Analyze Colleges Just Like You Would a Stock
Calculate a school’s ROI to determine whether it is a good investment or not
A typical college degree is worth a ton of money over a career. A typical degree – but not every college.
College costs rose roughly 7% annually over the past 50 years, about double the average yearly inflation rate. And overall costs of some, including even community colleges, have increased faster than that in recent years, according to the College Board.
In general, higher education does boost your lifetime earning potential. Some schools simply seem not worth the investment, though.
What is Your Return on Investment?
To calculate whether your college is worth it, use an opportunity cost measure called return on investment (ROI). After factoring all the net college costs, compare 30 years of estimated income of a college graduate versus 34 years of income from a high school graduate who started working immediately and didn’t pay college expenses or assume the debt of student loans.
Future college students (and their parents) must realize that not all colleges are equal. Graduates from the lowest-ranking schools often earn less income after graduation. You can also assume that low-performing schools tend to offer less financial assistance, which leaves graduates with larger debt burdens.
The most highly endowed colleges can reduce their cost of attendance with grants and scholarships. For example, Stanford ranks as one of the most expensive schools based on sticker price. But generous financial assistance makes for a very competitive net cost and would give the school a high ROI score.
Debt burdens are also relative. A doctor’s salary more quickly pays off a high-price education loan than a teacher’s. Good rule: Avoid incurring college debt exceeding half your expected annual income. Limiting loans in this way allows you to pay off student debt after five years using 10% of your future salary.
Clearly your ROI analysis will show a world of difference between the outcomes of graduates of highly rated schools and with graduates of those schools near the bottom of the barrel. Attending a college with a poor ROI is not necessarily a mistake but, for reasons now obvious, the financial aid package better be sweet.
As with any investment, do your homework before you commit time and money to such an unknown outcome.
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