Thinking of College As a Return On Investment

In March, we wrote about student loans, which continue to grow in size for just about every kind of student (remember, they are actually the US Federal Government's largest financial asset at about $730 billion outstanding). I wanted to follow-up on that post, which briefly touched on thinking about a college degree as an investment in future income potential.

Like many investments, the success of a college degree is largely a function that depends less on which college you choose, and more on what you pay. has a very interesting analysis on the subject in this article. Using their database, they use the median pay for graduates between 1983 and 2012 from almost 1,500 colleges, adjust for inflation, and then use that current-dollar figure to create an estimate of the 30-year earning potential. There are flaws in using this (or any) method, which they discuss here, but with these in mind, I find it reasonable to make some comparisons across the different schools since each university is subject to the same method.

The article then calculates the average cost for each college, again, using a somewhat complicated formula which attempts to account for the number of years tuition is paid, graduation rates, and other factors. Note that advanced (masters, doctorate) degrees are ignored for the purposes of comparison.

The formula spits out data which allows a prospective student to compare the potential 30-year earnings potential that a college has given to its graduates, compared to the cost of attending that college. Unsurprisingly, technology- and hard-science based schools (Caltech, NYU-Poly, MIT, and the Colorado School of Mines) rank very favorably in 30-year earnings potential, while certain liberal arts schools tend to fall to the bottom of the ROI-rankings (not to say that these aren't excellent centers of learning - keep the methodology in mind).

Take a look at the full rankings here.

Thus, if you're looking at a college degree for a return on your investment, I would seek out schools that offer high income potential at minimal cost. SUNY Maritime stands out in this formula, as does Georgia Tech, CUNY Baruch, Berkeley, Virginia Tech, and UMass Amherst. The most expensive colleges that offer a low return on investment include Sarah Lawrence, School of the Art Institute of Chicago, Franklin Pierce, and Bard (again, not to say that these aren't excellent schools, but they are certainly expensive). The highest ROI + expense combination shows up as the incredible Harvey Mudd College, which I had never heard of until today!

WBUR in Boston went a step further and created this fantastic visualization on their website, which interactively displays all of the data. Please click on the link to check it out:

Source: WBUR's

The question I get at least once a week in the office: is college still worth it? Yes, of course it's still worth it. Currently, the unemployment rate for those without a high school diploma (8.9%, red line) is about three times that of those with a college degree (3.3%, blue line). Granted, the U-3 has its flaws (it's really the unemployment rate for those currently seeking work), but like the article, provides a useful comparison. 

Thinking about the return on a college degree as an investment in your (or your child's) future is the right way to frame these discussions, and also to have your kid realize that education is a (sometimes) expensive but essential way to secure your financial future. 

Let me know if I can help.