Calculating the ROI of a 4-Year College Degree

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People tend to assume that getting a college education is a good financial investment. But a new Brookings report Should Everyone go to College? [pdf] finds that the actual value of a 4-year bachelor’s degree can vary dramatically depending on factors such as field of study, type of college, graduation rate, and future occupation. As usual, I’m just plucking out the charts that I like from the study. As you read all this, remember that correlation does not mean causation.

The more selective the school, the higher the return on investment (ROI) as calculated by Payscale. Here the annualized ROI seems to average around 10%, while other studies have found it closer to 16%. Public schools tend have a higher ROI than private schools (remember that ROI isn’t in absolute dollars). The bad schools are pretty bad, as Payscale found that 1 in 5 have a negative ROI over 30 years.

The lifetime earnings of a graduate also varies widely with the type of major and subsequent occupation:

The above charts deal with graduates. Another issue is that less than 60% of students who enter a 4-year school even finish within six years. That means you spent lots of money on tuition with no diploma at all.

Basically, the Brookings report points out that some students actually end up worse off due to college, especially if they don’t graduate. The authors suggest that this means you should enroll at the most competitive college that you can get into, as well as perhaps focus on the most lucrative major with which you find a fit. They also promote the idea of apprenticeships and vocational education as an alternative.

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  1. Free Money Minute says

    Thanks for the reminder that college education does not always solve life’s problems.

  2. Easier way to avoid all that drama…..learn coding. No degree needed. You’ll be set for life and can move anywhere and even work from home.

  3. Scott Guirlinger says

    NM – By move anywhere I hope you are including China, India, and other emerging market nations. Coding work is super easy to outsource. Competition is global and it is fierce. So your home better be inexpensive (on a global scale) in order to compete in the long-term.

  4. While “learn coding” is definitely a great way to get started, I know many tech companies will not hire you without a bachelor’s degree. It would be like hiring an accountant because they passed their multiplication tables test – necessary but not sufficient.

    That’s not to say there isn’t a lot of work out there for coders without a degree, but there are certainly not as many positions and probably don’t get paid at the same rate as reflected by the charts in the post.

  5. I don’t think kids really think about how much they are going to be spending. I know many think loans are free money. They forget they will have to pay them back after college.

  6. Great article. Parents and students need to understand what the return on investment will be for college. If you want to be a teacher, then you don’t need an Ivy League education and the associated costs with it.

    College is an investment. If you treat it as such, you will make better decisions than if you look at it from the “I like the campus” approach. Don’t get emotional, stay rational.

  7. Scott- Outsourcing is not as easy as has been reported. Many companies learned that the tradeoffs have not been worth it and are now in-sourcing (Intellectual property for one). The shortage of skilled programmers is real and meaningful and are jobs that are going unfilled here, not some other country.
    Much of the media focuses on the trials and tribulations of Silicon Valley, but in the rest of America the opportunities for those who know how to code are growing.

  8. No surprises here really. The best ROI is at a competitive public schools with degrees in STEM.

    THe drop out rates for less selective schools are pretty high. But thats probably more a reflection of the student body rather than the schools. The most competitive schools are packed with high achieving high school valedictorians who are a lot more likely to finish college. Least competitive schools have a lot more students who don’t do so well in school, have less interest in school,etc. and are less likely to finish.

  9. This all makes sense. People are so desensitized to the idea of college. They think they have to have it and pay the most for it, but that doesn’t guarantee you anything. Just because you actually finish college doesn’t mean you will get a job or reach your earning potential.

  10. I’d be interested in seeing this broken down a bit more. How broad, for example, is the “most competitive” category. I ask because my suspicion is that the ROI for the truly “most competitive” private colleges (Harvard, Yale, Princeton, Stanford, Williams, Amherst, Swarthmore, and a handful of others) is better than for the “most competitive” public universities. I suspect that the researchers did not compare the top 10 or so most competitive private colleges to the top 10 or so most competitive public universities, however, because the private schools are MUCH more competitive, but instead compared much broader pools of private and public schools (top 50 versus top 50, for example) to achieve a closer comparison (in the process sweeping a lot of less competitive private schools into the mix). The ultra elite schools are typically cheaper than the top public schools for most students (given their large endowments and generosity with grants), and tend to have materially better employment outcomes.

