How can Return on Investment be used sensibly?
Though this blog takes a data-centric, quantitative approach to the business of higher ed, using numbers wisely means knowing when they can measure something informatively and when they cannot. The “returns” to students from completing college degrees is one of these areas where overstepping of this boundary is common. Fundamentally, the problem is that careers, during college and after, have both financial and non-financial rewards. Return on Investment (ROI) can help evaluate the benefits of college but it can’t serve as the primary parameter both because careers are not just about income and also because measuring these returns is fiendishly difficult.
Let’s start with three fictional examples showing how income is insufficient to measure success after graduation. Graduate A uses their degree to land a job in IT security paying a generous $70k annually out of the gate, as they had hoped. Graduate B uses their degree to land a job in social services paying a much less generous $25k but is fulfilling and, more importantly, is what B wanted to do. Though they are in different income brackets now, a divergence which will likely only widen in the future, both of these graduates are happy they went to college and with their initial job, which is on their desired track. Those are positive outcomes flowing from college.
Then we have Graduate C. C made $35k two years after receiving their degree, more than Graduate B, but earned most of that driving for Uber along with busting their butt working different side jobs. They are paying off their student loans but are pissed off that they ever attended college and are wondering how they will get on to a professional track. C earns more than B, so in pure ROI terms is a more successful outcome. But we’d probably all agree that B is more satisfied with their college path and represents a better outcome wholistically.
ROI’s conceptual shortcomings
Three other complications further hamper the usefulness of ROI. (Readers will easily think of additional factors, such as students switching majors and careers.)
First, college is partially an investment and partially consumption, just like a home is for homeowners. The consumption portion extends from academics (enrichment courses unrelated to student career tracks), housing (upgraded dorms don’t add anything to educational investment) and campus activities (athletics, social clubs). How much is investment and how much consumption? There is no way of splitting these neatly, but it’s important to recognize that spending on college consists of both.
The second complication is that people, not credentials, produce income. While a college degree from the right school can help a student get on a career track, success with that track is not earned by the degree, but by the person. And this becomes truer and truer as the years pass. This is of course a complex topic so we won’t cover it further here, but bring it up to point how it muddies any simplified ROI approach.
And finally there is the matter of risk, which is intrinsic to any ROI calculation. A graduate with a prestige degree will have second and third chances if they experience a career failure, chances that many graduates from less prestigious schools will never receive. The prestige degree here mitigates career risk. Measuring that risk is impossible and the tolerance for this risk will vary by student and by family.
Using numbers wisely means knowing when they can’t measure something informatively. The elements of the ROI formula (cash flows divided by investment and adjusted for risk and the time value of money) cannot be calculated: college costs are only partially an investment, and the portion of a person’s income flowing from a college education and the risk attached to that income are all unquantifiable.
ROI isn’t everything – but it is something
Income by itself may not be enough to judge success, yet post-graduation income has to be a consideration in deciding how much college a student can and should pay. A student cannot spend say 10x or 20x their first-year salary on their college degree. (Let’s leave aside a case where the student’s family is very wealthy. Exceptions such as this make for poor rules. We can name this the “Harvard rule” – any argument or position related to higher ed that starts by mentioning Harvard should be discarded tout suite.) Paying a large multiple of future income for college can lead to crippling results as the Student Debt Crisis website illustrates with its posts from graduates struggling with debt. Before you click on the link, be aware you will have website loading issues because the section runs to 144 (!) pages of painful personal accounts. What is the appropriate ratio of a degree’s net cost to initial salary so students can avoid the situations described there?
Needed: a rule of thumb based on clear-eyed data
One way to establish some guardrails around the ROI question is by benchmarking the ratio for all students and using that as a guide. We need to see how much a typical student pays on average for a degree and compare it with an average graduate’s initial income to know how a prospective degree compares to a US average.
How much do they pay? Using CTAS’ proprietary Net Cost metric and industry metric – which cuts through confusing numbers and financial aid jargon to present college costs in the same way as other commercial purchases outside of higher ed – the current estimate for the average Net Cost of a 4-year degree for the incoming Class of ’25, as long as they finish the program straight through without breaks, is $102,284 (that number will change as data is updated). That establishes the average investment in a Bachelor’s.
To look at the returns, we need to know about income in the years after graduation: what is the average starting salary for a newly-minted college graduate? This is where the national professional organizations should step in and provide clear-eyed data. Unfortunately, the body taking point on career outcomes, the National Association of Colleges and Employers (NACE), produces an annual First Destinations report that is deeply flawed. In upcoming posts, we will look at First Destinations, some alternative sources of information such as a recent Strada report, and then at the Federal Reserve Bank of New York’s tracking of college grad underemployment to approximate an appropriate ROI benchmark and also to better understand the risks associated with going to college.
Read this post and more at CTAS Higher Ed Business