PayScale College ROI Report - 2015 Methodology and Notes

Data Set Characteristics:

All data used to produce PayScale’s Return on Investment (ROI) Package were collected from employees who successfully completed PayScale’s employee survey.

Bachelors Only: Only employees who possess a Bachelor’s Degree and no higher degrees are included. This means Bachelor graduates who go on to earn a Master’s degree, MBA, MD, JD, PhD, or other advanced degree are not included.

For some Liberal Arts, Ivy League, and highly selective schools, graduates with degrees higher than a bachelor’s degree can represent a significant fraction of all graduates.

Careers that require advanced degrees, such as law or medicine, are not included.

U.S. Only: All reports are for graduates of schools from the United States who work in the United States. This sample does not include U.S. territories, such as Puerto Rico or Guam.

Full-Time Employees Only: Only graduates who are employed full-time and paid with either an hourly wage or an annual salary are included.

Self-Employed, project-based, and contract employees are not included. For example, project-based graphic designers and architects, and nearly all small business owners and novelists, are not included.

Definitions of Variables:

Full-time Undergraduates: (as defined by IPEDS) A student enrolled for 12 or more semester credits, or 12 or more quarter credits, or 24 or more contact hours a week each term.

First-time Undergraduates: (as defined by IPEDS) A student attending any institution for the first time at the undergraduate level. This includes students enrolled in academic or occupational programs. Also includes students enrolled in the fall term who attended college for the first time in the prior summer term, and students who entered with advanced standing (college credits earned during their high school education.)

Overall Graduation Rate: This rate is calculated as the percentage of full-time, first-time degree seeking undergraduate students who began their studies at the given school who graduate within six years. It is provided by the Integrated Postsecondary Education Data System (IPEDS) produced by the National Center for Education Statistics (NCES).

Typical Time to Graduation: Utilizing graduation rate data from IPEDS, we calculate the number of years it takes for at least 65 percent of graduates from a given class to receive their diplomas.

Percent Receiving Grant Money, Overall: This is the percent of full-time, first-time undergraduates who received local, state, federal, or institutional grant aid in the 2012-2013 academic year, as reported by IPEDS.

Average Grant Money Received: This is the average grant aid received by those who get grant aid. It is the average of local, state, federal and institutional grant aid for the 2012-2013 academic year, as reported by IPEDS.

On Campus Cost: This cost is comprised of the sum of Tuition and Fees, Room and Board, as well as Books and Supplies for each academic year used in the analysis. We utilized on-campus living costs for Room and Board. Data supplied by IPEDS.

For public schools, we calculate the cost for both an in-state student and an out-of-state student.

Off Campus Cost: This cost is comprised of the sum of Tuition and Fees, Room and Board (off campus), as well as Books and Supplies for each academic year used in the analysis. Data supplied by IPEDS.

For public schools, we calculate the cost for both an in-state student and an out-of-state student. Cost, With Aid: This cost, calculated for both on and off campus costs, is simply the reduced price of education accounting for average grant money received over four years of education.

Total Cash Compensation (TCC): TCC combines base annual salary or hourly wage, bonuses, profit sharing, tips, commissions, and other forms of cash earnings, as applicable. It does not include equity (stock) compensation, cash value of retirement benefits, or the value of other non-cash benefits (e.g. healthcare).

Median Pay: The median pay is the national median (50th percentile) annual total cash compensation. Half of a school’s employed graduates earn more than the median, while half earn less.

20 Year Median Pay for a 2014 Bachelor’s Graduate: Using PayScale’s database, we calculate the current 20 year median pay for a bachelor’s graduate of 2014 from a specific school by summing up the median pay for bachelor graduates who graduate between 1995 and 2014 from that school. We are using data over the last year so these earnings figures are in current dollars.

By using this method we are effectively taking future potential earnings and deflating them down to current dollars by wage inflation. In other words, this amount represents a present value of future earnings discounted by wage inflation.

We are effectively assuming the (wage inflation adjusted) earnings 20 years from now for a 2014 graduate is the same as the current earnings of a 1995 graduate. If the character of a school’s graduates has changed substantially in the last 20 years, this measure may be inaccurate.

For example, a school that has added or substantially expanded an engineering program in the last 20 years, such that the mix of graduates today are much more likely to be engineers than 20 years ago, would tend to have a 20 year median pay that underestimates the future earnings of the typical 2014 graduate.

