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This is a guest post from Edmit.

Key Takeaways:

  • College costs are high, even taking financial aid into account.
  • On average, college has a positive ROI for graduates.
  • Your costs, how long you take to graduate, and economic conditions will impact your ROI.
  • There are also considerable differences in ROI based on the major, graduate school, and career path of a student.

As the price of a college education continues to rise, many Americans are questioning whether a college degree is still worth it. A college education is an investment of your time and money, and in order to make smarter financial decisions about college, it’s important to be aware of how much you can expect to get out of your investment. This article covers all you need to know about return on investment, or ROI.

How much are Americans investing in college education?

What is the average amount an American student spends on a college degree? Contrary to what you might expect, calculating the average cost of a college education can be surprisingly difficult. The National Center for Education Statistics estimates the prices for undergraduate tuition, fees, room, and board for the 2015-16 academic year to be at $19,189 at public four-year schools, $43,191 at private nonprofit four-year schools, and $9,939 at public two-year schools. Based on these numbers, it may be tempting to conclude that the average total cost of a college education is around $76,000 at a public four-year school and $172,000 at a private nonprofit four-year school. But thanks to grants and scholarships, many students end up paying significantly less than the “sticker price” of college, or the amount published as a college’s tuition and fees. The amount owed in tuition and fees after all grant aid, called the net price of college, can vary considerably depending on the student.

According to a 2018 report by the Urban Institute, among students who started college in the 2015-16 academic year, 66 percent of students at public four-year schools paid $5,000 or less in tuition and fees after all grant aid in their first enrollment year. At private nonprofit four-year schools, the net price of college was most varied: although 25 percent of students paid $2,500 or less, 22 percent of students paid more than $20,000. These numbers are significantly lower than the sticker price of college, estimated to be at $3,440 at public two-year colleges; $9,410 and $23,890 at public four-year colleges for in-state and out-of-state students, respectively; and $32,410 at private four-year colleges.

Although the net price of college is often considerably lower than the sticker price, it can still be a significant financial burden for many students and their families. The average American college graduate carries $37,172 in student loan debt. This is a burden that follows a student long after they’ve graduated. According to a 2017 report by the National Center for Education Statistics, 63 percent of students who began in the 2003-04 academic year took out federal education loans within 12 years of entering postsecondary education. Of these students, only 23.5 percent paid off their loans or had them forgiven by 2015, and the average amount owed 12 years after entering postsecondary education was $24,000 (the median amount was $9,400). Students who attended private nonprofit 4-year universities had the most debt, with an average of $31,800 (median of $11,200).

The picture gets more bleak when you look at those who went on to graduate school. What’s perhaps most staggering in the whole report is that the 11.1 percent of students who had borrowed to attend graduate school owed an average amount of $70,000 (median amount of $48,000) 12 years after entering postsecondary education.

Average lifetime ROI of a college education

Is a college degree worth this investment? A 2014 study by Jaison Abel and Richard Deitz of the Federal Reserve Bank of New York found that since 2000, the average ROI for a bachelor’s degree has remained steady at around 15 percent, “easily surpassing the threshold for a sound investment.” (This ROI was calculated based on the cost of an undergraduate education and the college wage premium—or wages college graduates can expect to earn relative to the wages of high school graduates until the age of retirement, at 65.) Even in the midst of falling wages in the wake of the Great Recession combined with sharply rising tuition over the last decade, the value of a college degree hasn’t flagged for the simple fact that the wages of those without a degree have been falling even more rapidly. In fact, as those with only a high school degree continue to fall behind, getting a college degree may be more important than ever. While we often hear of students saddled with student loan debt (aggregate student loans in the U.S. are at more than $1.5 trillion as of 2018), the widening wage disparity has kept the college wage premium “at an all-time high.” Abel and Deitz add that college graduates with a bachelor’s degree earn an average of 75 percent more in wages than high school graduates, amounting to over $1 million over a lifetime. A different report from 2011 by the Georgetown University Center on Education and the Workforce puts the lifetime college wage premium at 84 percent, adding up to about $2.8 million on average.

