More ROI Hooey – College or Work?

In 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 again. It’s titled “How Higher Education Helps the Economy.” The infographic was prepared using data from Bloomberg/ Business Week and an organization called PayScale. The data can be examined along the lines of the question “Does it pay off to go to college?”

Which Way? College or Work?

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The Payscale data used here is suspect (no sampling, unequal numbers and %’s of students from each school, self-reported income figures, etc.), but their methods of using that data seem to be pretty sound up to a point. The problem is that they stop short of making the important calculations – so I’ll make them here. They calculate a 30-year return on investment  for bachelors degree students (one number for grads, different one for all students who attend regardless of graduation) based on the extra earnings that the average student/graduate has earned after attending each college after factoring in the total out-of-pocket costs of attendance (both before and after grants) and the average number of years to graduate from each school. They are looking at a 30-year time period, starting after the 4 to 6 years that they spent in college. They look at students from various colleges and factor in that school’s average years to graduation (but don’t share what those numbers are). The base income is the amount that the “average” high school graduate would earn over a 34-36 year period and comparing that to what the average bachelor degree graduate earns over the 30 year period, after spending 4-6 years in school prior to graduation.

So let’s see what Payscale came up with. They rank the schools based on “ROI.” Yep, here comes some more ROI Hooey!! But what the heck, let’s just go with it and see where it leads.

Here are their top 5 schools.

  1. Cal. Tech – ROI: $2,033,000  -  Cost (after grant aid): $91,250
  2. Harvey Mudd College – ROI: $1,868,000  -  Cost: $117,500
  3. MIT – ROI: $1,797,000   -  Cost: $72,560
  4. Dartmouth – ROI: $1,701,000  -  Cost: $72,850
  5. Stanford – ROI: $1,691,000  -  Cost: $75,710

Many people will look at this data and say “what a great deal!!” Spending $75,710 to go to Stanford provides a return of $1,691,000 over 30 years. “That’s fantastic!”

Ummmm, no, it’s really not all that special. Here’s the deal. If you took the money spent to attend Stanford over a four year period and invested it in the stock market, and then let it ride for 30 more years after that (same 30-yr time frame used in the study for the college grad to earn more than a high school grad), you would come up with an expected value of $1,655,755 – which is only $35,245 less than the benefit of going to Stanford. And don’t forget that you would have a pot of money sitting there equal to $1,655,755, which is very unlikely to happen for the Stanford grad who made (and probably spent much of) the extra income.

Those numbers apply only if we are talking about getting out of Stanford in 4 years. What if Stanford is a five year proposition? That changes things substantially. Now the high school grad has the advantage over the college grad by $53,471. Yikes. Giving the lowly high school grad that extra year of stock market gains makes about an $89K difference.

Crazy talk, right? I’m not so sure. What’s so crazy about it?

Let’s recap.

  • A student who graduates from Stanford pays a total of 75,710 out-of-pocket, including loans that have to be paid back. Grants received are free money and are not considered to be an out-of-pocket cost.
  • Let’s assume that they make eight equal payments over the four years (one payment every six months). In financial circles, making a payment at the beginning of each time period is known as an annuity due. For Stanford, those 8 equal payments would be $9,464 ($75,710 / 8) per payment. Sure, they’re not really going to be equal payments, but close enough.
  • The long-term rate of return for the stock market is approximately 10%, although it’s somewhere within the 9-11% range depending which 30 year time period you choose. We’ll use 10%.
  • The future value of an annuity due for 8 periods at a 5% interest rate (10% annual / 2 payments per year) equals $94,889 at the end of the four years.
  • The high school grad has been working for those four years instead of going to college. At this point the high school grad leaves his investment nest egg (the $94,889) alone for the next 30 years while the Stanford grad goes to work for the next 30 years.
  • The Stanford grad earns a salary over those 30 years that exceeds the salary of the high school grad by $1,691,000.
  • During those 30 years, the Stanford grad presumably saves for retirement and invests her riches along the way. How much she will accumulate after 30 years is anybody’s guess (go ahead, take a guess).
  • The high school grad has an investment portfolio of $1,655,755 – and that’s assuming that he hasn’t added a penny to it (nor taken one out) over the past 30 years.

