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PayScale 2011 Return on Investment Data Package

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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:

Overall Graduation Rate: Using the Integrated Postsecondary Education Data System (IPEDS) produced by the National Center for Education Statistics (NCES), we find the overall graduation rate according to the cohort of students entering the specific school in the fall of 2003. This overall graduation rate is the percentage of students who graduate within 6 years.

Percent of Graduates who Graduate in 4/5/6 Years:
Utilizing graduation rate data from IPEDS, we calculate the percentage of graduates who graduate in 4 years, 5 years and 6 years relative to the Overall Graduation Rate.

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.)

Percent of Full-Time, First-Time Undergraduates Receiving Grant Aid:
This is the percent of full-time, first-time undergraduates who received local, state, federal, or institutional grant aid in the 2008-2009 academic year, as reported by IPEDS.

Average Amount of Grant Aid:
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 2008-2009 academic year, as reported by IPEDS.

Total 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. Data supplied by IPEDS.
For public schools, we calculate the cost for both an in-state student and an out-of-state student. We only include the cost for those who live on campus.

Weighted Total Cost for a Graduate in 2010:
Utilizing the percent of graduates who graduate in 4, 5, or 6 years (as reported by IPEDS), we calculate the average cost based on the number of years it actually takes students to graduate. This cost is calculated in three steps:
  1. Of those who graduate, we find the percentage that graduate in 4, 5, or 6 years.
  2. We calculate the 4-year, 5-year, and 6-year cost by summing the Total Cost (defined above) from 2007-2010, 2006-2010 and 2005-2010 respectively. For Public Schools, this is done for both in-state and out-of-state students.
  3. Lastly, we calculate a weighted average by first multiplying the percent who graduate in 4, 5 or 6 years by the 4, 5 or 6 year cost respectively and then summing across these three products.
For schools where the majority of undergraduate students graduate in 4, 5, or 6 years, this weighted calculation will have little to no effect on the cost reported as opposed to a straight summation of the total cost.

However, for schools where the percentage that graduate in 4, 5, or 6 years is fairly split, the cost will more accurately represent the average cost faced by students based on the number of years it typically takes to graduate.

For example, assume we have a school with a 45% 4-year graduation rate, a 65% 5-year graduation rate and an 80% 6-year graduation rate. Then, of those who graduate, 56% do so in 4 years, 25% do so in 5 years and 19% do so in 6 years. Now let's assume the total cost for each academic year is simply $10,000. Then the 4, 5 and 6 year costs would be $40,000, $50,000 and $60,000.

Now we can calculate the weighted cost: (56% * $40,000)+(25% * $50,000)+(19% * $60,000) = $46,250.

Note: This cost is roughly between the 4-year and 5-year cost since the majority of those who graduate do so in 4-5 years.

Net Cost: We calculate net cost as the difference between Total Cost and the Average Amount of Grant Aid. Due to the unavailability of grant data from IPEDS for each academic year, we use the most recent data on the average amount of grant aid for the entire period considered, whether it be 4, 5 or 6 academic years.

Weighted Net Cost for a Graduate in 2010: Similar to the Weighted Total Cost, we calculate the average cost utilizing a weighted average of the net cost paid by those who graduate in 4, 5 and 6 years.

Total Cash Compensation (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.

30-Year Median Pay for a 2010 Bachelor's Graduate: Using PayScale's database, we calculate the current 30-year median pay for a bachelor's graduate of 2010 from a specific school by summing up the median pay for bachelor graduates who graduate between 1981 and 2010 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 30 years from now for a 2010 graduate is the same as the current earnings of a 1981 graduate. If the character of a school's graduates has changed substantially in the last 30 years, this measure may be inaccurate.

For example, a school that has added or substantially expanded an engineering school in the last 30 years, such that the mix of graduates today are much more likely to be engineers than 30 years ago, would tend to have a 30-year median pay that underestimates the future earnings of the typical 2010 graduate.

Weighted 34 to 36-Year Median Pay for a 2010 High School Graduate: We calculate the weighted average median pay for a high school graduate by utilizing a weighted average of the median pay for those who graduate between 2010 and 1975, 1976 and 1977 (34, 35 and 36 years of earnings post high school). Similar to above, we are using data over the last year so these earnings are in current dollars.

Given the long term decline in earnings of high school graduates over the last 40+ years, it is likely we are overestimating the wage inflation adjusted future earnings of 2010 high school graduates in 30 years' time by using current earnings of 1975/6/7 graduates. While this does not change the ranking of schools for return on investment, it may mean the dollar value of bachelor's degree from all schools is underestimated.

Type of School: We separate schools into three categories: Public (In-State), Public (Out-of-State), and Private. 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.

School Categories:

Private 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
and classified by IPEDS as a private institution. Private 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.

