How to Calculate the ROI a College Gives Graduates
Rather than relying on college rankings (which are highly flawed), suggest parents consider a school’s return on investment for graduates in terms of future earnings. Modern resources make it easy enough to do.
Affluent parents and their teenagers are the ones most likely to focus on U.S. News & World Report’s rankings when they are compiling their college lists. That largely explains why so many high-income students unfortunately end up fishing for colleges in the same small collegiate pond.
Rather than rely on extremely flawed rankings, a better way to search for colleges is to rely on measurements that actually are meaningful. An important one to look at is a college’s return on investment for its graduates, as well as the ROI of individual academic majors.
There are promising new ways to evaluate ROI. And they are free.
These tools can be powerful when parents are discussing potential majors with their children and weighing the future earnings power of individual majors with the financial commitment that they will require.
First a little background on what prompted the new flood of ROI data for families.
The federal College Scorecard, the consumer site for families researching colleges, used to provide some information on the earnings of graduates at individual colleges.
That stopped, however, in 2018, when the Trump administration began withholding that information. Some colleges, and especially for-profit institutions, didn’t want these earnings figures making them look bad.
The Biden administration reversed the policy and salary data is now being displayed again in College Scorecard. On the site, you can find out what the median earnings are for 10-year graduates at a particular college.
Just as importantly, the U.S. Department of Education is sharing its data files, which other groups are using to provide more ROI figures to consumers in assessable ways. Outside groups have been quick to take advantage of this data and that’s good news for your clients.
One frustrating aspect of the federal data, however, is that the salary figures only reflect the earnings for graduates who took out federal college loans or received federal grants. That leaves out salary information for a lot of higher-income students.
Listed here are three resources or tools that are using this federal data in a way that could be valuable to your families. Each is discussed more thoroughly below.
- Georgetown University’s Center on Education and the Workforce
- Foundation for Research on Equal Opportunity
- Third Way
Georgetown University’s Center on Education and the Workforce
Using the new federal data, the Georgetown center ranked 4,500 colleges and universities by return on investment.
Georgetown looked at an institution’s net present value at five different time intervals from 10 years after graduation up to 40 years after graduation. The center defines NPV as how much a sum of money in the future is valued today. This metric includes costs, future earnings, and the length of time it would take to invest and earn a specific amount of money over a fixed horizon.
What is cool about this tool is you can use it to filter in a variety of ways, including looking at two- and four-year schools in a particular state, as well as state and/or private institutions nationally. You can also choose a specific time interval, then rank for that period and filter by highest and lowest performing institutions in that time period.
For example, Figure 1 shows a screenshot of a search I did for state universities nationally that provided the highest NPV for 40 years post-graduation.
Figure 1: Calculating NPV for State Universities 40 Years Post-Graduation
Source: Georgetown University’s Center on Education and the Workforce
You can also search by institutional categories such as liberal arts colleges, doctoral universities and master’s level universities.
The rankings also include a metric that measures the share of students at an institution whose earnings 10 years after enrollment are higher than those of workers with a high school diploma as their highest level of education.
An average of 60% of college students across institutions earn more than a high school graduate after 10 years. However, at 1,233 postsecondary institutions (30%), more than half of their graduates 10 years after enrollment are earning less than a high school graduate.
Foundation for Research on Equal Opportunity
While Georgetown provides an institutional-level view of ROI, it is also important to explore what the economic return is for individual academic disciplines.
The think tank Foundation for Research on Equal Opportunity, referred to as FREOPP, has calculated the estimated earnings and lifetime ROI for nearly 30,000 bachelor’s degree programs.
You can see the financial value of individual degree programs within an institution. To make the calculations, the researchers looked at earnings at ages 25 and 45.
One thing you will discover when checking on academic programs is the huge earnings differences within an institution for individual majors. Figure 2 shows a screenshot of ROI statistics for some of the majors at the University of California, Berkeley.
At Berkeley, for example, the lifetime ROI for business majors and chemical engineers is $1,529,287 and $1,069,675 respectively. Compare that to the ROI for anthropology and classical/ancient studies at the university which are a negative $57,987 and negative $238,293 respectively.
Figure 2: Not All Majors Yield the Same ROI
In a separate study, FREOPP has also calculated the ROI for 17,000 associate degrees and certificates.
Third Way, another think tank, takes a crack at department-level earnings and earnings by type of higher-ed institution, such as liberal arts colleges, doctoral universities, master’s level universities and specialty schools. It does so by measuring what it calls the Price-to-Earnings Premium (PEP) calculated as the time it takes students to recoup their postsecondary educational costs based on the earnings premium that the typical student obtains by attending an institution of higher education.
The new data from the U.S. Department of Education allowed the data crunchers to dig below the surface at institutions across the country to explore what kind of ROI the typical student received from his/her specific college program. Comparing the earnings premium that students obtained relative to the price they paid to earn their credentials allowed Third Way to calculate the PEP that individual majors within individual institutions produce for their graduates.
Figure 3 shows two charts you might find interesting; you’ll see the highest percentage of graduates who recouped their educational costs within five years. You’ll also see the majors that did the worst.
Figure 3: Recouping Costs by Major
Source: Third Way
The worst performing major was drama/theater arts and stagecraft where 72.5% of graduates had yet to experience any return on their college investment after five years!
When money is an issue, and it almost always is, it is important for parents and students to look at the potential ROI of their majors.
Families shouldn’t just look at the beginning salaries but instead take a longer look. For instance, the Georgetown data, in particular, shows that students attending some liberal arts colleges that tend to have lower starting salaries do enjoy considerable salary boosts later in their careers.
What the new resources do show is that wherever students attend, the academic major selection is often critically important for an individual’s future financial health.