College ROI: What We Found
The PayScale methodology reveals which schools prepare students for well-paying careers and which schools make for poor investmentsApril 7, 2011, 12:31PM EST
When Bloomberg Businessweek andPayScale last year inaugurated their ranking of the top U.S. colleges for return on investment, the main finding was a shocker. At a time when experts were trumpeting the value of a college education, our analysis showed that it was worth a fraction of what was previously thought, less than $400,000 over 30 years' time. Only four schools had 30-year ROI in excess of $1.6 million, the highest previous estimate.
This year, we did things a little differently, but the results did not change that much. By calculating the cost of a degree at each school and incorporating the average financial-aid grant award—instead of using the school's "sticker price," without aid, as we did the year before—we lowered the cost and improved ROI for many schools.
But the average 30-year ROI ended up being about $6,000, or 1.5 percent, less than last year, or $387,501. One reason was that this year we ranked 693 schools, up from 554 last year, an increase of 25 percent, and many of the new schools suffered from poor ROI, due largely to low graduation rates. Since all the data used to calculate ROI—including tuition and fees, graduation rates, and graduate salaries—have been updated since last year, changes to the findings were expected. With tuition costs growing and wages stagnating, it should come as no surprise that ROI declined.
CREAM OF THE CROP
So who ended on top? Last year's No. 2, the California Institute of Technology, unseated MIT at the No. 1 spot, with a 30-year ROI of more than $1.8 million. A degree from the highly selective science and engineering school costs nearly $200,000, but the cost is cut in half for grant recipients, and graduates have the highest cash compensation in the study. Last year's No. 4, Harvey Mudd College, moved up to No. 2, with ROI of $1.7 million. And MIT, with ROI of more than $1.6 million, came in at No. 3. MIT was followed by Princeton University (up from No. 7) and Stanford University (up from No. 6).
All eight members of the Ivy League—Princeton, Dartmouth, Harvard, the University of Pennsylvania, Yale, Columbia, Cornell, and Brown—all landed in the top 30. Elite private universities in general dominated the top of the ranking, accounting for 26 of the top 30 schools, as did engineering schools, a list that starts with Cal Tech and MIT but includes Worcester Polytechnic Institute, Rensselaer Polytechnic Institute, and Stevens Institute of Technology, among others. Schools in California, Massachusetts, Pennsylvania, and New York accounted for 21 of the 30 top spots, with No. 18 UC-Berkeley laying claim to the highest ROI for a state institution, more than $1.2 million.
Some schools saw a surge in value. Thirty-year net ROI without grant aid factored in grew 4.2 percent at Cal Tech, while Duke, the University of Michigan, and the University of Illinois at Urbana-Champaign registered increases of 7.6, 8.3, and 16 percent, respectively. But the winners were the exception that proved the rule. At the University of Chicago, the 30-year figure dropped 11.1 percent, to $937,600. Carnegie Mellon had a 10.1 percent decline. Dartmouth, Notre Dame, and Lehigh all saw single-digit drops.
OVERALL EARNINGS DECLINE
Al Lee, PayScale's director of quantitative analysis, said that average 30-year earnings for alumni of the more than 500 schools ranked both last year and this year fell about 2 percent. The drop, he said, was due largely to smaller bonuses, laid-off employees forced into lower-paying jobs, and recent college graduates opting for low pay over unemployment. That, combined with higher tuition at many schools, lowered ROI across the board.
"College graduates, in terms on earnings, are not immune to the recession, and overall the average college has become a less good deal than the year before," Lee says. "Graduate earnings have not held up, and costs have gone up."
Unlike most ROI calculations, the PayScale analysis is based on 1.4 million pay reports from individuals using the company's online pay comparison tools. For each school, PayScale used an average of about 1,000 such reports from alumni who are full-time, U.S.-based employees and who received bachelors degrees between 1981 and 2010.
The PayScale calculation differs in two other respects as well. Like many ROI models, to calculate the cost of a college degree it includes all college expenses—tuition and fees, room and board, books and supplies. But instead of assuming students all graduate in the standard four years, it multiplies those expenses for however long it took 2010 graduates of each school to obtain their degrees, whether in four years, six years, or something in between. Unlike many ROI calculations that reckon the value of a degree, the PayScale analysis tots up the return on a college investment, over and above what a high school graduate would earn during the same period. When someone attends college but fails to graduate, there's an investment but little or no financial return, so the PayScale analysis incorporates graduation rates, in effect adjusting the return for the risk of not graduating. How big is that risk? On average, two of every five students who entered the colleges in the ranking never participated in commencement.
WHEN GRADUATION RATES ARE LOW
The result of incorporating graduation rates can be dramatic. Consider Babson College and the New Jersey Institute of Technology. Both schools produce graduates who go on to earn nearly $1.5 million more than high school graduates. Babson graduates 91 percent of all students, leaving it with an enviable ROI of nearly $1.4 million. NJIT, on the other hand, has a graduation rate of 55 percent, and as a result its ROI is just $810,400.
The other way that seemingly similar schools can have big differences is in costs. Schools may have the same sticker price, but the amount of grant aid awarded, the number of students receiving it, or each school's ability to graduate the majority of students in four years can make one school a much better investment, with much larger returns. Cross-town rivals Boston College and Boston University have annual costs that are almost identical, but Boston College graduates earn $1,049,000 more than high school graduates over 30 years, nearly $150,000, or 16 percent, more than those at Boston University. There are no doubt many reasons having to do with majors and career choices, but the fact that aid recipients at Boston College receive $6,000 more in grant aid each year than their Boston University counterparts surely doesn't hurt.
In addition to the 30-year ROI calculation, PayScale included a 15-year ROI as well, which shows just how much of a long-term investment a college education can be. By the 15-year mark, ROI for the schools in the ranking averages just $77,751, meaning that 80 percent of the value of a college education isn't realized until much later in the typical career trajectory, when earnings begin to take off. In fact, the net result of poor early-career earnings, low graduation rates, and other factors leaves many schools with negative ROIs at the 15-year mark. This is true both for overall ROI, adjusted for graduation rates, and ROI for graduates only. At one school, Missouri's College of the Ozarks, graduates who received grants had earned $133,000 less than a typical high school graduate after 15 years. After 30 years, the school's graduates had made up the lost ground and out-earned high school graduates by $203,200.
Of course the biggest factor affecting ROI is how much graduates earn. The alumni from the schools in the ranking had overall median cash compensation of $62,254 in 2010 dollars, including the most recent graduates and those with 30 years in the workforce. Here again, the engineering schools fared well: Cal Tech topped the list at $108,000 a year, followed by Harvey Mudd at $103,000, MIT at $99,500, Dartmouth at $96,300, and Stanford at $96,200. Shaw University, a private school in North Carolina where annual costs total $23,436 and two-thirds of students don't graduate in six years, had median alumni pay of $42,700, or about $20 an hour, the lowest among all ranked schools.