College ROI: What We Found

Photograph by Paul Hudson/fstop/Corbis

When people talk about the value of a college degree, they mean different things. A report last year by Georgetown University’s Center on Education and the Workforce pegs the median value of a four-year bachelor’s degree at $2.3 million, which is the average earnings for a degree holder employed full-time from ages 25 to 64. The value of a college investment calculated by PayScale, a Seattle-based compensation data company, for Bloomberg Businessweek is a small fraction of that amount, and to understand why, you need to know a little bit about our methodology.

The PayScale methodology differs from most others in several key respects. Instead of using lifetime earnings, it starts with earnings over a 30-year period. From that figure, we deduct the earnings of a typical high school graduate (since most people who don’t go to college would still have earnings, albeit at a much lower amount). In our return on investment (ROI) calculation, the “investment”—or total net cost—is the amount spent on college over the actual time it takes students to graduate, whether four, five, or six years. Finally, our ROI figures are adjusted using each school’s graduation rate. After all, if you don’t graduate, you’ve made an investment with very little financial return. The result is a return that reflects what incoming students can reasonably expect from their investment.

In 2012, both the cost of a college education and graduate earnings took a bite out of the 30-year college ROI, which fell 2.3 percent to an average of $353,182 when comparing the same set of schools in 2011 and 2012, and fell 7.8 percent to $333,455 when comparing both lists in their entirety, 691 schools in 2011 and 853 schools in 2012. (To view the complete 2012 ranking, click here.)

While our methodology underwent significant changes last year and this year, those figures represent an apples-to-apples comparison. On the cost side, they reflect the college sticker price for tuition, room and board, and books, without financial aid factored in, which increased 6 percent. On the earnings side, they reflect the earnings of college graduates (which decreased by 1 percent) in excess of the median pay of a high school graduate.

Two important changes to our methodology in 2011 and 2012 had the net result of reducing ROI dramatically. Since many students receive grant aid from their institutions, starting last year we began deducting average grant aid from college costs, which has the effect of increasing ROI. But starting this year, we made a second change that has the opposite effect: using 75th percentile high school graduate pay (instead of the median) to calculate how much each college’s graduates earned over and above the pay of high school graduates. We believe the 75th percentile more accurately reflects the pay of individuals capable of winning acceptance to college or who spent a few years in college before dropping out.

Looked at that way, ROI is only a fraction of what it was last year: on average, $152,114 for all 853 schools on our list, including two separate ROI calculations for state institutions using in-state and out-of-state tuition. Private schools did far better than publics, with 30-year ROI of $222,047, easily surpassing public schools for students paying in-state tuition ($122,987) and out-of-state tuition ($100,155).

Nearly a third of the top 30 schools were engineering schools, including the top three institutions: No. 1 Harvey Mudd College, No. 2 California Institute of Technology, and No. 3 Massachusetts Institute of Technology. All three schools had 30-year ROI well above $1 million, a claim only 11 schools could make. On average, engineering schools had ROIs of $603,362, more than double the ROI for liberal arts schools ($245,943), more than triple that of business schools ($141,014), and more than 26 times that of arts and design schools ($22,328).

The only schools that fared better than engineering schools were those in the Ivy League. Seven of the eight Ivies are in the top 15, and the average ROI for all eight was more than $1 million. While costs for these schools are high, several factors worked in their favor, including generous financial aid and excellent graduation rates—both in terms of how many students ultimately graduate and how long it takes them to do so. The weighted net cost to graduate was $84,241—less expensive than half the schools on the list, and half the cost of the most expensive.

Schools in New York, California, and Massachusetts dominated the ranking, snaring nine, eight, and eight top-50 spots, respectively, with California and Massachusetts claiming half the top 10. New top schools were crowned in six states: Alaska, California, Florida, Illinois, Iowa, and Montana. In California, Harvey Mudd took over the top spot from Caltech (in the state and the nation). In Illinois, an elite private research institution, the University of Chicago, lost the No. 1 ranking to the University of Illinois at Urbana-Champaign, a state school with far lower costs.

Overall, the cost to receive a degree from the schools on our list averaged $85,276, a figure that reflects not just the tuition sticker price, but also average grant aid and how long it takes the average student to graduate. Private schools ($99,206) and out-of-state students at public schools ($98,538) paid the most, followed by in-state students at public schools ($55,861).

One reason why our ROI calculations differ from many others is that ours incorporate graduation rates in two different ways. First, each school’s ROI for graduates is adjusted, using its six-year graduation rate, to reflect the risk of not graduating. Second, the percentage of graduates who receive their degrees in four, five, or six years is used to determine college costs. All other things being equal, schools that graduate a large percentage of students, and who do so in four years, do a good job of holding down costs and as a result fare well in our calculations. Those who don’t, don’t.

On average, all 853 schools in this year’s ranking only graduate about 59 percent of their students, and less than two-thirds of those receive their degrees in four years. For the top 50 schools in the ranking, graduation rates are a big differentiator. On average, they graduate 88 percent of their students (compared with 51 percent for the 50 lowest-ranked schools) and 84 percent of graduates receive their degrees in four years (compared with 61 percent for the lowest-ranked schools).

Of course, it doesn’t hurt that many of the schools with the best ROI are the kind of highly selective elite private research universities with sterling reputations whose graduates tend to fetch the highest pay. Average annual pay for all the schools on the list this year was $61,426. Of the top 50 schools with the best ROI, 38 also have top-50 graduate pay, with alumni earning $81,000 or more per year. Six of the 10 schools with the highest graduate pay were either engineering or Ivy League institutions.

On the other end of the spectrum, there are 191 schools where graduates had negative ROI. At Fayetteville State University in North Carolina, where only one out of three students graduates in six years, in-state grads earned $289,000 less over 30 years than a high school graduate earning at the 75th percentile, after deducting the cost of the degree. For out-of-state graduates, the figure is $338,000.

At all 191 schools with negative ROI, graduates actually fared worse than those who dropped out after a few years—the financial benefit of earning a degree was so meager that the added expense it entailed was simply not worth it. At these schools, at least from an ROI perspective, dropping out was the smartest thing to do.