Next taking a look at the chronically underemployed, the New York Fed researchers add that although for much of their careers around a third of college graduates find themselves working jobs that do not require their degree, they still tend to earn more than high school graduates on average, and most settle into college-level jobs by age thirty. In general, they are far less likely to become or remain underemployed as well.

This is not to say, however, that all college students can expect the same ROI as there are many factors that affect a student’s ROI outcomes. According to the same 2018 report by the Urban Institute, “factors contributing to an individual’s ROI in higher education can be broken down into several (often interrelated) component parts, including the cost of higher education after grants; the length of time in school and the likelihood of certificate or degree completion; the earnings returns from a given level of degree, major, or institution; the student’s demographic background; and local economic conditions.” Although investing in college pays off for most students, it can be incredibly risky for some. Understanding each of these individual factors is an important and necessary part of making financially smart decisions about college. Here’s a brief breakdown:

Cost of higher education after grants

Unlike the sticker price of college, the net price can vary considerably depending on the student, and different financial aid packages can dramatically change a school’s ROI. For example, at schools like Yale and Harvard, which promise to meet 100 percent of students’ demonstrated financial need, low-income students may see a higher return on their investment than their peers. For students from high-income families, on the other hand, private universities might be the worse financial decision because their net price of college is much higher. For more information on calculating your ROI, check out Edmit’s article on the topic.

Length of time in school and the likelihood of certificate or degree completion

A startling 40 percent of students fail to earn a bachelor’s degree within 6 years of starting their undergrad. “Each additional year in school increases a student’s total cost of attendance and reduces the number of years the student can work in a job that requires a credential,” reports the Urban Institute. In fact, although we often hear about graduates saddled with student loan debt, “the even more damaging outcome is for students who take on debt but never complete their degree,” says the Department of Education, “[and] students’ ability to repay their loans depends more strongly on whether they graduate than on how much total debt they take on.” When deciding which college to attend, keep in mind that completion rates are lowest at for-profit schools and highest at public and private nonprofit four-year schools.

Earnings returns from a given level of degree, major, or institution

Depending on which level of degree you pursue, the major you select, and the institution you attend, your ROI could change dramatically. In general, more education leads to higher returns, and STEM and business majors have the highest lifetime earnings, but there are important exceptions. (For more information on the best and worst undergraduate, graduate, and doctoral degrees in terms of ROI, the second half of this article deals extensively with the subject.) Additionally, graduates from selective institutions tend to see higher returns than their peers, but there’s some dispute as to whether this can be attributed to the schools themselves.

The student’s demographic background

“Even when they enroll in the same institution, degree level, and major, students from different demographic backgrounds may experience different earnings returns,” reports the Urban Institute, “The demographic differences in earnings returns can reflect a student’s preferences for work in different sectors or on different schedules, but they can also reflect differences in a student’s access to job opportunities (e.g., the strength of connections to employers or the discrimination of employers against members of certain demographic groups).” Female students, for example, tend to see lower returns than male students even after multiple controls for education.

Local economic conditions

This might go without saying, but if the economy is bad when you graduate, your ROI will probably take a hit. Research has found that students who graduate into a recession see lower returns than those who graduate into a stronger economy.

Some of these factors, like demographic background and local economic conditions, are outside of your control. Others, however, are based on your decisions. In order to credibly predict your ROI, take as many of these factors into consideration as possible, and continually update your estimate with each major decision you make.

Finally, this article would not be complete without a long, hard look at the word “return.” Although this article is primarily concerned with financial return, you should know that many advantages of attaining a postsecondary degree have little to do with money. These include self-esteem, knowledge exposure, and other elements of personal value which are important for the formation of personality and character. According to a 2013 report by the College Board, attending college significantly lowers the likelihood of obesity and smoking, raises the probability of civic involvement, and improves overall health, quality of family life, social mobility, and job satisfaction. In other words, the benefits of a college education are not just financial. Students looking to make smart, well-informed decisions about college shouldn’t ignore this side of the college “return.”