I can hear some of the objections you’re raising, such as “sure, but these are averages, and my kid (or whoever) is way above average and will do much better than that.” Maybe so, but the same can be said for those above-average high school grads who will do real well for themselves without the college degree.

Another objection: “but going to college is much more than just maximizing your earning potential. It’s about the people you meet and the connections you make.” I always love that one. It makes it sound like a person who doesn’t go to college is doomed to a life in solitary confinement and cannot possibly live a fulfilling life or expand their mind or any of the other things that people tend to think can only be achieved through a college experience.

Another objection: “you have no way of knowing that the stock market is going to return 10% again over the next 30 years.” Yep, that’s right. We also have no way of knowing whether college grads will continue to earn this much more than high school grads over the next 30 years, nor do we know whether the jobs that your degree qualifies you for will even exist over the next 30 years. It’s definitely a series of dice rolls and we could crap out at any time on any one of them.

Another objection: “it’s completely unrealistic to think that non-college-goers could get their hands on that kind of money, and even if they did, they’d spend it rather than invest it.” That might be true, and it might not be true. It would probably be tougher for people coming from low-income families. But the math still works for those coming from high-income families. It still begs the question of whether they are better off investing their money rather than spending it on a college degree.

Another objection: “maybe that’s what the numbers say right now, but ‘past performance is not necessarily indicative of future results.’ All the experts say that a college education will be more important in the future than in the past. They also say that high school grads without college will find fewer and fewer job openings in the future.” How sure are you that those “experts” are right? Other experts are taking a different approach, such as the Thiel Foundation project that encourages entrepreneurship over college attendance.

It’s certainly not an exact science – which is exactly one of my major objections with the whole “ROI” malarkey in the first place. For the most part, they’re just making it up (and so am I).

Some of the things that Payscale doesn’t take into account, but probably should include:

  1. the average amount of debt incurred by grads at the different schools
  2. the amount of interest paid on that debt over the years
  3. the number of defaults on the debt at the different schools

Which leads me to the following adjustments:

  • Graduates who have a substantial amount of debt to repay will likely end up on the lower end of the cost/benefit calculation due to their increased costs and inability to save during the years when they are paying back loans.
  • Graduates who actually default on their loans are probably in a world of hurt and will have credit problems for much of their lives, and might have been much better off taking the low road of the high school grad.

Just a couple of other tidbits. I looked at a few schools of special interest to me.

  • I know someone who recently graduated from Western Michigan. He was an out-of-state student. The average cost of attending Western (after grant aid) is $113,000 for out-of-state students. His extra earnings over 30 years are projected to be $546,700. If he had just invested his college money he would have been better off by $1,931,136 (for 4-yr grad) or by $2,064,305 (5-yd grads). Ouch!!
  • How about Wisconsin-Green Bay? Low costs (relatively low) of only $39,050 (in state). But also low salary differential of only $285,600 over 30 years. Investing that money rather than spending it on college pays off to the tune of $568,412 (4-yr) or $614,309 (5-yr).
  • How about a school that stands out in a positive way? Take the Ramblin’ Wreck from Georgia Tech. Cost of $39,390 (in state) with a whopping salary differential of $1,467,000. The GT bachelor degree is a much better use of the money by about $605,553 (4-yr.) or $559,255 (5-yr.). Very few of them look like this.

In closing, let me make it clear that I am not an anti-college guy. I’m a pro-college guy. However, I think we need a dose of sanity when looking at the financial value of a college degree. High-achieving students need to go to college to be our professionals of the future. That includes the future doctors, lawyers, engineers, accountants, nurses, college professors, etc. etc.

However, I think this really begs the question of whether the lower-achieving students or less-prepared students who go to college would be better off going to work and investing their college funds. Looks like that’s a definite possibility, IMO.

Resources:

One Response

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

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