Tuesday, April 15, 2014

Is YOUR College Education a Good Investment?

There are all sorts of tabulations and statistical analyses that will convince you that college graduates as a group earn considerably more than those with only a high school degree. Pundits are tempted to conclude from this that if only we would send more students to get a four-year degree then all manner of beneficial effects would follow: low unemployment, higher salaries, more tax revenue…. 

Consider some global conclusions drawn by the OECD as it evaluated the US education system and compared it to other "rich" nations in a report from 2012. College education (tertiary education) is expensive.

"In the U.S., the total cost for an individual to obtain a higher education is quite large. On average, the total cost for a man in the U.S. to pursue higher education is more than USD 116,000 – about USD 71,000 in direct costs, and USD 45,000 in foregone earnings while he is in school. Only three other countries have total costs that exceed USD 100,000: Japan (USD 103,965), the Netherlands (USD 104,231), and the United Kingdom (USD 122,555). However, in these latter countries, the lion’s share of the total costs consists of foregone earnings. For women in the U.S., the total costs of higher education are slightly higher: USD 117,000 on average, comprised of USD 71,000 in direct costs, and USD 46,000 in foregone earnings…."

But, on average, there is a healthy return on that investment.

"….the payoff for obtaining a higher education degree is much higher in the U.S. than in most OECD countries. For example, over the course of his working life, a tertiary-educated man in the U.S. can expect to earn almost USD 675,000 more than a man with no more than an upper secondary or postsecondary non-tertiary education – far more than in any other country. Meanwhile, a woman with tertiary education in the U.S. can expect to earn almost USD 390,000 more on average…."

The nation as a whole benefits from its investment and from the students’ investments.

"U.S. taxpayers also realise a healthy return on the public funds that are used to support individuals in higher education. On average, they bear a cost (direct and indirect) of USD 45,554 to support a man in higher education and USD 45,618 to support a woman in higher education. Both amounts are higher than the OECD average, which is USD 36,085 for men and USD 35,281 for women. In the long run, however, taxpayers will recoup this investment many times over through the increased income taxes that tertiary-educated workers typically pay, as well as savings from the lower amount of social welfare benefits these individuals typically receive. Overall, the net public return in the U.S. amounts to USD 232,779 for each tertiary-educated man, and USD 84,313 for each tertiary-educated woman."

The issue that is rarely addressed is whether or not a specific four-year education at a specific school and at a specific cost is worth the investment for a given individual. As the OECD report indicates, an individual must consider direct costs for tuition, fees, books, and living expenses during a period of at least four years. He/she must also consider the loss in earnings accumulated over whatever time is required to obtain a degree. And finally, the student must have an estimate of the earnings potential from his/her specific educational path; not all schools and degrees are created equal.

An article in The Economist points out that there is an organization that is tallying data on educational outcomes so that prospective students might have some specific data with which to consider various options.

"PayScale, a research firm, has gathered data on the graduates of more than 900 universities and colleges, asking them what they studied and how much they now earn. The company then factors in the cost of a degree, after financial aid (discounts for the clever or impecunious that greatly reduce the sticker price at many universities). From this, PayScale estimates the financial returns of many different types of degree."

The article suggests that this type of information is greatly needed.

"A report by McKinsey, a consultancy, found that 42% of recent graduates are in jobs that require less than a four-year college education. Some 41% of graduates from the nation’s top colleges could not find jobs in their chosen field; and half of all graduates said they would choose a different major or school."

PayScale provides an annualized return on investment (ROI) for a large number of schools by integrating salary earned over a 20 year period since graduation after subtracting education costs and lost earnings (assuming a high school degree earning potential) while in school. The article provides this selection of results when all majors are included and financial aid is deducted from costs.

The PayScale website can be found here; the data on ROI can be found here. An interested individual can learn a lot by perusing this data.

The University of Virginia rates highest in the list provided in the above chart, not because it is the best school, although it is considered a very good school, but because it has low tuition for in-state students and it provides a significant amount of financial aid to needy students. The 17.6% annual ROI is obtained because only in-state students are tallied and with financial aid subtracted, the cost of the education is a mere $25,880. In-state tuition without financial aid comes at a cost of $94,300 and lowers the ROI to 10.3%. Out-of-state tuition raises the education cost to 191,600 and lowers the ROI to 6.4%.

If one wonders which schools produce the highest earning graduates over the next 20 years, PayScale provides an interesting answer. The winner is Harvey Mudd College with costs of $229,500 and a net ROI of $980,900. Including financial aid lowers the cost to $116,800 and increases the net ROI to $1,094,000.

Of the top 10 schools in terms of net 20-year ROI, eight are focused on technology: Caltech, MIT, Colorado School of Mines (twice for both in-state and out-of-state costs), Georgia Institute of Technology (in-state), Rose-Hulman Institute of Technology, Polytechnic Institute of NYU, and Stevens Institute of Technology. Stanford rounds out this top ten.

One has to wonder if these technical schools rate so high because a large fraction of the students must go on to post-graduate degrees if they are to participate meaningfully in science and engineering.

PayScale also is collecting data on schools by degree type as well. It considers the fields of art, business, computer science, economics, education, engineering, English and the humanities, life sciences, math and physical science, nursing, political science, and social work and criminal justice. This information should be invaluable in choosing a major and a school at which to study in a given field.

PayScale is attempting to provide some transparency to assist in making one of the most important decisions a person makes in his/her lifetime.

The PayScale effort seems very much a work in progress. The website behaved erratically (at least on Internet Explorer), and some of the responses to queries suggested a severe lack of statistically solid data. That was not surprising considering the scope of the effort. Hopefully, the data will only improve over time.

Meanwhile, those behind this project should be applauded and encouraged to continue this important effort.
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