Is College Worth the Investment?

October 19, 2010

As the cost of higher education rises, more and more students are struggling over the decision to attend college.  But they now have help from PayScale.com, which recently released data on the return on investment (ROI) from over 500 colleges and universities, says Mark Schneider, a visiting scholar at the American Enterprise Institute.

Considering schools' selectivity (as measured by Barron's Profiles of American Colleges) and separating them into public versus private (nonprofit), Schneider see two patterns.

  • First, in general, attending a more selective school increases a student's payoff.
  • Second, public institutions have a consistent advantage over private not-for-profits at every level of selectivity.

One way to judge whether the ROI is worthwhile is to figure out how much it costs students to borrow money to attend a college and compare those costs to the rate of return.

  • Currently, unsubsidized student loans from the federal government carry a 6.8 percent interest rate.
  • This rate is a natural starting point to compare student ROIs; if the rate of return is lower than the cost of the borrowed money, attending that college does not seem like a prudent choice.
  • Of the schools for which PayScale reported data, 17 colleges fail this basic test, says Schneider.

Other loans that students may take out have higher rates -- up to 10 percent.  If the cost to attend college is set at 8 percent, over a quarter of the schools in the data set (147 out of 533) fail the test; if it is set at 10 percent, then over half (284) have failing ROIs.

Knowing how that investment is going to pay off is a critical consideration that should factor into the decision about which school to attend.  Going forward, we need to find ways to make these detailed ROI data available for more schools and help students make worthwhile investments of their time and money, says Schneider.

Source: Mark Schneider, "Is College Worth the Investment?" American Enterprise Institute, October 2010.

For text:

http://www.aei.org/docLib/09-EduO-Oct-2010-g.pdf

For PayScale database:

http://www.payscale.com/education/average-cost-for-college-ROI

 

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