Guest Post by Sabrina Manville, Co-Founder of Edmit
College graduates earn $1 million more in their careers than the average high school graduate. Since college costs (for now) less than $1 million, paying for a college degree seems—on its face—to be worth it. But not all degrees are created equal: each college and major has a different return on investment.
Here at Edmit we spend a lot of time thinking about how to quantify the value of a college degree, and we know that students and families are paying attention to this more than ever. Career readiness is one of the most important factors in someone’s satisfaction with higher education, and a recent poll by Gallup and Strada shows that two-thirds of college students do not feel they will graduate with the skills and knowledge to be successful in the workplace. That’s a big number—and for such a big purchase, you want to feel confident that the money won’t be wasted.
How, then, can you help predict whether your college education will be worth it? Let’s keep it simple and look at your return, and then at your investment.
You’re probably going to college for a lot of reasons—to gain new skills and knowledge, build relationships, and to gain exposure to new ideas. But for most students, the ability to get a better job is top of the list.
Many families considering their college choices focus first on their major—and what they’re likely to earn after college if they pursue that major. In addition, you’ll probably want to consider where you are going to be living and working (salaries in San Francisco look a little different than those in Kansas City, even for the same job title). Also take into account your anticipated career path, especially in cases where your major does not tell the full story. An English major could become a high-paid corporate lawyer, or a part-time journalist. Of course, if you plan to take a job which does not require a college degree (and, accordingly, has a low salary), this is important to factor in also.
Edmit has data on earnings by major by college, so you can get a more precise estimate that takes into account the college you’re attending. We recommend you consider earnings over a 14 year period, to get to what we call “mid career”—by then, the value of a degree should be evident in salary and career trajectory, and many students will have paid off their loans. Add those up—it will look like a nice, large number!
Will you be working during school? Let’s assume the typical college student will earn approximately $13,000 in work study and part time jobs during college, working approximately 10 hours per week. Add that to your “return” as well.
Last, looking at post-college earnings alone doesn’t tell the whole story. If you don’t go to college but you do work, you’ll be earning money (though probably not as much). So in calculating the return on your investment, you should subtract the money you would have made anyway. High school graduates without a college degree make, on average, approximately $37,750 per year, or about $970,500 over 18 years (post-tax).
The obvious costs of college are tuition and any required fees the college charges. Make sure you look at your financial aid award letter to see what grants and scholarships (the “free money”) you’ve been awarded. Those will reduce your bills. Some may be renewable for all four years, but others won’t be. Come up with your best estimate of what you’ll have to pay each year you’re in school, either with cash or loans.
Everyone needs a roof over their head, so a high school graduate would have living expenses just as a college student would. So for simplicity, you can remove room and board costs for the purposes of determining the value of your college investment, assuming you’d have those expenses (or close) either way.
Most students and many parents have to take out loans to close the gap between a college’s cost and how much financial aid a student receives. It’s critical to include the total interest you’ll have to pay on that loan (extra cost on top of the original amount borrowed) when you do your analysis. Use a loan payment calculator to see your total interest based on the types of loans you take out.
We assume the student will graduate in four years and start repaying their loans then. Note, if you take longer than that to graduate (many do!), you won’t start repaying your loans right away, and the interest from the loan will increase while you’re still at school.
Running the Numbers
To see the relative return/cost ratio of each college, we divide the additional income of the college graduate compared to a high school graduate by the costs of college, including debt.
Money you’d earn with a college degree (over 14 years)
PLUS (+) Money you’d earn during college, if you are working part-time ($13,000)
MINUS (-) Money you’d earn without a college degree, starting at high school graduation (over 18 years) (~$970,500)
Money you’ll pay for college, over and above living expenses (total tuition & fees)
PLUS (+) Total interest on your student loan
What does this number mean, exactly? Where it gets interesting is in comparing colleges with each other. Different financial aid packages can make a large difference, as can your choice of school. A school with a larger ratio is generally a better “bang for your buck.” This can result from its graduates’ having better earnings, it being more generous with financial aid, more affordable generally, or some combination of the two. We recommend you do the analysis with a range of schools you are considering—public and private—to get a sense for what colleges may make be most worthwhile for you.
Is College a Good Investment?
On average, yes—college is usually worth it! By the numbers, it’s one of the best investments you can make in America today. Assuming you continue working beyond the mid-career point noted in this calculation, the rate of return on your college investment will actually increase, as wages tend to peak in your 40s. But: your payoff is not guaranteed. Not only does your ROI depend on your choice of college and what you do while you’re enrolled there, but it hinges on the financial decisions you make before you even apply. We like to think of it in terms of risk—the more you’re investing, the more confident you want to feel about what opportunities you’ll have on the other side. To maximize your investment, do your homework on the outcomes as well as the true costs of college.
College Coach has teamed up with Edmit to offer a “high tech + high touch” college planning experience for families. Edmit Premium is a subscription service combining Edmit’s proprietary “financial fit” software with College Coach’s expert guidance. Learn more about Edmit Premium.