Unveiling the Positive Return on Investment of Education

In America, the conversation around education often revolves around money: Is the private school a better value than the public school? Will the significant investment in private tuition set my child up for success? Should we pay the lofty price for a prestigious, brand-name college education or maximize value and go for in-state tuition? For many families and students, the economics are primary. Education is expensive, and the scale of the investment forces us all to consider the return on that investment. This article delves into the multifaceted concept of a positive return on investment (ROI) for education, exploring its definition, influencing factors, measurement, and implications for students, policymakers, and educational institutions.

Defining Positive Return on Investment (ROI) in Education

Return on Investment (ROI) is a financial metric used to evaluate the efficiency and profitability of an investment, calculated by dividing the net profit from the investment by the initial cost of the investment. In the context of education, ROI is often used to assess the effectiveness of educational policies and reforms in terms of their financial returns, which can be measured through improved student outcomes, increased graduation rates, or higher earning potential for graduates.

In the strictly financial sense, an investment is an outlay of money from which one expects a return of some kind, in addition to the original amount allocated. The return on investment, or ROI, is a common performance measure used to evaluate and compare the efficiency of financial investments. Education is expensive, and the scale of the investment forces us all to consider the return on that investment.

Understanding the Nuances of Educational ROI

While the basic formula for ROI is straightforward, its application to education requires a more nuanced approach. Unlike traditional investments, the returns on education are not always immediately apparent or easily quantifiable. They often manifest over the long term and encompass a wide range of benefits, including:

Increased earning potential: On average, attaining higher levels of education creates a measurable wage premium and an increase in earnings over a lifetime. According to a study by the Federal Reserve, the average grad with a bachelor’s degree earned $78,000 annually, versus $45,000 for the average worker with only a high school diploma.
Improved employment opportunities: A college degree can open doors to a wider range of job opportunities and career paths.
Personal and intellectual growth: Education fosters critical thinking, problem-solving skills, and a lifelong love of learning.
Societal benefits: A well-educated population contributes to a more informed and engaged citizenry, driving innovation, economic growth, and social progress.

The Intangible Benefits of Education

In a recent conversation regarding the value of college, Stephen J. Dubner, of Freakonomics fame, examines some of the intangible benefits that result from attending college. One of the primary benefits of attending a brand-name school involves the “halo” effects, the reputational effects conferred to the attendee. Other benefits include peer effects, the motivational enhancement from surrounding yourself with other disciplined, motivated individuals. And finally the power of the social network, the human capital and connections that result from the shared student experience. A college degree sends a social signal, and few of us are immune to the power of prestige. When evaluating a stack of resumes, swiping through profiles on a dating app, or contemplating an invitation to a lunch date, knowing a person attended a highly selective college or graduate school can influence the decision. Without knowing any personal details, we know that individual made it through the admissions gauntlet to attend a highly selective school, attained the necessary grades and scores, and had a certain degree of drive and motivation. That halo affects our perceptions, whether or not it is warranted by that individual’s merits and attributes.

Factors Influencing ROI in Education

Several factors can influence the ROI of education, including:

The cost of education: Pricing increases with few equivalents. The price of education in America has grown more rapidly than most other expenses. Educational costs fall just below hospital costs in terms of their growth over time. Educational costs fall just below hospital costs in terms of their growth over time. Thankfully, we all get to enjoy relatively cheap televisions and cell phone service, but education, health care, childcare, and housing costs are putting the pinch on millions of American families. Consider this graphic, which illustrates the relative rise of educational costs in the 21st century.
The choice of major: College major makes the difference. The college you attend makes a difference for ROI, but the major makes a bigger difference. College NPV lists the ROI for 67,000 majors at various schools. Forbes highlighted another site, the Foundation for Research on Equal Opportunity and their ROI evaluations of 53,000 majors. Computer and Information sciences have a lifetime ROI of 716.6%. Business finance returns 710.2%, business accounting returns 547.2%, and electrical engineering returns 517.8%. Fine arts, general studies, and education degrees tend to yield much lower returns.
The quality of the institution: Selective institutions have the greatest endowments, invest the most in their students, and generate the greatest financial returns for their students.
The state of the economy: The amount of money you’ll make is also dependent upon other factors - including some you can’t control, such as the economy.
Individual effort and aptitude: Ultimately, the ROI of education depends on the individual's ability to apply their knowledge and skills in the real world.