24 Year Median Pay for a 2014 High School Graduate: We calculate the median pay for a high school graduate by summing up the median pay for high school graduates who graduated between 1991 and 2014. Similar to above, we are using data over the last year so these earnings are in current dollars.

School Type: We separate schools into 4 categories: Public (In-State), Public (Out-of-State), Private for-profit, and Private not-for-profit. Schools are deemed either Public or Private by IPEDS, while In-State or Out-of-State refers to the tuition used to calculate the Return on Investment.

Census Regions: Regions of state grouped by the US government (See here).

Percent Stay In State: Percentage of respondents who said that they work in the same state as the college that they attended.

Religious Affiliation: (as defined by IPEDS) Indicates religious affiliation (denomination) for private not-for-profit institutions that are religiously affiliated.

School Categories:

We categorize the schools into eight categories.

Research University: A school categorized by the Carnegie basic higher education classification system in one of three categories:

1. RU/VH: Research Universities (very high research activity)

2. RU/H: Research Universities (high research activity)

3. DRU: Doctoral/Research Universities

Research Universities are the ones that grant Ph.D’s and do at least some research.

Liberal Arts School: Any private school with a Carnegie basic classification of “BAC/A&S Baccalaureate – Arts and Sciences” and identified as private by IPEDS. These generally are non-pre-professional undergraduate focused institutions, and usually have smaller enrollments.

A Liberal Arts designation includes science majors. It does not include pre-professional degrees like business, nursing, and engineering.

Arts, Music & Design School: Any private school with a Carnegie basic classification of "Spec/Arts: Special – Arts" and which grants bachelor's degrees according to IPEDS.

Business School: Any school (public or private) which grants more than 50% of their undergraduate degrees in business, accounting, entrepreneurship, finance, human resources management, management information systems and marketing majors based on data from IPEDS. The idea is to identify business focused schools, not necessarily schools that only have business programs.

Engineering School: Any school (public or private) which grants more than 50% of their undergraduate degrees in math, physical sciences, computer science, engineering and engineering technology majors based on data from IPEDS. The idea is to identify science, engineering and technology-focused schools.

Ivy League School: One of the 8 schools in the Ivy League.

Party School: One of the 20 schools on the 2014 Princeton Review “Party Schools” list.

Sober School: One of the 20 schools on the 2014 Princeton Review “Sobers Schools” list.

Private School: Any school identified by IPEDS as being privately funded.

Public School: Any school identified by IPEDS as being publicly funded.

Religious School: Any school with a religious affiliation, as defined by IPEDS.

Sports School: Any school with a Division 1 Football or Division 1 Basketball team.

Return on Investment (ROI) Calculations:

In calculating the return on investment, we must first determine the investment in college and the return from attending college. The investment is the cost of college as determined by the actual cost of attending college. The return (gain) is the additional expected future income stream received for being a college graduate.

Investment in College: This investment in college is the cost of attending college, as calculated by the cost for a Graduate in 2014, on and off campus, or the Cost, With Aid for a Graduate in 2014 (for those who get financial aid) as defined above.

Return from Attending College: The main financial benefit of attending college is the gain in income received by a college graduate over a high school graduate. However, by choosing to attend college, one is giving up 4 years of income one could have received if one went straight to work after high school. Therefore, we calculate the gain in median pay over a high school graduate (Earnings Differential) as the difference between the 20 Year Median Pay for a 2014 Bachelor’s Graduate and the 24 Year Median Pay for a 2014 High School Graduate.

ROI by Career and by Major: This year we have included ROI calculations by major and by career, where possible. This does not change the investment required to attend a given school, but does affect the return one gets from attending college. This is due to differences in yearly salary and the maturity curves of a graduate over 20 years of employment. ROI by Major represents graduates of a school with the given major. ROI by Career represents graduates of a school who work in the given job category.

Note that only School-Career and School-Major combinations for which PayScale had a statistically significant sample were considered for this study. Exclusion from the study is not a reflection on the quality of the institution, but simply indicates that we did not have enough verified data from the school’s alumni to publish an ROI ranking for it. We acquire our data from individuals filling out the PayScale Salary Survey.

