A. A college applicant.
B. A high school graduate.
C. Someone with a 2-year (Associate) Degree.
D. Someone with a 4-year (Bachelor’s) degree.
The answer is D: Someone with a 4-year (Bachelor’s) degree”.
The higher education has gotten too costly and students nowadays have to truly find and pick the right advanced level education that can suit your final goal of getting a better return on investment.
The return on investment (ROI) from education is normally the highest for someone with a 4-year (Bachelor’s) degree. The Bachelor’s degree would be given more preference than an associate degree for any professional job profile, which means someone with four years of Bachelor’s have high possibility of landing a job and will be able to get more return on investment.
What does ROI mean in higher education?
ROI stands for Return on Investment. In financial terms, it means the efficiency of one investment over the investment’s cost. It is usually arrived at by subtracting the cost from the gain and dividing it by the cost of the investment.
In education, the cost of getting a degree can be a costly investment. And if the returns concerning job and salary are not enough, then the ROI is low.
ROI of education has a meaning that is similar to ROI in finance. It is the cost of education vs the lifetime earnings. The following paragraphs explain how one can calculate the ROI in education.
Living expenses and college tuition
One must calculate the total cost of getting a college degree. This includes tuition as well as living expenses. Tuition keeps increasing year after year, and this shift must also be considered while making the calculation. Living expenses can include apartment rent, food, transportation etc.
Salary and job prospects
The student must perform research on prospective jobs and related salaries that she/he may get post their graduation. Also, consider the inflation, industry growth and cost of living in the area where the jobs are.
Life time earning
Once a student checks out his/her career prospects, they must calculate the lifetime earnings, considering the next 30 year period, while considering the salary growth and cost of living adjustments.
Once the lifetime earning is determined, subtract the student debt (college tuition, living expenses during college etc.) and compare the remaining number to other schools and offered salaries for their graduates. College is expensive and taking a loan for a career in a dead industry is a bad financial decision.
Why the ROI of education can matter to your financial success
The cost of a college education has skyrocketed. Earlier getting a college degree meant getting a better paying job. But today a good degree doesn’t necessarily mean a good paying job. There is a correlation between education and income, but a premium education may not give the same correlation.
Wages have increased over the years, but not at the same pace as tuition costs. This has resulted in a shrinking ROI. If one goes to college to get a good job, earn more and have a better life but ends up covering their student debt from most of the earnings, then the aim of a better life may not be met.
Your savings will go down, and even if you earn at the market level or higher, you will not enjoy a big chunk of your income as you will need to pay back the debt.
You need to remember that even if your wages increase over time, the debt also increases due to interest on the unpaid amount. The vicious cycle of loans and interest will continue if you don’t decide the right college based on the ROI.
Calculating ROI for your higher education
People often believe that if the cost of their college education is higher, then they will probably experience higher salaries in their lifetime. This is untrue and unrealistic.
The lifetime earnings divided by total costs of education will yield the ROI. For example, if you want to go to college to become a teacher, who generally earns $35,000, then project the income until retirement or say 30 years.
The salary does increases around 2%-3% annually. This is the lifetime earnings that need to be divided by the total cost of education. In this example, the ROI is 887%, whereas the best colleges can have an ROI of 1,714%.
Benefits amplifying the return on investment in higher education
Apart from the ROI in financial terms, there can be unquantifiable effects from an investment in higher education that amplify a good ROI.
Lower risk of unemployment
The largest benefit of having an education is that one is less likely to be unemployed. People who are highly educated are less often out of work. The unemployment rate for college graduates in the USA is 4.1% which is much less compared to the rest of the population.
High life quality
Research has depicted a positive association between higher education and high levels of civic engagement and family stability against a negative association with ills like addiction and crime.
A higher education helps one in switching careers and demonstrating the ability to learn new skills. It creates career options to find more remunerative and rewarding work. A business education empowers one to start their own business while dealing with errors and risks.
Trends show that if one graduates from a college, they earn more, and an income gap is often because of education.
Going to school has always meant learning new things. A college education enables students to understand their purpose and think critically.
The higher a persons’ education, the higher is their chance to make it big in the world. But it is best when someone invests in a 4-year college degree with a good ROI over the 2-year associate degree or below.
- Return on Investment in Higher Education: Retrieved from darden.virginia.edu
- ROI calculation for College Degree: Retrieved from investopedia.com
- Benefits of High-level Education: Taken from urban.org