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Calculating the ROI of a College Education

Everyone knows that college costs have been skyrocketing over the last 30 years. The College Board reports a 213% increase in public college tuition rates and a 129% increase in private college rates from 1988 to 2018. For Generation X (people born between the mid-1960s and 1980s), going to a four-year college was an obvious choice. A college degree was the answer to a higher paying job and a better life.

Nowadays, a college degree doesn’t necessarily mean a higher paying job or a better life. While studies by labor economists do show a correlation between education and income, paying a premium for education does not. Wages have increased in the last 20 years, but have not kept pace with rising tuition costs. This has caused that once guaranteed outsized return on your investment to shrink.

While it’s impossible to precisely predict the return on investment (ROI) for a college degree, having an awareness of the general expected return is important in making a decision that will have a huge impact on your long-term financial success. (For more, see: The True Cost of Attending College.)

Calculating the ROI of Higher Education

Have you ever wondered what the return is on your higher education? Whether you have an associate’s, bachelor’s, master’s or doctoral degree, most people expect that the more expensive the education, the higher salary you should experience throughout your lifetime. It’s not realistic to try and calculate the precise ROI. It is, however, a useful exercise to gauge or benchmark whether or not you’re paying too much for education.

You can calculate the ROI of higher education by finding out the lifetime earning that is possible as a result of education. Estimate your lifetime earnings, then divide by the total cost of education to yield a simple ROI.

For example, if you or your child wants to be a teacher and the starting salary is $35,000, start projecting the income for every year up until retirement, say 30 years. Keep in mind that the salary should increase by 2%-3% per year. Then take the lifetime earnings and divide it by the total cost of education. This resulting number yields the percentage return of education. In this example, the lifetime income for a teacher is roughly $1.42 million. Divide this number by the total out pocket cost of college, estimated at $160,000 for four years, and the total return in this scenario is 887%.

According to a recent ranking by Bestcolleges.com, that 887% would just barely crack the top 50. The number one school based on their ranking was SUNY Maritime, with an ROI of 1,714%.

Implementing ROI Results

Let’s say you could increase the return on your education not by making more, but by cutting the cost of your education. Going to a similarly rated school for a cost of $80,000 instead of $160,000 makes complete sense if you are still likely to find employment at the same income level over the course of your career. This is a valuable conversation to have with your kids who are looking at colleges and a worthwhile consideration if you are considering graduate school. (For more, see: Are U.S. Colleges Still a Good Investment?)

Paying off that extra $80,000 in 15 years at 6% is a payment of $675 a month. Don’t forget the interest over the course of the loan of $41,515, which brings the total cost to $121,515.

How Much Should You Spend on Higher Education?

Start with the income and work backward. When you have a clear and realistic picture of the income a career will produce, you’re able to make a more informed decision about how much money is wise to spend on education, including student loans and interest to be paid on those loans.

The first year’s salary is a significant number. Payscale.com is a good place to find out how much money certain careers yield in the first year, taking into account education level, skills and geographic location. And when you look at the bell curve of income levels, your best bet is to look at the conservative projections.

The rule of thumb today is that student loans shouldn’t generally exceed the first year’s salary after graduation. Certain professions like doctors and lawyers require more education upfront before any income is earned. In these instances, review the lifetime earning calculation above. The first year salary minus education debt should result in a positive number.

In the example of a teacher, the median annual salary, according to the Bureau of Labor Statistics, was $58,390 in 2017. The lowest 10% earned less than $37,340, which tends to comprise first year and part-time positions. According to the rule of thumb, it wouldn’t make sense to graduate with $50,000 in student loan debt to be an elementary school teacher.

Why ROI of Education Matters to Your Financial Success

What you spend on education has a lifelong impact on your financial future. Having more education can mean higher income potential, but not always. It’s important to do research on your career’s income potential and run the ROI calculations first before assuming education debt.

Additionally, if you or your children spend too much on education to the point that you aren’t able to save 10% to 20% of your annual income toward retirement, it hinders the ability to build real wealth for the future. Financial success is impacted by the sum of life’s choices and for most that starts with how much you pay for education. Invest in yourself wisely so that you can get the highest return on your chosen career path. (For more, see: The 3 Unbreakable Rules for Financial Success.)