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:
A. 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.
B. 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:
A. 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%.
B. 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).
PayScale calculated the 20-year net Return on Investment (ROI) for those with a bachelor’s degree and no higher degree for the years 2006 through 2014. The 20-year net ROI is the difference between the earnings differential between a college graduate and a high school graduate less the in-state 4-year total cost of obtaining a degree. For each year, we calculate the 20-year earnings of the college graduate as the sum of the median earnings for each year of graduation going back 20 years (for example, for 2006, we utilize the graduation years of 1987 to 2006). Since high school graduates get an additional 4 years in the labor force, we calculate the high school earnings as the sum of the median earnings for each year of graduation going back 24 years (for example, for 2006, we utilize the high school graduation years of 1983 to 2006). All wage data comes from PayScale and is in nominal terms.
The cost data is obtained through the Integrated Postsecondary Education Data System (IPEDS) run by the department of education. We calculate the cost of a degree as the 4-year total cost for in-state students. This includes tuition and fees, room and board, as well as books and supplies for each school year for the 4-year window (for example, for 2006, we sum the total cost figures for academic years 2002-03, 2003-04, 2004-05, and 2005-06).
Once we calculated the 20-year net ROI values for the years 2006 through 2014, we calculated a line of best fit for these data points. Using this line, we then projected ROI values for 2020 and 2025.