College ROI results by PayScale for Bloomberg Businessweek

by Grace

College ROI (return on investment) figures produced by PayScale for Bloomberg Businessweek are calculated using a different method than the one used by Georgetown University’s Center on Education and the Workforce, which last year calculated the median value of a four-year degree at $2.3 million.  This number is in sharp contrast to PayScale’s median calculated ROI of $353,182.

The PayScale methodology differs from most others in several key respects. Instead of using lifetime earnings, it starts with earnings over a 30-year period. From that figure, we deduct the earnings of a typical high school graduate (since most people who don’t go to college would still have earnings, albeit at a much lower amount). In our return on investment (ROI) calculation, the “investment”—or total net cost—is the amount spent on college over the actual time it takes students to graduate, whether four, five, or six years. Finally, our ROI figures are adjusted using each school’s graduation rate. After all, if you don’t graduate, you’ve made an investment with very little financial return. The result is a return that reflects what incoming students can reasonably expect from their investment.

The net cost of college used by PayScale reflects the subtraction of average grant aid from gross costs.  Payscale also started using a better comparison point for measuring the pay of college graduates against that of high school graduates.

… But starting this year, we made a second change that has the opposite effect: using 75th percentile high school graduate pay (instead of the median) to calculate how much each college’s graduates earned over and above the pay of high school graduates. We believe the 75th percentile more accurately reflects the pay of individuals capable of winning acceptance to college or who spent a few years in college before dropping out.

The self-reporting aspect of using PayScale salary figures has been criticized, but a BusinessWeek editor defends their validity by pointing out that they are generally consistent with numbers reported elsewhere.

Not surprising that engineering schools and Ivy Leagues have highest ROIs

Nearly a third of the top 30 schools were engineering schools, including the top three institutions: No. 1 Harvey Mudd College, No. 2 California Institute of Technology, and No. 3 Massachusetts Institute of Technology. All three schools had 30-year ROI well above $1 million, a claim only 11 schools could make. On average, engineering schools had ROIs of $603,362, more than double the ROI for liberal arts schools ($245,943), more than triple that of business schools ($141,014), and more than 26 times that of arts and design schools ($22,328).

The only schools that fared better than engineering schools were those in the Ivy League. Seven of the eight Ivies are in the top 15, and the average ROI for all eight was more than $1 million. While costs for these schools are high, several factors worked in their favor, including generous financial aid and excellent graduation rates—both in terms of how many students ultimately graduate and how long it takes them to do so. The weighted net cost to graduate was $84,241—less expensive than half the schools on the list, and half the cost of the most expensive.

Negative ROIs

On the other end of the spectrum, there are 191 schools where graduates had negative ROI. At Fayetteville State University in North Carolina, where only one out of three students graduates in six years, in-state grads earned $289,000 less over 30 years than a high school graduate earning at the 75th percentile, after deducting the cost of the degree. For out-of-state graduates, the figure is $338,000.

At all 191 schools with negative ROI, graduates actually fared worse than those who dropped out after a few years—the financial benefit of earning a degree was so meager that the added expense it entailed was simply not worth it. At these schools, at least from an ROI perspective, dropping out was the smartest thing to do.

Among the schools with negative ROIs are several schools specializing in art and design.  In a different category is Lewis & Clark College, with a negative ROI of $78,400.  It ranked 71 on the list of National Liberal Arts Colleges by BusinessWeek and has a total cost of attendance that approaches $55,000.  Its website highlights some recent recognitions – tops Peace Corps rankings … Sierra Club picks Lewis & Clark as “Coolest School” in Oregon … national recognition for beautiful campus.  I guess “coolest school” does not necessarily correlate well with high ROI.

To view the complete 2012 college ROI ranking, click here.

Related:  SmartMoney’s college ranking based on ROI

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3 Comments to “College ROI results by PayScale for Bloomberg Businessweek”

  1. Wait–Reed is not the coolest school in Oregon? No way.

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  2. Good point! Although I have read that Lewis & Clark is like Reed, but less rigorous.

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  3. That would explain the ROI for Lewis and Clark, which would make it Oregon’s answer to Evergreen in WA. I was in grad school with a Reed graduate (a very smart guy), and the vibe I got from his stories was that Reed has the world’s smartest potheads.

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