Private School: Any school identified by IPEDS as being privately funded, and not otherwise identified as a Liberal Arts School, Private Research University, Arts, Music & Design School, Business School, Engineering School, or Ivy League School.

Public School: Any school identified by IPEDS as being publicly funded and not otherwise identified as a Business School or an Engineering School.

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 Weighted Total Cost for a Graduate in 2010 or the Weighted Net Cost for a Graduate in 2010 (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 4-6 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 30-Year Median Pay for a 2010 Bachelor's Graduate and Weighted 34-36 Year Median Pay for a High School.

Using the Return and Investments above, we calculate 4 measures of ROI in two overall ways:


1. 30-Year Net Return on Investment (2011 Dollars):
To calculate the 30-Year Net Return on Investment, we start with the Earnings Differential less the Weighted Cost for a Graduate of 2010.
Those who graduate earn an income premium over their classmates who do not graduate. We assume those who don't graduate earn slightly more than high school graduates, enough to compensate for their education costs and years spent in college, giving them a zero Net Return on Investment.

Since not all people who attend college graduate, we then multiply the Earnings Differential less the Weighted Cost for a Graduate of 2010 by the overall graduation rate, giving the Net Return on Investment.

This is an expected net return as it factors in the school's overall graduation rate. For example, a school with an 80% graduation rate, $1,000,000 Earnings Differential for graduates, and $200,000 in Weighted Costs would have a $640,000 Net Return on Investment.

Note: This figure is in 2011 dollars and thus represents a real return rather than a nominal return.
This ROI represents a net return on investment after the opportunity cost (High School Graduate Earnings), cost of investment (tuition, room, board, books, etc.), and probability of graduating have been taken into account.

This measure is useful for high school seniors evaluating their likely financial return from attending college.

Note: This ROI is calculated for two measures:
  1. 30-Year Net ROI: The Earnings Differential is the difference between the 30-Year Median Pay for a 2010 Bachelor's Graduate and the Weighted 34-36 Year Median Pay for a 2010 High School Graduate. The cost utilized is the Weighted Total Cost for a Graduate of 2010.
  2. 30-Year Net ROI including Aid: This uses the same Earnings Differential as the 30-Year Net ROI, but now the cost utilized is the Weighted Net Cost for a Graduate of 2010.
2. Annual ROI: This is the Expected Value of the Earnings Differential divided by the Weighted Cost for a 2010 Graduate, annualized to represent the percent of expected ROI received each year after graduation.

Once again, we calculate an expected value of the annual gain by assuming no net gain or loss for people who attend college and drop out relative to high school graduates.

For example, a school with an 80% graduation rate, $1,000,000 Earnings Differential for graduates, and $200,000 in Weighted Costs would have annualized return of 4.9% if we are looking at the 30-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 this number to a nominal rate using the Social Security Administration's National Average Wage Index, by multiplying the real annualized rate by this rate of wage inflation.

Note: This ROI is also calculated for two measures:
  1. 30-Year Annual ROI: The Earnings Differential and Weighted Cost utilized are the same as the 30-Year Net ROI. The wage inflation between 1980 and 2009 (30 years) reported by the SSA is 4%.
  2. 30-Year Annual ROI with Aid: This uses the same Earnings Differential and wage inflation as the 30-Year Annual ROI, but now the cost utilized is the Weighted Net Cost for a Graduate of 2010.
Since 30-year wage inflation is 4%, schools with graduates whose expected value of the Earnings Differential is just enough to pay back their investment in college (30-Year Annual ROI) will have an annualized return of 4%.

For comparison, as of January 1st 2011, 30-year U.S. Treasury bonds were yielding an annual return of 4.5%. The lowest 30-Year Annual ROI of the included schools is 4.5%. Therefore, attending the school with the lowest annualized return is a wash compared to taking tuition money, investing it in a 30-year Treasury bond and working straight out of high school.

90% Confidence Interval on the 30-Year Median Pay: For all schools, the 90% confidence interval on the 30-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 90% confidence interval is +/-10%.
  • Due to smaller data sets, the 90% 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 30-year median pay is included in net ROI. For example, a 5% error on a 30-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 net ROI includes the sum of the 30-year median pay, high school earnings and cost of education, both of which have much smaller errors, the uncertainty in the 30-year net ROI is about the same as the uncertainty in the 30-year median pay. For an example school with $1.8 million 30-year median pay, $100,000 in education costs, and given $1.1 million high school graduate earnings, the net ROI would be $600,000 +/-$90,000 for most schools and +/-$180,000 for the aforementioned exceptions (90% confidence interval). Note: The above example assumes a 100% graduation rate. If instead the graduation rate was 60%, then the net ROI becomes $360,000 +/-$54,000 for most schools and +/-$108,000 for the exceptions.
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