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Thursday, February 9, 2023

College Tuition vs. Investing: Is It Worth It?

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With the cost of college rising each year and questionable career prospects awaiting college graduates, some people are wondering if a college education is still worth it. If you took all of the money you would spend on a college degree and invested it, would you come out ahead? Are college loans worth it?

One of the ways to figure out if a degree is worth the money is to calculate the return on investment (ROI) of a college education. The ROI is a metric that measures the effectiveness of the return on an investment but also compares it to other investments during a similar time period.

ROI is calculated by dividing the benefit or return by the cost of the investment. The result is expressed as a percent or a ratio. In this article, we look at the return on investment for college degrees based on a few different factors and compare them to other investments.

Key Takeaways

  • Quantifying the value of a college education is difficult, but the return on investment can be calculated using key data.
  • Factors such as annual percent return, 20-year net ROI, and specific majors can help determine which colleges rank higher.
  • Other investments may not offer a better ROI, but it’s important to look at them individually.
  • Keep in mind that you cannot factor in important things like networking, raises, and other opportunities when you calculate your ROI.

The Best Schools for Return on Investment

The value of a college degree can be hard to quantify. In addition to the tangible value of your future income, there are many intangible benefits, including learning, independence, improved social skills, and general skills such as working with teams and developing good working habits. Because intangible skills can’t be quantified into a dollar amount, we must examine the numbers that can be quantified to determine the ROI of an education.

According to the most recent study by popular career website Payscale, not all degrees and colleges are created equally. The study, reported in 2020, looked at more than 1,900 schools across the country. All calculations noted from the study for the purpose of this article assume the option of on-campus housing and no financial aid.

Colleges with the Highest ROI Percentages

If we look at specific universities, the ROI for a college degree is a compelling investment. The United States Merchant Marine Academy’s Service Academy ranked at the top for with the best ROI at 19%, with the total cost of a four-year degree coming in at $34,900.

Both SUNY Maritime College’s in-state program and Brigham Young University-Idaho rounded out the top three with an ROI of 13%. However, the four-year cost of tuition for SUNY Maritime College was $95,300 versus $48,200 for Brigham Young University-Idaho.

Colleges with the Highest Income Earned

If we look at the total income earned by graduates minus the cost of education, the results are a bit different. Harvey Mudd College came in at $1.140 million while the Massachusetts Institute of Technology (MIT) ranked number two with $1.123 million. The U.S. Merchant Marine Academy still ranked high, claiming the third spot with a 20-year net return of $1.111 million.

The U.S. Military Academy came in second with a $1.074 million return. SUNY Maritime College ranked #6 with $1.009 million while Brigham Young University-Idaho ended up in the 123rd place with only $534,000 for a 20-year net return on investment.

Remember, these are the best-case scenarios. Other schools, including Ivy League heavyweights Harvard and Yale, do not reach the top spots thanks to a high cost of attendance. The median annualized ROI for all schools comes in around 6% for public schools and 4% for private schools.

The high cost of attending Ivy League schools like Harvard and Yale keep them out of the top spots.

The Best Majors for Return on Investment

Of course, looking at the ROI of a college degree by school has some flaws. An art major has very different career prospects from an engineering major. Let’s take a look at how various majors factor into the ROI.

For a humanities major, the best option is Brigham Young University-Provo, with a 10% ROI. A business major at the same school can expect a 14% ROI, a full 4% better. An engineering major at BYU averages a 14% ROI while a science major has a 12% ROI.

Please keep in mind that the comparison by major consisted of only one school with a very targeted student population and one that is consistently at the top of the list. The average for other schools can be quite a bit lower.

Benchmark Investments

Now that we know the 20-year ROI of top degrees from some top schools, let’s take a look at how those same dollars invested in a college degree compared to financial investments.

The safest investment in general for most retail investors is a U.S. Treasury bond. Because these investments are so safe, the return paid by the U.S. government is very low. Over the last 20 years, this would have resulted in a 2.1% ROI as of Oct. 25, 2019. Compared to the average college degree, an education would fare much better, yielding about double.

Some stellar investments beat a college degree investment several times over. For example, an investment in Apple (AAPL) stock in 1999 returned 105.2% over the last 20 years, while Microsoft (MSFT) returned 3.7%.

The benchmark for the market return is the S&P 500 index. Over the same period, the S&P 500 returned 4.3%—higher than the average degree, but far from matching the ROI from the top degrees at the best schools.

Understand Your Personal ROI on a College Degree

No college experience or career is exactly the same, so your best bet is to estimate your own ROI based on the school and degree of your choice.

I earned a business degree from the University of Colorado at Boulder. The typical ROI for that specific degree is approximately 8%, better than the S&P 500, and a safe investment. However, that number does not tell my whole story.

After earning a bachelor’s degree at CU, I went on to earn an MBA from the University of Denver. That private school’s MBA cost about 33% more than my in-state cost of attendance at CU. While some people might argue that I had a better use for $90,000, I was debt-free two years later, and my income has had several large jumps, which I attribute to my MBA.

Right after I graduated from my MBA program, I found a new job that would never have happened without the networking I did at school. It brought me a modest $5,000 raise, but over 20 years that covers my entire cost of attendance plus an extra $10,000. Any raise over that increases my ROI. Three years later, I received a 40% raise when I accepted a job—one that I would not have been qualified for without the MBA. If I stay at the same salary as today and never get another raise, that is an 889% ROI on my MBA.

Of course, my results are better than some and worse than some. Your results will vary.

The Bottom Line

While we all want to be like Warren Buffet and beat the S&P for nearly our entire career, Buffett is not the average investor. You can safely invest in the S&P 500 and bring in a steady return, but your growth potential is fairly limited.

If you are like most people, your career is going to be your primary income source for most of your life. A college degree does increase income and lower the chances of unemployment—both valuable factors to consider when weighing a college degree against a market investment.

If you’ve made it this far, you know that all degrees are not created equally. If you go to a quality school and earn a business, engineering, or computer science degree, you will beat the market. And, if you work hard and do well, your income will continue to increase. A college degree may not beat the market on its own, but coupled with hard work, your return on investment has unlimited potential.

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