With all the talk about changes to student loan repayment plans, popular student loan forgiveness programs potentially ending, and now limits on student loan borrowing, it’s essential that you fully understand what your college return on investment (ROI) is.
Going to college is an investment – just like buying stocks or investing in real estate. You are spending money (tuition, room, board, and more) with the goal of earning more money in the future – due to better paying jobs and opportunities.
And this has shown to be true for the last several decades according to the National Center for Education Statistics. Adults who complete a bachelors degree, on average, earn 57% more than those who are high school graduates. That’s a significant boost in earnings. But, if you spend too much to achieve it, it might not be worth it.
The Basic Math Of College Return On Investment
When you’re 17 or 18 years old, thinking about your lifetime return on investment of your college expenses is challenging. When you’re that age, it’s hard to even plan what classes to take, let alone your college major, future career, the implications of borrowing money to pay for school.
Luckily, we live in an era where there is more data than ever to help us make decisions.
To think about your return on investment, you want to look at what you spend – the cost of tuition, room, board, and more, and then compare it to what you have the potential to earn.
The Social Security Administration has some aggregate data on earnings that’s useful here. Controlling for various socio-demographic variables, men with bachelor’s degrees would earn $655,000 more in median lifetime earnings than high school graduates and women with a bachelor’s degrees would earn $450,000 more in median lifetime earnings than high school graduates.
Here’s the more interesting part – let’s take that lifetime earnings potential and discount it for the present day value. Applying a 4 percent annual real discount rate, the net present lifetime value at age 20 of a bachelor’s degree relative to a high school diploma is $260,000 for men and $180,000 for women. For those with a graduate degree, it is $400,000 for men and $310,000 for women.
So, adjusting for nothing else (such as career choice), men should never spend more than $260,000 for a bachelors degree, and women should never spend more than $180,000 for a bachelors degree.
The Advanced Math Of College ROI
Now that we have the basics, you can take some of that same math and apply it to your situation and see if you’re getting a potentially positive ROI or a negative ROI on your education costs.
You can look at your school’s cost of attendance (COA), which can typically be found on their financial aid webpage. Using that data, you can see the cost to attend four or five years.
Then, look at what you’d expect to earn over your lifetime. This can be a challenge, but tools like Glassdoor (which show salaries in various industries and jobs) or even government websites like Transparent California, where you can view ever Californian Public Worker’s salary. Using that data, you can see what you’d expect to make throughout your career, and add up your earning potential.
Once you do the math, you can see how the cost of your education stacks up for ROI.
Easy Rules Of Thumb To Remember
Doing the math can be challenging, but there are also some simple rules to remember when calculating your ROI.
First, while it may not seem like it, you can adjust your variables. You can attend a less expensive college (or do a path like community college first, then a state school). You can also earn more after graduation. Look at not just a career but adding in a side hustle as well. Maybe you are really passionate about a certain career, even though it doesn’t pay very well. You can still have a positive ROI, but you’ll earn that ROI with other jobs.
Second, borrowing to pay for school is expensive. It is a drag on your ROI due to the interest that will be accruing on your loans. And easy way to keep your ROI in balance with student loans is to never borrow more than you expect to earn in your first year after graduation. This is very career dependent, but it highlights how you can borrow more if you plan on going into a higher paying industry.
Finally, this math only includes high school versus bachelor degree. However, the same logic can apply to trade school or graduate school. You just need to get data around what you expect to make after graduation versus the cost of your education program.
There’s More Than Money When Going To College
Some will argue that there is more than a money ROI when it comes to higher education. And I’d be remiss to ignore that because it’s true. There is more to higher education than dollars in, dollars out.
Going to college has a variety of secondary benefits, such as a student moving out from home and learning how to handle communication, problem solving, and more. These real world skills are tough to put a monetary value on.
But, on the flip side, college is an expensive way to find yourself. While moving out of the house and having new experiences can be a very positive thing, it can easily become a future regret if the burden of student loans and poor financial choices weighs on you for a large portion of your life.
And my challenge would be, are there other ways to get these experiences while trying to build a positive ROI on education spending? My answer is yes.
Thinking about the ROI of your education spending can be a challenge. But it’s a must for every high schooler and parent.
Robert Farrington founded The College Investor, a personal finance website dedicated to helping people get out of student loan debt and start investing as early as possible.