Measuring Return on Invest for a College Degree
Return on Investment i(ROI) is used in business as way to measure, -your return on investment-Hows that for a bold statement. Let’s look at this a little closer.
If you invest a thousand dollars and a year later you have two thousand dollars, your return on investment is a thousand dollars. If you neighbor invests a thousand dollars another way and get back five hundred dollars, the return on investment is five hundred dollars. If your other neighbor invests his grand and loses five hundred dollars, he has a negative return of investment. Simple huh. What about an advertising campaign. Companies will measure the cost of advertising and how much more profit (or loss) it brought to the company. The ROI will determine whether it was a good campaign or a bad campaign. Companies often borrow money hoping that the return on investment will allow them to pay back the money and end up with even more money.
What about employee training. How much time do you spend training an employee to bring the biggest return on your investment? The investment is the time and the money to produce a better trained employee to make the business better and more profitable. Just how much time and money and it’s impact is a lot harder to measure in this case. It could also be measured against better ways to invest the same amount of time and money to produce better employees and more profit. This is why we have business schools-they deal with this stuff. We deal in education.
How much time a money is necessary to produce a better student? Does more money produce better students, and if so how much more and how much better? Does more time produce better students and if so, how much time and how much better? This is part of our dialogue when it comes to funding public education and a worthy discussion. But what about you. How much money should you spend or should be spent by parents on college to get a good return on investment?
The answer is it depends on the degree. Some degrees will produce a lot more income over the a lifespan than other degrees. An engineer will almost always outearn a social worker. One can calculate the expected income based on current information a profession can expect to generate ever a lifetime. Now, of course the results will vary widely depending on each individual and their situation, but it’s the best we can do projecting out forty years or so.
The main reason to ask this question is in regards to college debt. How much money should be borrowed to get a good return on investment. If student borrows a hundred grand and uses that money to produce a lifetime income of three million dollars, it might be considered a good investment. If a student borrows $250,000 dollars for med school, the return on investment might be five millions dollars over their lifespan, again a good investment. An art history major who borrows $250,000 and uses that degree for a job that earns $500,000 over a lifespan-not so much. How much money should one borrow? That is the question. That same art history major could work at Starbucks and make the same $500,000. That med student could invest $250,000 in the stock market and return 5 million dollars just by letting sit in the market for 40 years-based on historical performance. And they wouldn’t have to do any work! As you can tell, using ROI and colleges can be a very “what about” process with many outcomes, so what should we do?
I think the college experience is more than an ROI on future lifetime incomes. Thinking skills, experiences, relationships, explorations, are all part of the college experience and a lot harder to quantify. How much return does a student receive in working with others? How much return in living in a diverse community? How much return is there in the exchange of opinions and ideas? How much return in living away from home? The return on investment on being in sports, clubs, choirs, theater, and all sorts of activities that elude most of us in the working world? Somewhere between 30 and 70 percent of students switch their majors, how do we figure this in our ROI calcuations?
Now that you’re thoroughly confused, there are some guidelines available. A good rule of thumb is to expect to pay off 10% of what you borrow over 10 years or . If you borrow $10,000 dollars, you can pay $1,000 for 10years. Let’s assume a 5% interest rate on the loan.
Borrowed amount $10,000 $25,000 $50,000 $100,000 $200,000
Monthly payment $106 $265 $530 $1,060 $2,121
Total payment $12,720 $31,800 $63,600 $127,200 $254,520
The two things to look at are the monthly payments and the total payments. The first question to ask is “Can your profession let you pay that amount per month for the first ten years of your life?” The other is total payments. What else would you do with $14,000, $70,000 or whatever the amount is druing the first 10 years of your life after college? A car, a house, a spouse, an expanded pez collection? So the final question that needs to be answered is “How much is the total college experience worth?” Not just the practical return on investment, but would you put off buying a car or house or pez several years because you value the total college experience. And of course, the answer to this question differs for each family and student. Just make sure you’re INFORMED and not a on the news because nobody told you borrowing $300,000 to major in pez collecitng was probably not a wise decision.