The Impact of Student Debt on ROI

One of the most significant challenges to achieving a positive ROI in education is student debt. We cannot ignore the 43 million students carrying $1.7 trillion in educational debt, the millions of students in default on their federal loans, and the current political fight to forgive hundreds of billions in student debt. According to Forbes, nearly 45 million student borrowers in America owe more than $1.5 trillion in student loan debt. That translates to $32,731 owed per student. The amount of student debt you’ll incur depends on the total cost of college and any additional sources of income you may have to lower those costs. For example, can your parents give you financial help? Is there a college fund in your name? Will you be working during college? Can you work during the summer and use that money for college?

High levels of student debt can significantly reduce the financial benefits of a college degree, potentially delaying or even negating the positive ROI.

Measuring ROI in Education: Approaches and Metrics

Measuring ROI in education is a complex undertaking that requires careful consideration of both costs and benefits. Several approaches and metrics can be used to assess ROI, including:

Cost-benefit analysis (CBA): Cost-Benefit Analysis (CBA) provides a broader framework that complements ROI assessments by evaluating not only the financial returns but also the social and economic impacts of educational policies. While ROI focuses primarily on financial metrics, CBA examines qualitative benefits such as improved community well-being and social equity alongside quantitative data.
Earnings premium: The difference in earnings between individuals with different levels of education.
Payback period: The time it takes for the cumulative earnings of a graduate to exceed the cost of their education.
Net present value (NPV): The present value of future earnings, adjusted for inflation and the time value of money.

The Importance of Data and Transparency

For decades, students had little way to know whether graduates of specific degree programs were landing good jobs after college. Lawmakers in North Carolina ordered a 2023 study on the financial return for degrees across the state’s public universities.

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Accurate and reliable data is essential for measuring ROI in education. This includes data on tuition costs, financial aid, graduation rates, employment rates, and earnings. Transparency in data collection and reporting is crucial for ensuring that students and families have the information they need to make informed decisions about their education.

Strategies for Maximizing ROI in Education

Given the rising cost of education and the increasing importance of demonstrating value, students, families, and educational institutions must adopt strategies for maximizing ROI. Some key strategies include:

Choosing a major with strong career prospects: Students are clearly following the money. Degrees in the STEM fields (science, technology, engineering, and math) often have the highest earning potential. Other higher-paying majors include business management, economics, nursing, computer science, and law.
Attending an affordable institution: Many public schools are pitching the value of their honors colleges, offering much lower net pricing, irrespective of merit-based financial aid. Some families in the Selingo article intentionally perused college’s Common Data Sets, seeking out colleges with a high percentage of institutional aid given to students without respect to financial need.
Seeking out financial aid and scholarships: Those sources include grants, scholarships, and work-study funds; essentially, the financial aid you receive that you don’t have to pay back.
Developing in-demand skills: He gathered a council of Michigan business leaders to identify skills that graduates will need for jobs, from agriculture to banking.
Networking and building connections: More affluent adults have more friends they made in college. That network could be the source of some of the advantages of attending the most selective schools: jobs, connections, investment opportunities, relationships and more.
Staying in your home state: Staying in state will keep the parents’ savings intact, potentially allowing them to help with the next round of their child’s education.

The Role of Educational Institutions in Enhancing ROI

Educational institutions also have a crucial role to play in enhancing ROI for their students. This includes:

Controlling tuition costs: Colleges, said Matt Sigelman, president of the Burning Glass Institute, a think tank that studies the workforce. American higher education has been grappling with both sides of the ROI equation - tuition costs and graduate earnings.
Providing career counseling and placement services: Our experienced student lending professionals can help you figure out the best way to fund your college education that will improve your chances of your investment having a positive ROI.
Aligning curriculum with industry needs: Last year the institute, partnering with Strada researchers, found 52% of recent college graduates were in jobs that didn’t require a degree.
Offering internships and experiential learning opportunities:
Tracking and reporting on graduate outcomes:

ROI Beyond College: Early Childhood Education

A common argument for supporting early childhood is that it is a good “investment.” Often, the term is used colloquially, meaning that early childhood is an area in which funders can make a positive difference, and that support is broadly beneficial for children. While the colloquial meaning of investment is certainly valid, when business people and economists talk about investment and return on investment in early childhood, they generally mean something more specific.

Because high quality early childhood programs promote healthy development, they can generate savings by obviating the need for more expensive interventions later in a child’s life. For example, studies show that participation in high-quality early care can help children avoid special education, grade repetition, early parenthood, and incarceration - all outcomes that imply large costs for government and for society.

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The National Forum on Early Childhood Policy and Programs has found that high quality early childhood programs can yield a $4 - $9 dollar return per $1 invested. A 2009 study of Perry Preschool, a high-quality program for 3-5 year olds developed in Michigan in the 1960s, estimated a return to society of between about $7 and $12 for each $1 invested.

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