Degrees with the best average ROI

Among the most important factors determining projected ROI is undergraduate degree choice. This is because there are considerable differences in lifetime earnings across different majors. Grouping college majors into 13 broad categories, the New York Fed study found that the bachelor’s degrees with the highest rates of return include those under engineering (21%), maths and computers (18%), health (18%) and business (17%). In general, majors that tend to emphasize quantitative skills lead to the highest returns. But before you head over to your university registrar’s office to change your major, be aware that other factors might be at play. Here’s what the New York Fed researchers have to say:

“In presenting our findings, we emphasize that not all majors are feasible for every college student. For example, recent research has shown that graduating with a math or science major is more difficult than pursuing other fields of study. Thus, some of the economic return associated with particular majors may reflect differences in the abilities of the students who choose these majors, and not necessarily the skills obtained through majoring in these fields.”

In other words, when it comes to choosing your major, aptitude matters. Choosing a major that doesn’t align with your strengths or requires skills you don’t have increases the risks of a poor outcome (not to mention, might make you seriously unhappy). Recall that length of time in school and the likelihood of degree completion are important factors in determining your ROI. While you should be concerned with the wage premium of your degree, be aware of the dangers of choosing a major that is not right for you. Additionally, it’s possible that the variations in earnings across majors may be caused by other factors. Students select their majors, and this selection bias should be taken into account in your interpretation of these findings. Studies show that high school grades and standardized test scores, especially for math, vary among students who choose different majors. These differences in the abilities of the student may be the cause behind the earnings variation.

For more information on which college majors make the most money, check out Edmit’s article on the topic.

What about graduate school? Is getting an advanced degree really worth the extra buck? Here the financial picture gets more complicated. As a rule, comparing grad school costs and expected payoff post-grad school, we find that people with more education tend to make more on average. According to the Bureau of Labor Statistics, in 2013, the median annual wage for full-time workers with a master’s degree was $68,000; for full-time workers with a bachelor’s degree, the median annual wage was $56,000. Similarly, a 2011 report by the Georgetown Center on Education and the Workforce found that the median salary of graduate degree recipients is 25 percent more than that of peers with only a bachelor’s.

However, having a master’s or a doctorate under one’s belt isn’t always a surefire resume booster. Employability and wage payoff can vary wildly depending on your field of study and occupation. On the one hand, for leadership, administrative, or academic careers, an advanced degree may be required. The Bureau of Labor Statistics has very helpfully compiled a list of 33 occupations that typically require a master’s degree at the entry level. These occupations include anthropologists and archaeologists; educational, guidance, school, and vocational counselors; nurse practitioners; and sociologists, to name a few. Professional degree recipients in engineering or business, in addition, may find their starting salary prospects dramatically improved. But those in other occupational fields, like the arts or computer programming, may find that their advanced degree doesn’t translate as readily into a fatter paycheck, improved marketability, or instant opportunities for career advancement.

So while overall a graduate degree leads to higher earnings, the additional earnings return is determined for the most part by discipline. According to the Georgetown study cited above, the majors grouped under Biology and Life Sciences who go on to obtain a graduate degree in their field get an average earnings boost of 101 percent; under Business, 40 percent; under Computers and Mathematics, 31 percent; and under Arts, 23 percent. Be aware that specific majors within each of the broad categories may vary significantly. For example, let’s consider graduates in the Physical Sciences, who, on average, get an impressive earnings boost of 70 percent by attaining a graduate degree. At the extreme ends, graduates in the Science: Life/Physical subcategory get a boost of 86 percent, whereas those in Atmospheric Sciences and Meteorology earn only 1 percent more. For more information on your major, follow this link to the full report.

