Calculating the ROI of a Higher Education
As students enter their sophomore and junior years of high school, many begin contemplating their post-graduation plans, including attending college. If you are a parent, you will want to assist your child in finding the best college to fit their educational and social needs, and give them the solid platform they need to launch their career.
Finding the right college involves researching the school to ensure it offers the appropriate major and degree path, provides a professional network for job opportunities after graduation, and provides a safe environment for students living independently for the first time. When you do find the right institution, it’s crucial to consider the financial cost as an investment for both you and your child. The cost of college can be substantial, and having a significant amount of debt can negatively impact your – or your child’s – financial future.
A good way to determine if the price is right is by calculating the return on investment (ROI). This quick and easy calculation assesses the future anticipated income benefit against the cost of education.
To calculate the ROI, subtract the average salary for someone with a high school diploma from the salary expected with a college degree, and multiply that by the number of years in the workforce after graduation. Divide that number by the sum of tuition, fees, books, and loan interest, and then multiply that by 100. Ideally, an ROI greater than 100 should be achieved within ten years, although it can take longer.
Let’s say your son would like to be a public school teacher. He attends a four-year state school with an average annual tuition of $27,000. Once he graduates college, he anticipates his average annual salary will be around $66,000. The average annual wage for an individual with a high school diploma and without a college degree is around $40,000. When he does attend college, he plans on taking a loan for the entire amount of his tuition with an interest rate of around 7% and will pay it off over 20 years.
(67,000-40,000)20/200,000 = 270
In this hypothetical situation, he would potentially earn almost three times his investment and his plan would be worth considering.
Now, let’s change some of the assumptions just a little. Instead of going to a state school, he would like to go to a private school where the annual tuition is $45,000 per year. We will also assume he takes a break for seven years to take care of his small children.
(67,000-40,000)13/335,000 = 105
You can see how easy it is to go from having a high ROI to barely breaking even on your educational investment. Plus, you still continue to pay on student loans even in years when you might not be working full-time in your career of choice.
Sit down with your child to discuss all factors involved in making a college decision, including potential future salaries and student loan payments. You can use online calculators to illustrate the true cost of college and monthly loan payments. Additionally, help your child understand how career changes could impact their overall ROI and prepare them for financial success, or how a change or break in their career could impact the overall ROI of their college education.
Obviously, we can’t predict the future. But the more you can talk to your child about various life scenarios and their impact on future financial success, the more prepared they will be when life throws them a curveball. We can’t protect our kids from everything, especially when they walk out the door and start their new lives as adults, but we do have the ability to help set them up for success. Talk to them about money and finances. And if you don’t feel comfortable having that conversation, find a trusted financial advisor who can help guide both of you to your ideal futures.
Just getting started saving for your child’s college education? Learn how a 529 Plan can help you save in a tax-efficient way.
This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.
Anne M. Mank
Director of Financial Planning
CFP®, CPA