ROI on Tuition Paid – Another Bunch of Hooey

One of the greatest lies ever told: “Come to our college and you’ll get a 16% (or whatever) return on investment for your dollars spent on tuition.”

A company called EMSI gets lots of work in this arena, and I’m sure they’re a fine company. Here is an example of their work: Quantifying the Economic Contribution of Washburn University.

I have no quarrel with what is probably the major part of this study – their attempt at measuring the economic impact of WU (or any college or university) on the surrounding area. A college’s economic impact is usually very significant on the local area. No big surprise there. Nothing wrong with that either, unless the pundits make it out to be something more special than it is – large employers always make a big economic impact on the area – that’s not news. It’s also not news that some WU grads stay in the area and add to the economic vitality of the region. It WOULD be news if most the grads left and took their economic power with them. It would ALSO be news if the surrounding area started to attract large numbers of imported residents who were educated elsewhere (using someone else’s money) and added to the vitality of the region. The fact that the WU service region benefits from WU is exactly the same story that most of the other 4000+ institutions of higher learning can tell. Having said that, I’m really not bothered by that part of the article.

Flickr photo of Bill Gates by tvol (CC-BY licensed)

The part I take great exception to is the individual student impact that they tout in these studies. For example: “Students see a 15.9% average rate of return on their investment in WU and an increase of $5.60 in discounted lifetime income for every dollar invested in the four-year school…”

First off, the average rube (pretty much all of us) has no idea what “$5.60 in discounted lifetime income” means, but it sure sounds good. I do know what it means, and I can tell you that it is a worthless figure for anyone to use when deciding whether he/she should go to college. Let’s focus instead on the 15.9% average return on investment.

All the ROI talk in education makes me a bit crazy. It’s a business concept that means something very specific – then we apply it to education in a very different and non-specific way. I taught cost accounting and finance for 17 years , and investment analysis was a big part of the curriculum. Maybe that’s why my ears perk up every time someone utters the letters R-O-I.

In no particular order, here are my beefs:

  1. There is no “investment” by students in the way that it is used in “real” ROI analysis. An investment means that there is an identifiable asset on a balance sheet somewhere. College students have neither identifiable educational assets nor balance sheets. So, when someone tells you that students will see a 15.9% ROI, they’re just absolutely making that up.
  2. Students are spending, that’s true, but there’s a big difference between spending and investing. It’s more complicated than that though since students are often not spending their own dollars. Should a student apply for grants and scholarships and then SPEND that money on education? Absolutely, especially since that money can’t be spent on anything else (except those who game the grant system to pay their living expenses when they have no intention of actually getting an education – but that’s a whole different conversation). But when students are taking out loans or spending money out of their (parent’s) bank accounts, then it is a question of how much of a benefit they will see in the future on those dollars spent (yes spent, not invested).
    • As an aside. I was once told by a fresh-faced sales person what a great investment it is to buy an aquarium. Sadly, I went with my first reaction which was to LOL in his fresh little face. I went on to explain to him that an investment is something that either produces income in the future or increases in value, or both. If it doesn’t do that, then you’re just spending your money, not investing it. He then asked if I wanted to spend my money on an aquarium. I did not.
  3. The biggest problem I have with the student ROI (fantasy) figures is that they are based on the “average” student (apparently). That’s not the way that ROI analysis works in the business world. We don’t say that we should invest in a new product line because on average, when we invest our money in new products, we get a 15.9% ROI. That would be a very poor management strategy. We need to analyze each decision independently and determine if it is a good use of our limited funds. Some products promise higher returns, some promise lower returns.  Same thing with students. The average (fantasy) ROI is a product of extremes. No doubt there are students who lose financially (incur a negative return) by going to college, and others who benefit greatly. Telling an incoming student that they can expect a 15.9% ROI is total bull. The level of future benefits they might reap from their spending on a college education will be influenced by dozens of factors, many of which are out of their control. Some of the factors that will make a difference include a) degree program choice, b) regional employment outlook in that field, c) general economic condition of region/state/nation, d) willingness to relocate, e) high-achiever, low-achiever, or in between, f) destructive vices or hobbies, g) creativity quotient, h) schmooze factor, i) friends in high places, j) well-connected parents or other relatives, k) then add in a whole bunch of other factors. Then you’ll still be wrong.

Makes for great articles though, doesn’t it?

Too bad it’s a bunch of crap.

(NOTE: original CC-BY photo by Flickr user tvol)

4 Responses

  1. [...] ROI on Tuition Paid – Another Bunch of Hooey [...]

  2. [...] the most recent post prior to this was about how ROI (return on investment) is used in all kinds of ways that don’t really match [...]

  3. [...] case you missed it, I recently published a rant about measuring ROI in higher ed, titled: ROI on Tuition Paid – Another Bunch of Hooey. Lo and behold, another of the innumerable infographics crossed my email path and got me going [...]

  4. […] own post: ROI on Tuition Paid – Another Bunch of Hooey (also More ROI […]

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