Our recently released College Return on Investment (ROI) rankings reflects a few updates to our methodology. In this blog post, I will provide some insight into the overall methodology, as well as highlight the methodological changes we have made and why we made them.
For an in-depth discussion of our methodology, please see this link on the PayScale website.
When calculating the return on any investment, you have to consider your investment (the costs) and your expected return. When it comes to college, the costs are two-fold: 1) the actual cost of paying for education (tuition & fees, room & board, and books & supplies) and 2) the foregone wages from choosing to attend college rather than working straight after high school graduation. The return from attending college is simply the wages earned after graduating.
Therefore, in simple terms, the 30-year ROI of a college education is the difference between the wages earned and the costs (both direct and indirect) incurred. In our study we find the average 30-year ROI across the set of ~1000 schools is $485,000, with a range of -$228,000 to $2,113,000.
College ROI: Cost Measures
There is a variety of ways that different individuals deal with the cost of attending college. Some pay full sticker price, some take out private loans, some receive federal loans, some earn scholarships (academic, sports, and other forms) and some use a combination of the above.
Since representing all cost structures faced by students is impossible, we focus on two measures that use publicly available data from the Integrated Postsecondary Education Data System (IPEDS), which is run by the Department of Education:
- Full sticker price, which incorporates tuition & fees, room & board, and books & supplies, where room & board is calculated in two ways:
- Net price paid by students who either live on-campus or off-campus, not-with-family (depending upon school) for their entire college career.
- On-campus living for schools that offer these arrangements
- Off-campus, not-with-family living for schools that do not offer on-campus living arrangements
- This price incorporates the average annual grant aid received by students at the school, where the grant aid includes local, state, federal and institutional grants.
- It is simply the difference between the full sticker price and the average grant aid multiplied by every year of attendance.
- Please note that at the time of data collection, the most recent grant aid data available was for the academic year 2010-2011.
For both of these costs, we calculate the in-state tuition cost and the out-of-state tuition cost for every public school on the list.
Once we collect the cost data from IPEDS, as well as the 4-, 5-, and 6-year graduation rates, we calculate the weighted cost of attending, where the weights used are the aforementioned graduation rates. For example, assume we have a school with a 45 percent 4-year graduation rate, a 65 percent 5-year graduation rate and an 80 percent 6-year graduation rate. Then, of those who graduate, 56 percent do so in four years, 25 percent do so in five years and 19 percent do so in six years. Now, for simplicity, let us 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.
Using these figures we can calculate the weighted cost: (56% * $40,000)+(25% * $50,000)+(19% * $60,000) = $46,250.
Note that this cost is roughly between the 4-year and 5-year cost since the majority of those who do graduate do so in four or five years.
For schools where the majority of undergraduate students graduate by a particular year of attendance (e.g. the majority graduate by their fourth year), this weighted calculation will have little to no effect on the cost reported as opposed to a straight summation of the total cost. The effect will be seen for schools where the percentage that graduate in four, five, or six years is fairly split.
College ROI: Income Measures
Both the college alumni and high school graduate income numbers utilized in the ROI package come from the profiles of people who have completed an online salary survey at PayScale.com.
People come to our survey to price themselves within the labor market. The survey asks questions about compensable factors that influence pay, such as years of experience, location of work, management responsibilities, common skills and certifications, etc. In the survey, we also ask people about their educational background (school, degree, major and year graduated).
Since the main motivator for completing a PayScale survey is to find your labor market price, the school data is secondary. Therefore, we don’t suffer from the “happy alumni bias.” This bias typically exists when schools survey their own alumni, as the majority of respondents are those with success stories. In other words, if an alumnus went to Harvard, got a degree in English and now works as a barista, they are likely not to inform their school. However, in our case, we get data from both groups: the success stories and those whose school backgrounds do not match their current career choices.
Additionally, alumni may be less likely to provide income details to their alma mater due to concern they may have about being targeted for school donations. This worry is nonexistent with a PayScale profile.
One question we’ve received is how are we measuring the expected 30-year median pay for a graduate in 2012? The simple answer is we are using past graduates to predict what future graduates might earn.
In more specific terms, what we did was sum up the median pay for bachelor-only graduates who graduated between 1983 and 2012 from a given school. Please note that we are using data collected over the last year so these earning figures are in current dollars.
This method means we are essentially 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.
There is one minor flaw in this approach that we will readily admit. This method assumes earnings 30 years from now for a 2012 graduate are the same as the current earnings of a 1983 graduate. However, if the character of a school’s graduates changed significantly over the last 30 years, this measure may be inaccurate. That being said, no one possesses the power to see the future and the best anyone can do is make an informed estimate of what the future may entail by using past information.
College ROI: Main Calculation
Once we have the costs associated with attending a given college (the price of attendance and the foregone high school earnings), as well as the after-graduation earnings, we calculate the ROI of a bachelor’s degree from a given school as simply the difference between these costs and the earnings.
Therefore, schools with high-earning graduates and relatively low costs fare well in our study (e.g., public engineering schools like Colorado School of Mines). Schools with relatively low-earning graduates and high costs don’t fare well in our study (e.g., private art schools).
College ROI: Changes from Last Year
There were three main changes in our methodology from last year:
- We no longer weight the ROI calculation by the overall (6-year) graduation rate. In the past, we multiplied the calculated ROI by the overall graduation rate such that schools with low graduation rates were penalized in the ROI calculation. This year, we calculated an ROI measure that applies only to those who graduate. The main difference caused by this methodological change is a handful of tech/engineering schools with high earning graduates, but low graduation rates, leapt up into the top 25.
- We included schools that don’t offer on-campus living arrangements (primarily for-profit private schools). For these schools, we calculated costs for students who live off-campus, but not with family.
- Last year we utilized the 75th percentile of high school graduate earnings for comparison with the notion that those who have the ability to attend college are likely to earn more than the typical high school graduate. However, further studies have shown our high school graduate earnings to be biased slightly high due to our underrepresentation of minimum wage jobs. (We don’t get as many people visiting our site and taking our survey with minimum wage jobs as we do get individuals who earn more than minimum wage.) For this reason, we switched back to using the 50th percentile of high school graduate earnings according to PayScale data.
Remember that the financial benefit of attending college is unique to a given person and thus our study will show what is typical for graduates, but not what your situation might be. To truly understand how you compare to others like you, be sure to build a complete profile by taking PayScale’s full salary survey.
Tell Us What You Think
Do you have more questions about the methodology behind the 2013 College ROI Report? Ask away on Twitter and in the comments below.