There’s less research on the wage premium of a doctoral degree (and a lot of the information out there is negative). A doctoral degree requires investing a significant amount of time in school—time that could be spent in the workforce—so the opportunity cost is huge. This investment is necessary if you want to go into academia, but if you’re thinking about pursuing a PhD for any other reason, know that the financial benefits are generally low. A 2016 article by the Economist cites a study in the Journal of Higher Education Policy and Management, which found the earnings premiums for master’s and doctoral degrees to be 23 and 26 percent, respectively. So while there is an earnings premium for a doctoral degree, in general, you’d be better off with a master’s, which takes significantly less time to complete. “Only in medicine, other sciences, and business and financial studies is [the wage premium] high enough to be worthwhile,” the Economist reports.

Degrees with the worst average ROI

What are the worst degrees in terms of ROI? According to the New York Fed researchers, the lowest lifetime returns for bachelor’s degrees are found among liberal arts (12 percent), leisure and hospitality (11 percent), agriculture (11 percent) and education majors (9 percent). But the good news for college undergraduates is that since the returns for a bachelor’s degree exceed 9 percent at their lowest—still well above what the authors consider the minimum threshold for a worthwhile venture (the bar for this would be your typical stock investment)—college remains a wise investment in general.

For more information on which college majors make the least money, check out Edmit’s article on the topic.

What about grad school? According to the National Center for Education Statistics, the average graduate tuition and required fees in the 2015-16 academic year was $11,303 at public institutions and $25,817 at private nonprofit institutions. Financial aid can be difficult to obtain for graduate school, which is partly why so many graduate degree recipients are saddling with student loan debt (nearly 50 percent of students enrolled in master’s degree programs financed their education through loans during the 2011-12 academic year). As we’ve already discussed, for some graduate degree programs, the expected payoff is worth this investment. But for others, a graduate degree is neither necessary nor advantageous for employment. According to the same 2011 Georgetown study, the majors with the lowest earnings boost from obtaining a graduate degree include atmospheric sciences and meteorology (1 percent boost), studio arts (3 percent), and petroleum engineering (7 percent). Other majors with the lowest average earnings boost from obtaining a graduate degree are advertising and public relations (12 percent), pharmacy pharmaceutical sciences and administrations (13 percent), forestry (15 percent), and computer engineering (16 percent).

Especially for fields that value skills learned on the job, such as engineering and computer science, a master’s degree might not be necessary for finding your dream job. If you’re able to get a research grant to fund your studies, a graduate degree might be a great opportunity as you would be keeping costs low (the two ways to increase your ROI is to minimize the amount you spend and to maximize the amount you get paid). And, of course, many people are interested in graduate school simply because they want to continue their education, which they find personally fulfilling. But if you’re considering getting a master’s degree for financial or work-related purposes, ask yourself the following questions. Is a master’s degree required for the job or position you’re pursuing? Do you work in a field that values work experience over a graduate degree? Could a certificate or professional certification help you get that job faster than a master’s degree can? Does your employer offer tuition reimbursement? Remember that there are alternatives to getting a graduate degree, alternatives that may be better suited for your particular interests or goals. If you’re still unsure whether a master’s degree is right for you, the Bureau of Labor Statistics has a lot of helpful resources on the topic.

If a graduate degree can be incredibly risky, a doctoral degree can be downright dangerous. The opportunity costs are even bigger for those considering a doctoral degree, and for some majors, the investment simply isn’t worth it. According to the Economist, “PhDs in maths and computing, social sciences and languages earn no more than those with master’s degrees. The premium for a PhD is actually smaller than for a master’s degree in engineering and technology, architecture and education.” In addition, especially for fast-changing fields such as engineering and information technology, losing out on five years of marketplace experience could set you back considerably compared to your peers. Given the risks involved, make sure you’re absolutely certain about your decision before pursuing a doctoral degree.

In summary, despite rising tuition and fees, college remains a worthwhile investment for most. However, it can still be a financially risky decision, and in order to increase their chances of a positive outcome, students should understand the myriad factors that may influence their ROI and update their estimates with every major decision they make. Here at Edmit, we’re here to help you get the information you need to make smart and informed decisions about college.



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