At LendKey we stress the importance of understanding the effects student debt has on the ROI of your college education. Sure, you go to college to better yourself – you gain knowledge, make connections, and more. But you also go to college to improve your earning potential. In fact, studies show that the average salary for college graduates is $46,900, while the average salary for those with just a high school education are only $30,000. That’s over 50% more.
But the equation is a bit harder than that. Every college and university charges a different amount for tuition, and your individual financial situation may require you to take on student loans or seek financial aid. Remember, the average college student is also taking on almost $30,000 in loans to get the benefit of higher pay.
So it’s not as simple as just, “you earn more by going to college”. It requires you to look at your Return on Investment.
College is an investment of both time and money. In return, that time and money should earn you more and improve your knowledge. Yes, there are far more benefits beyond the monetary ones, but given that the Federal Reserve Bank of New York highlights that there is over $1 trillion in outstand student loan debt, the monetary ROI is increasingly important.
PayScale recently shared it’s 2015 College ROI Report, in which it analyzed the cost of hundreds of colleges, while at the same time comparing that data to it’s own research on pay and salary after graduation. The result is an in-depth look at how much it costs to attend certain schools, versus how much those individuals make after graduation – College ROI.
To calculate the return on investment, the report looks at the monetary value using on-campus housing costs, no financial aid, and the average salary for 20 years after graduation. It also compares majors, types of schools, and more.
Not surprising, the report identified several trends in the college return on investment. First, engineering schools continue to dominate the top of the list. Seven out of the top ten schools are engineering school. The average 20-Year Net ROI for engineering schools is $677,500
Liberal Arts, Religious, Art, and Music & Design Schools were consistently lower than all other types of educational programs. All have an average 20-Year Net ROI of less than $250,000.
Furthermore, going to an in-state school consistently had the best ROI. State Schools dominate the list when sorted by 20-year Annualized ROI, which is indicative of their relative low cost when compared to Private Schools.
Let’s take a specific example. UC San Diego, which ranks 45th on the list, is an engineering-focused public school. The average cost to attend over the 4 years is $118,000. The average graduate leaves school with $22,440 in student loan debt. However, the typical graduate has a post-graduation salary of $50,600. This graduate has a 20-year net ROI (means the pay difference between someone with a bachelors degree versus someone who does not over the 20 year period) of $625,000. So, that additional $118,000 “investment” earned a 9.8% annualized return over that 20 years.
However, it’s important to remember that student loan debt can impact the ROI on your college degree. When a student takes on more debt, it lowers the ROI after graduation because the real costs of the degree will actually be higher.
Taking the same example of UC San Diego, let’s say the student had to borrow all $118,000. Using a student loan calculator, we can see that the debt will have actually cost $162,953 over the first 10 years after graduation. That would lower the ROI on the investment to roughly 9.0%.
However, if the student can lower the cost of college, by getting financial aid, or possibly graduating early, the ROI can increase as well. For example, if we can reduce the cost of going to college by just $2,500 per year (to a total cost of $108,000 over the 4 years), the ROI will push 10% after graduation.
As you can see, looking at your costs and return are extremely important. Your degree matters, as well as your college expenses. However, for a high school senior making this decision, these concepts can be tough. The best thing a parent can do is highlight these important ideas for their child and discuss the importance of getting a good education at a reasonable price based on the intended job after college. This way the student can maximize ROI on their education.