Is College Worth It? Decoding New Approaches to Calculating ROI

0
5


More than ever, students and their parents are asking whether college is worth it. Most recently, The Wall Street Journal called it “the albatross around their necks,” referring to graduates saddled with debt.

According to The Center on Education and the Workforce (CEW) at Georgetown University, bachelor’s degree holders earn 84 percent more than those with just a high school diploma. Yet at the same time, as the Journal pointed out, “millennials are the most educated generation in the nation’s history, but they are broke compared with their predecessors.”

Statistics like the aforementioned are compelling. But doesn’t answer the question people are really asking: Is this college worth it for me? Moreover, how should the return on investment (ROI) be calculated?

A Biden administration is likely to reinstate some form of gainful-employment rule, which was based on the idea that typical graduates of career-training programs need to earn enough to afford to repay their loans. The rule, enacted by Obama and cancelled by Trump, required any program where typical graduates’ debts exceed both 8 percent of their total income and 20 percent of discretionary income to improve—or else lose access to federal financial aid.

Most ROI calculations are based at least in part on data from the Department of Education. The department offers a tool, the College Scorecard, which provides information including average annual cost and median salary the year after graduating for those receiving financial aid. Some states, such as California, have made similar tools available. Salary Surfer, a website that provides labor market information for California community colleges, allows users to compare institutions’ salary outcomes at 2 and 5 years after finishing a program. In Texas, Seek UT, from my alma mater, The University of Texas, helps students understand how much graduates earn and how much they owe in student loans.

Non-governmental groups, such as CEW, The Brookings Institution, Third Way, and Payscale have designed different ways to measure ROI based on information from the College Scorecard. Here’s how one college fares according to their different calculations.

Net Present Value

CEW offers a “net present value” (NPV) approach to determine ROI. NPV is defined as “how much a sum of money in the future is valued today,” essentially translating future cash flows into today’s dollars. It provides a concrete number to compare an upfront investment with a future return.

How it works: This approach includes costs, future earnings, and the length of time it would take to invest and earn a certain amount of money over 10, 15, 20, 30, and 40-year horizons.

Example: Over a 10-year horizon, The University of North Carolina at Greensboro would provide an NPV of $93,000, according to CEW. The average annual net price to attend this school is $12,158, according to the College Scorecard. Therefore, if a student earns a degree in four years, it will cost them $48,632. In this case, the NPV is almost double the cost over a 10-year horizon. That ranks UNC-Greensboro 2,629 of the 4,500 schools CEW analyzed—a little below the median.

Limitations: CEW humbly calls their effort “a first try” and while their calculations are well-considered and robust, NPV is a sophisticated concept that 17 year olds might have difficulty understanding. Furthermore, high students are already suffering from choice overload so having to evaluate and choose between four different NPV time periods could be overwhelming.

Value Added

The Brookings Institution analyzes college “value-added,” the difference between actual alumni earnings outcomes and the outcomes one would expect given a student’s characteristics and comparable type of institution. This is meant to capture the degree to which the college affects student economic success post-graduation.

How It Works: A college’s “value-added” is the percentage increase or decrease in a graduate’s mid-career salary relative to what is predicted based on similar student and school characteristics. The approach shows how an institution’s alumni outcomes compare to the average of its peer institutions with the same or similar student, type, and location characteristics.

Example: According to Brookings, the University of North Carolina at Greensboro scores an 11 out of a score of 100 for value-added to median student earnings 10 years after enrollment.

Limitations: The concept of “value-added” is a proprietary approach which requires a lot of data and would be difficult to reproduce. Unlike NPV, which is a widely used financial calculation, “value-added” doesn’t have any common meaning and the output is difficult to interpret.

Price-to-Earnings Premium

Third Way’s ROI approach measures economic value, a price-to-earnings premium (PEP) that can be used to estimate the amount of time it usually takes to earn the amount equivalent to the cost of obtaining a credential at a particular school.

How It Works: If students who pursue a certificate or degree subsequently earn more than their non-college going peers, their additional income can be used to recoup the amount they paid to obtain their certificate, associate’s, or bachelor’s degree. Once they have recouped those expenses, any additional income is the surplus value credited to the credential.

Example: The typical student who attends The University of North Carolina at Greensboro earns $37,500 within 10 years after initial enrollment, according to Third Way. North Carolinians with just a high school diploma earn $22,000. Since UNC-Greensboro students’ wage premium is $15,500 more than North Carolinians with just a high school diploma, it would take them just over three years to recoup the $48,632 four-year cost.

Limitations: Third Way directly addresses opportunity cost and therefore can be helpful for students considering entering the workforce after high school instead of pursuing postsecondary education. This approach helps students evaluate the tradeoff in the amount of time it takes to pay off the net cost of the program. One concern about this approach is that it could lead to undermatching since inexpensive programs could be paid off relatively quickly even if they don’t provide a meaningful increase in career earnings potential.

Return on Investment

Payscale uses a straightforward ROI calculation.

How It Works: Payscale calculates a 20-year net ROI by subtracting the 24-year median pay for a high school graduate from the 20-year median pay for a bachelor’s graduate, and then further reducing the difference by the total 4-year cost of attending the college program.

Example: According to Payscale, the 20-year net ROI for in-state students at UNC-Greensboro is $139,000. The calculation uses a total 4-year cost of $77,600. Doing the math, that means the 20-year difference in median pay between the high school graduate and college graduate is $216,000.

Limitations: Payscale’s ROI calculation uses the full cost, including tuition, fees, room and board, and books and supplies. They acknowledge a student’s actual net cost may vary based on a student’s academic success and family income. While the average 4-year net cost (after grants and scholarships) for UNC-Greensboro is $48,632, Payscale uses 4-year full cost, a much higher number ($77,600), that not all students will pay. Payscale wisely made the decision to choose a single default time period for their measurement, making their results more digestible.

These approaches reach similar conclusions. UNC-Greensboro graduates earn about $15,000 more than high school graduates without a college degree. Over 10 years, according to CEW’s NPV approach, that nets out to $93,000, after taking costs into account. Over 20 years, according to Payscale’s ROI approach, that nets out to $139,000. Third Way’s PEP approach shows the payoff is approximately three years.

There’s no way around the fact that calculating ROI is complicated, involving numbers and calculations that are not always transparent to families. Students and their parents may have difficulty understanding the financial data, terminology, and relevance of the various measures needed for comparing the value of different college choices. It is also difficult to compare college and non-traditional options because the latter’s value, such as bootcamps, are often based on starting salary (due in part to longitudinal and government data being unavailable) whereas CEW, Brookings Institution, Third Way, and Payscale consider 10- or 20-year earnings figures.

That is why informational disclosures are important. While research shows mandated disclosure can help to reduce information gaps, it is not sufficient to support college choices. There is no universally adopted way to calculate the ROI of college, but there are an increasing number of resources available for students and parents to understand the value of college and make a more well-informed decision, even in the absence of gainful-employment rules.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here