    In other words, I believe that there is a small elite group of generous schools–all private, all much more competitive than the most competitive public school, all generous with finaid–that has the best ROI.

  11. Also, let’s not forget to separate the cause from effect: Does a college degree leads people to earn more, or people who are capable enough to be successful and earn more tend to be also college graduates? Had they not gone to college, such people may still have earned more and be successful. Perhaps even more so if the opportunity cost is taken into account.

  12. CollegeGrad99 says

    I always find it interesting that the people promoting this stuff are college graduates. Sure, I’ll agree that college isn’t for everyone … but in today’s world a college degree is almost like what a high-school degree used to be many years ago. The problem is that we’ve done such a good job at convincing our kids to go to college and now the market is full of college graduates seeking jobs. Is this the new strategy to solve that problem … deter people from going to college?

  13. also important to factor that very few people pay full retail price for schooling and the studies probably factor full price.

  14. Learn to code and go to Mom and Pop uni.

    Gain experience then go to better grad school.

    The end.

  15. Only speaking from experience, I don’t have a college degree…and my coding skills are minimal (CSS/HTML) but it was enough to get me steady employment. A recent CNN article quoted Bill Gates and Matt Zuckerberg as saying, “The whole limit in the system is that there aren’t enough people who are trained and have these skills today.”

    “”It’s really not unlike playing an instrument, or playing a sport,” says Drew Houston, who created file-sharing site Dropbox. “Even if you want to become a race-car driver, or play baseball, or, you know, build a house — all of these things have been turned upside down by software.”

    “Forget trying to become a doctor or rapper or a football star, not to mention all the teasing you may get in school for being a nerd — computers are where it’s at.”

    “…there is a worldwide shortage of computer programmers but that only 1 in 10 schools in America teach kids how to code.”

    ” claims that computer-programming jobs are growing at twice the U.S. national average while less than 2.4% of college students graduate with degrees in computer science — less than 10 years ago.”

  16. Paul Harvie says

    This is an interesting article because as a Paramedic I make x amount as a wage each year. If I was to return to medical school and become a GP physician I would expect to earn about 2.5 times what I earn now, but where I live, I would have high over head, to pay ER privileges, nursing staff, a clinic rent, and any admin staff, my NET income as a physician would be reduced to almost equal what I take home as a Paramedic now!! I was amazed, (Now if I were to specialize that is different, but as a GP that was how the math worked out!!) It was an alarming discovery and I am glad now that I did not pursue it! I just found your blog today, and will be book marking it for future reading!!

  17. I wonder the same thing as Serge Says. I’d love to see the controls on this study.

    The second thing I wonder is what the opportunity cost. Since this is a financial blog, let’s look at the alternative. Here’s one: parents give their kids $200k in investments in a trust they can’t touch for X number of years. Give it 4.5% real returns.

    Age: 34, Trust value: $400K (real)
    Age: 50, Trust value $800k (real)
    Age: 66, Trust value $1600k (real)

    Retirement savings done at 18 years young-not a bad deal-plus a 4 year head start on SS. As your readers should know, the average person should be saving 15-20% of income for retirement. So that’s a huge de-facto boost in income (compounded by the lower tax rates/more credits associated with lower AGI).

    Looking at your chart, the HS degree worker earns 1.5 million over a life time. The high paid engineer, $3.5 million. $1.5 + $1.6 = $3.2 million. The two workers are on par for this back-of-the-envelope exercise. So the cost of the opportunity is huge. Additionally, the engineer is has unemployment risk (e.g. disability, reduced government spending, recessions, etc.). The HS degree worker is diversified from capital investments and human labor. When the HS degree worker makes it to 65, he/she is set even with a few years of unemployment.

    A bit depressing. Interesting post. Thank you.

  18. Interesting points, John, and I realize this was meant to be “back of the envelope,” but I think you’ve missed some material intricacies.