Using the Return and Investments above, we calculate 8 measures of ROI in two overall ways:

1. 20-Year Return on Investment (2014 Dollars): To calculate the 20-Year Return on Investment, we use the Earnings Differential less the On Campus Cost, and the Earnings Differential less the Off Campus Cost.

For example, a school with a $1,000,000 Earnings Differential for graduates and $200,000 in Costs would have an $800,000 20 Year Return on Investment.

Note: This figure is in 2014 dollars and thus represents a real return rather than a nominal return.

In past versions of the ROI Report we adjusted the earnings differential to account for the graduation rate of a given school to give an expected net return, since not all people graduate from college, or calculated a weighted cost based on graduation rates over 4, 5, or 6 years. However, this year we’re not going to discount the earnings differential by the graduation rate so we can show what the typical earnings potential would be if a person did indeed attend the school and graduate in 4 years. This ROI represents a net return on investment after the opportunity cost (High School Graduate Earnings) and cost of investment (tuition, room, board, books, etc.) have been taken into account. This measure is useful for high school seniors evaluating their likely financial return from attending and graduating college.

Note: This ROI is calculated for two measures:

1. 20-Year Net ROI: The Earnings Differential is the difference between the 20 Year Median Pay for a 2014 Bachelor’s Graduate and the 24 Year Median Pay for a 2014 High School Graduate. The cost utilized is the Total Cost for a Graduate of 2014.
2. 20-Year Net ROI with Aid: This uses the same Earnings Differential as the 20-Year Net ROI, but now the cost utilized is the Cost, With Aid for a Graduate in 2014.

2. Annualized ROI: This is the Earnings Differential divided by the Total Cost for a 2014 Graduate, annualized to represent the percent of expected ROI received each year after graduation.

For example, a school with a $1,000,000 Earnings Differential for graduates and $200,000 in Total Cost would have an annualized return of 8.38% if we are looking at the 20-Year Return.

In order to compare this percentage to the rates of return on other investments (e.g., return on the S&P 500 and interest rates on bank accounts), we convert the earnings differential to a nominal rate using the Social Security Administration’s National Average Wage Index, by multiplying the real earnings differential by this rate of wage inflation and then annualize the return. This then results in an annualized return of 8.56% in the above example.

Note: This ROI is also calculated for two measures:

1. 20-Year Annual ROI: The Earnings Differential and Weighted Cost utilized are the same as the 20-Year Net ROI. The wage inflation between 1995 and 2014 (20 years) reported by the SSA is 3.23%.
2. 20-Year Annual ROI with Aid: This uses the same Earnings Differential and wage inflation as the 20-Year Annual ROI, but now the cost utilized is the Cost, With Aid for a Graduate in 2014.

Since 20-year wage inflation is 3.23%, schools with graduates whose expected value of the Earnings Differential is just enough to pay back their investment in college will have an annualized nominal return of 3.23%.

For comparison, as of December 31, 2014, 20-year U.S. Treasury bonds were yielding an annual return of 2.5%. The average 20-Year Annualized ROI of the included schools is 8.94%. Therefore, the typical person that attends a school in this report and graduates will earn more in 20 years as compared to someone who takes the tuition money and invests it in a 20-year Treasury bond and works straight out of high school.

90% Confidence Interval on the 20 Year Median Pay: For all schools, the 90% confidence interval on the 20 year median pay is ±5%, with the following exceptions:

• Due to large variation in the pay of graduates from elite schools (Ivy Leagues, Stanford, Caltech, etc.) the confidence interval is ±10%.

• Due to smaller data sets, the confidence interval for small liberal arts schools or schools where a majority of undergraduates complete a graduate degree is also ±10%.

To translate the impact this error has on net ROI, we need to examine how 20 year median pay is included in ROI. For example, a 5% error on a 20-year median pay of $1.8 million is ±$90,000. If we are dealing with a small school, or a school where a majority of undergraduates go on to a graduate program, the error increases to 10%, or ±$180,000.

Since ROI includes the sum of the 20 year median pay, high school earnings and cost of education, both of which have much smaller errors, the uncertainty in the 20 year net ROI is about the same as the uncertainty in the 20 year median pay. For an example school with $1.8 million 20-year median pay, $100,000 in education costs, and given $1.1 million high school graduate earnings, the ROI would be $600,000 ±$90,000 for most schools and ±$180,000 for the aforementioned exceptions (90% confidence interval).
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