Calculating Return on Investment (ROI)
With student loan debt reaching a record high of $1.2 trillion, according to NBC News, students and families are understandably concerned about the cost of a college education. Skyrocketing tuition rates have also lead many to question whether a degree is even worth it. Research has shown, however, that a degree does pay off, as long as it leads to a well-paying career and not just a job at the local coffee shop post graduation.
The harsh reality is that some colleges and degrees pay for themselves, while others don’t, and in today’s job market that’s something all students need to seriously think about before enrolling in any college and degree program.
What is ROI?
ROI, or return on investment, is a term that many have probably heard before. It’s a performance or value metric that can be applied to all sorts of purchases to determine if something is worth one’s money. If the benefits—or return—outweigh the investment, that’s a good sign that the purchase will be worth it. In terms of higher education, ROI refers to the cost of attending college (investment) versus the graduate’s future earnings (return). Because college students will be spending tens of thousands of dollars a year on education, it’s important to determine a college’s ROI before making any commitments. ROI, however, can be very subjective, and there is no one-size-fits-all calculation. An important factor to one student may not be as important to another. For example student A may decide that she needs the personalized attention only found in a small classroom in order to do well, while student B can thrive in a small or large environment.
Although ROI can be very personal, below are important factors that all students should consider:
The Investment: Total Cost of College
To calculate a college’s ROI, the first step is to determine the total cost of college. While tuition and fees are amounts that most students look at, some tend to overlook other important expenses that can affect total cost. Examples of other expenses to consider include:
- Additional fees, such as technology, assessment, laboratory and health insurance fees
- Room and board
- Textbooks and supplies
- Personal living expenses
In addition to these expenses and fees, also consider the financial aid received, such as grants and scholarships. In recent years, the federal government has pushed for increased transparency when it comes to college prices so many schools now provide online calculators to help students and families estimate the total net costs.
Calculating Potential Debt
The potential debt that students accrue can greatly affect ROI. For example, if one’s student loan debt at graduation is more than one’s annual starting salary, that will be a problem. Ideally, a graduate should earn enough to meet all agreed repayment terms and conditions that came with the loan. This is when scholarships and grants will be beneficial. The more free money you can get, the less you’ll have to borrow and eventually pay back.
The Return: Expected Future Income
How much a graduate will earn is key to calculate college ROI, as well as making smart decisions about student loans. Even if you’re not sure of the amount, an educated guess will still be helpful as it’ll be difficult to determine if you’ll be able to earn back the money you invested in your degree without an idea of future income. The Bureau of Labor Statistics posts median wages for several industries and occupations. Sites such as salary.com are also useful for researching potential wages.
On a related note, one’s major or field can greatly influence future salary. It’s no surprise that an engineering degree will lead to a lucrative career, whereas a liberal arts degree will be much more varied, with some occupations even leading to little or no return at all. Therefore, when considering colleges, be sure to also think about your field of study and eventual career. If you’re passion is in a field that doesn’t pay well, it may be wise to consider a lower-cost college to maximize ROI.
According to salary.com, below are five majors that are a wise investment:
- Information Technology
- Human Resources
For many students, the primary concern is what they’ll earn after graduating. Although definitely important, some students may also consider other subjective, qualitative returns such as personal development and enrichment, life experience, passion, and socialization. These may not translate directly into financial benefits, but considering the fact that you’ll be committing a year, at the very least, of your life to being a student, they may help to keep you motivated and happy throughout the journey and can also positively affect you long after earning your cap and gown.
How Long Will it Take to Graduate?
Just because you’re pursuing a four-year degree, doesn’t necessarily mean that you’ll actually finish in four years. In fact, according to the Institute of Education Sciences, in 2012, 59 percent of first-time, full-time undergraduate students completed their degrees in six years. That’s two more years of tuition, fees, and student expenses that most likely weren’t factored in at the beginning.
Time to graduation is particularly important for adult learners to consider. Because many adult students work part- or full-time while in school, it may take them longer than expected to complete a degree program. This extra time can also result in missed income opportunities. For example, if you’re currently working full-time in marketing, but decide to go back to school for two years to earn an MBA, not only are you paying for an expensive degree, but you’re most likely losing out on income by going to part-time employment or giving up your job entirely. One way to bypass this is to attend an online college, which offers more flexibility so you can work towards your degree and still earn that full-time paycheck.