    First, white collar jobs generally come with benefits that can be very valuable such as healthcare, life insurance, and retirement. Those could be a significant part of the economic picture for the college grad that the HS grad has to either fund himself or forgo. Conversely, statistically speaking a white collar worker is much less exposed to the risks of early death, disability, and job loss in a recession than a blue collar worker.

    Second, you are comparing the future value of a pool of wealth to the value of earnings when they were earned. Truthfully, the degree-earner should be able to invest some of those excess earnings and compound them similar to the way the HS grad invested their college account. Assuming your hypothetical college grad maintained the same standard of living as the working HS grad, they could sock away their entire excess earnings for similar and significant compounding at 4.5%. Let’s say the engineer saved only half of the excess amount he earned above the high school grad, and invested it each year between the ages of 22 and 65 at a 4.5% real return. The engineer’s retirement account, without considering any employer contribution, would be worth $3.3 million (real) at age 65, a full $1.2 million above the $1.1 million of lifetime earnings contributed.

    Also a note: 4.5% real may be a reasonable assumption, 4.5% real after taxes probably is not.

  19. Andy, great points. It was really meant to “back of the envelope” exercise on pure dollar and cents basis. Of course, there’s other factors, including the financial literacy rate, benefits, etc. that are extremely important, but more difficult to quantify. Personally, I find the charts as presented, while thought provoking, skimpy on details including many of the important issues you bring up.

    -As to life insurance, the blue collar worker inheriting the money probably wouldn’t need it (assuming the blue collar worker can keep his/her family out of major debt). Life insurance (generally) is to protect against loss of future wages-not as much of an issue in this case compared to the engineering who has leveraged himself/herself for higher wages. They need lots of life insurance, especially when they buy that big house. I’ll make the same argument about the disability insurance. I yield on the health care issue-it would be a problem-as it is for many Americans.

    -It’s absolutely true the engineering would be able to also invest. What the blue collar worker has is time-the engineer would need a long acclimation phase. How long would take an engineer to build $200k to invest? Assuming income of $100k/year by age 30 at 20% saving rate (which is not common, but doable)-age 40 to reach $200k of investment assets. The blue collar worker has ~two decades in the market over the engineer. Additionally, most young professionals don’t have that discipline to save 20% of income (the readers of this blog are probably an exception). A disciplined engineer that you described would likely beat the pants off the blue collar worker in net assets, but it depends a little bit luck (market conditions over a shorter amount of time, e.g. hope you didn’t retire in early 2009), risk control, and discipline. I have a good number of friend who are high earners (well into the 1%) and most are not savers.

    Also, the blue collar worker could invest his/her own income in addition the inherited money-though they don’t need to.

    -There are several tax advantages to having low income. A big example is social security benefits are regressive, so the return on investment heavily favors lower income folks (especially if you’re married). For the engineer, SS isn’t a great deal for the money they put in. Also, the engineer would phase out of several important credits/deductions.

    BTW, the chart doesn’t state if it’s pre- or post-tax dollars. I’m guessing it’s pre-. The take-home earning are effected by the progressive tax code. If it is pre-, the difference between the engineer and the blue collar/HS worker is exaggerated.

    -On the 4.5% real returns, there are ways to side-step the tax issue for the inherited monies. Off the top of my head, step-up basis, slowly transferring $11k/year into 2 IRAs for a couple (since money is fungible), and realizing gains in years when income is low (e.g. job loss since the capital gains rate is 0% up to the 15% bracket).

    -Lost income from recessions should already be included in the chart. The chart compared life time earnings-all that is already factored in. If I’m reading the caption right, the study was published in 2012 and looked at a 5 year earning period. As you point out, the recession disproportionally hurts the lower wage earners. Thus the study is basis against low wage earners as the study selectively choose a time that worse for low wage earners. Sad to think the study was basis towards college degree earners and it’s still unclear if the BS/BA is worth it once you factor in the cost of opportunity :/

    Finally, let’s not forgot the very basis of my back-of-the-envelope method: it compared a HS degree earn vs a engineer, the **highest** paid undergrad major in this study. Most BS/BA don’t even come close. The blue collar worker with $200k of inheritance handily beats most college grads.

    The biggest risk of the blue collar worker is screwing up by living above their means. But isn’t that true for everyone?

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