's degrees, and certificates. Not surprisingly, many community colleges and certificate programs netted the highest ROI at the 10-year mark because of their low cost. But over 40 years, baccalaureate colleges fared much better.
What stood out to Van Der Werf was the mix of institutions clustered around the 50th percentile of the rankings, those offering an average ROI over time.
Colleges and Universities With the Highest Long-Term ROI
|Institution||State||40-Year Net Present Value|
|1. Albany College of Pharmacy and Health Sciences||NY||$2,722,000|
|2. St. Louis College of Pharmacy||MO||$2,714,000|
|3. Massachusetts College of Pharmacy and Health Sciences||MA||$2,421,000|
|4. Massachusetts Institute of Technology||MA||$2,273,000|
|5. Stanford University||CA||$2,068,000|
|6. Maine Maritime Academy||ME||$2,043,000|
|7. Babson College||MA||$1,985,000|
|8. Harvard University||MA||$1,967,000|
|9. Georgetown University||DC||$1,950,000|
|10. United States Merchant Marine Academy||NY||$1,949,000|
|Source: Georgetown University Center on Education and the Workforce. Data taken from the U.S. Department of Education College Scorecard, 2019.|
"The value proposition in higher education is mostly built on price and selectivity," he said. "And so it's a natural instinct for people to think the more selective institution they go to, the more they're going to get out of it.
"The surprising thing is, we found a lot of colleges that people would tend to think of as being very different — community colleges, for-profit institutions, regional publics, selective privates — all giving you approximately the same return on investment."
Additional Attempts to Measure College Outcomes
A few other organizations have attempted to calculate educational ROI using different approaches.
Like Georgetown, PayScale measures future earnings minus the initial cost of attendance. It determines ROI by subtracting the 24-year median pay for high school graduates from the 20-year pay of college graduates (allowing for four years of college) along with college costs.
According to PayScale's ranking, Harvey Mudd College rates the highest, as it did in Georgetown's liberal arts analysis, followed by MIT and several service academies (some with no tuition). Georgetown's reigning overall champ, Albany College of Pharmacy and Health Sciences, comes in 13th on their list.
Here again, ROI is measured in terms of income. Although colleges offer "returns far beyond the obvious monetary ones," the study says, "the financial aspects of evaluating college return on investment cannot be ignored."
Similarly, Michael Itzkowitz from the think tank Third Way claims, "The number one reason why students attend an institution of higher education is to increase their employability and gain financial security."
“The number one reason why students attend an institution of higher education is to increase their employability and gain financial security.” — Michael Itzkowitz, Third Way
Their method introduces the notion of a "price-to-earnings premium," or PEP. Using their formula, ROI is calculated as the additional income one earns over and above an earner who has not graduated from college after accounting for the cost of attendance. That difference is the premium. They then determine the number of years it takes to pay down the net cost.
Institutions aren't ranked per se, but their data are reflected on an interactive map.
And then there's the Brookings Institution, which determines a college's "value added" as the "difference between actual earnings outcomes and the outcomes one would expect given a student's characteristics and comparable colleges."
Value added, they say, "captures the benefits that accrue from aspects of college quality we can measure, such as graduation rates and the market value of the skills a college teaches, as well as aspects we can't."
How one gauges aspects that can't be measured is anyone's guess. Brookings calls this the "X-factor." As we've discovered, measuring ROI is an imprecise science, an undertaking akin to dissecting gossamer.
The Limitations of Measuring Educational ROI
Despite these various efforts, it must be obvious by now that calculating the exact return on an educational investment is an impossible task. Still, it's a fun exercise and perhaps useful to those comparing colleges.
Four main limitations quickly come to mind. First, as mentioned earlier, these data don't measure outcomes by major but by school, so each graduate's career journey might result in a different financial picture based on their course of study.
Second, these analyses don't take into account graduate and professional degrees, which add considerable value over time. Graduates of liberal arts colleges are more likely than alumni of other institutions to obtain advanced degrees, yet ROI measurements don't account for how much a law degree, a medical degree, or a Ph.D. adds to career earnings.
We know from the U.S. Bureau of Labor Statistics that college graduates earn almost twice as much annually as high school graduates — a median of $64,896 versus $38,792 in 2019. Yet those with a professional degree made a median of $96,772.
Third, general ROI measures don't take into account individual starting points. Georgetown's study, for example, uses an average net cost. But low-income students receive more aid, so their individual ROI, at least in the short term, is higher.
This leads to the final quibble: the notion of payoff in terms of income. Graduates of seminaries and art schools and music conservatories typically won't earn as much as their STEM counterparts, but that doesn't mean they don't lead fulfilling lives. Their ROI should be measured differently.
You can't put a price tag on all the salutary benefits one might receive from attending college. Yes, college graduates tend to earn more during their careers. But investing in one's abilities and potential opens doors to unforeseen opportunities, expands intellectual horizons, instills habits of mind, and pays incalculable dividends over a lifetime.
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