Chart: Assessing a More Probable ROI
This information comes to us from an academic research paper titled “Dropouts, Taxes and Risk: The Economic Return to College Under Realistic Assumptions.” The authors, Alan Benson of the University of Minnesota and Raimundo Krishna Esteva and Frank Levy of MIT, sought to pick up on factors that mainstream data crunchers miss.
Specifically, most prevalent calculations dealing with “return on investment” (ROI) payoffs of a degree infer a series of best-case assumptions, specifically 100% student graduation rates, graduations after four years, and equal tax liabilities. But what are the returns according to more modern, realistic assumptions?
In “Dropouts, Taxes and Risk” the authors ran a set of analyses using a wide variety of information, including data from the University of California (UC) system, a proxy for selective schools, and the California State University (CSU) system, a proxy for less selective schools. This greater set of inputs paints a picture of what the typical student’s actual return on an educational investment might be according to current trends. The data certainly get interesting in this particular report. While the authors do conclude that the average student is in fact better off for their college experience the trend line is moving in such a way as to raise caution flags. Some findings:
- Dropout rates, as we’ve seen previously, have become dishearteningly high. This report quotes a study by Complete College America that finds “among 580 US public four-year institutions, only 50 report four-year graduation rates above 50%.”
- We also know that those who do graduate increasingly take longer and longer to obtain a degree, particularly at less selective colleges. We see that in the California system wherein UC’s graduates take a median of four years to earn a diploma while CSU’s take nearly six. We must nowadays consider the likelihood of related excess costs when making more reasonable return on investment calculations.
- And to the point of today’s chart: what of the student who graduates on time? While the average graduate fares positively, it’s no longer a given. In 1980s and 1990s a student could enroll in either system, rack up two years’ worth of tuition in debt (an assumption behind the chart’s numbers), and then graduate to a job market that rewarded the process nearly all of the time. Today’s students can’t take this for granted. Particularly, students who take on the UC system’s higher costs graduate into a world where they have a 16% chance of facing financial distress (having loan repayments in excess of 15% of their income at age 30).
Here we see the rub of higher education today. Cheaper and/or less-selective schools tend to make better economic sense for graduates but these graduations tend to take longer or not occur at all. Meanwhile, the students of more expensive and/or more selective schools have better graduation prospects but a rapidly expanding minority face grimmer economic realities as the costs have outpaced the economic benefits of a degree.
Pick your poison. Students at less expensive schools must focus on doing what it takes to graduate in a climate less amenable to academic success. Students at more expensive schools may need to work harder on the monetary aspects, avoiding debt and acting more practically about degree selection and the career implications of their choices. Either way no one can any longer simply assume that attending college makes economic sense. (See also previous Chart of the Week on this topic).