The Return on Investment in Education

In America, when we are talking education, we are typically talking money. Is the private school a better value than the public school, and 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? There is certainly much more to an education than its cost and financial return, but for many families and students, the economics are primary. 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. Education is expensive, and the scale of the investment forces us all to consider the return on that investment.

Pricing out my own educational journey, then and now

I attended a private school in Atlanta from 8^th grade to graduation, where tuition gradually increased from $6,800 ($17,249 in current dollars) to $8,800 ($18,677 in current dollars.) Today my alma mater charges $38,640 per year ($438,330 for a K-12 degree). My first year at Penn cost $27,900 ($59,187 in current dollars), while a year at Penn in 2024 costs $88,000 ($352,00 for a bachelor’s degree). For my wife and I to provide our children an education identical to the one I received requires a significantly greater financial investment. Like every family contemplating the rising costs of their children’s education, my family is going through the exercise of examining the public and private options, considering affordability, value, financial fit, and ultimately what is best for our children. 

Pricing increases with few equivalents

The price of education in America has grown more rapidly than most other expenses. Consider this graphic, which illustrates the relative rise of educational costs in the 21^st century.  

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.

What do you get for your investment?

On average, attaining higher levels of education creates a measurable wage premium and an increase in earnings over a lifetime. The Bureau of Labor Statistics keeps track of the wage premium:

Over the course of a lifetime, these wage differences compound, leading to significant changes in wealth. The financial effects and benefits of college are greater for more affluent students. However, due to the increase in costs of attendance and corresponding financing costs, the average time to break even for a bachelor’s degree is now 15.5 years. The return on education is positive, but it is lower than it used to be. Due to the increasing costs of attaining a degree, more Americans than ever are losing confidence in higher education. A recent Gallup poll finds that only 36% of adults have a “great deal” or ”quite a lot” of confidence in higher education, down from 57% in 2015.

The intangible benefits of college

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. 

The power of prestige

One of Dubner’s guests, Bryan Caplan, author of The Case Against Education, argues that “a college degree is a bit like the peacock’s plumage. Something you spend a lot of resources on primarily to elevate your status among the lesser plumed.” Peter Blair, Harvard Economist, argues that the forces driving behavior in the domain of selective higher education revolve around scarcity, exclusivity and prestige. 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.

Does a more prestigious institution produce greater economic benefits for an individual?

When it comes to brand-name schools, the big questions most families ask are: 1) Can my kid get in? 2) Can we afford it?  3) Is it worth it?

For several decades, economists and researchers have been examining the question of how attending a prestigious college impacts earnings.

Berg Dale and Kruger

Stacey Berg Dale and Alan Kreuger published a seminal paper in 2002 entitled “Estimating the Payoff to Attending a More Selective College.” Examining a data set of some 14,000 students, the researchers found that “students who attended more selective colleges do not earn more than other students who were accepted and rejected by comparable schools but attended less selective colleges.” There were, however, significant wage benefits for students from more disadvantaged family backgrounds, students of color, and first-generation students.  

This study was gospel for a decade and was updated in 2011. Dale and Kreuger found no advantage for affluent white and Asian students who attended elite institutions. Whether you attend an Ivy like Penn or a public school like Penn State, the outcomes will be the same. This story felt good, and it also jived with my own experience. Some of my most successful friends attended state schools like the University of Georgia. I personally referenced this study when talking to students about which universities they might or might not attend. Follow your passion; don’t chase the prestige.

Raj Chetty, John Friedman and Colleagues

In 2017, Raj Chetty and his colleagues at the Opportunity Insights research consortium at Harvard released a study on “Mobility Report Cards” that analyzed admissions outcomes and IRS financial records (1098-Ts) for millions of students. Chetty and colleagues determined that students who attend the most selective colleges, the IVY-Plus schools, holding other variables constant, are more likely than other students to have the greatest earnings as adults. In 2023, Chetty and colleagues updated their research with findings that “attending an Ivy-Plus college instead of the average highly selective public flagship institution increases students’ chances of reaching the top 1% of the earnings distribution by 60%, nearly doubles their chances of attending an elite graduate school, and triples their chances of working at a prestigious firm.” Chetty and colleagues found measurable benefits of attending the top schools.

Chetty focused subsequent research on the importance of the social network acquired from attending college. 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.

Caroline Hoxby

Stanford researcher Caroline Hoxby stands with Chetty and colleagues and argues that it is sensible for students to apply to and attend the most selective institutions to which they are admitted. Selective institutions have the greatest endowments, invest the most in their students, and generate the greatest financial returns for their students.

Thus, the academic research paints a mixed picture. Berg Dale and Kreuger discount the value of highly selective colleges and universities, while Chetty and Hoxby find value therein.

College major makes the difference

The college you attend makes a difference for ROI, but the major makes a bigger difference. Some websites attempt to quantify the ROI of selected majors at individual colleges. 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. Of the programs evaluated, 69% have a positive ROI, but 31% do not, contributing to the student debt crisis. 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. 

New research out of NYU finds that for 5.8 million Americans, a college degree yields a significant return on investment, which varies by field of study. In this analysis, engineering and computer science majors had the highest median returns, over 13% annually, followed by business, health, and math and science majors (10-13%), biology, agriculture, and social science majors (8-9%), and education, humanities, and arts majors (below 8%).

Given the rising economic uncertainty, partially driven by emerging and likely disruptive technologies, more and more students are searching for safe, stable ground. They are considering the elevated costs of education, which leads directly to more risk aversion and conservative behaviors. Students are looking for a degree that is future-proof. In doing so, many students are moving away from the humanities. Here is a helpful graphic from Jeff Selingo, illustrating that trend:

While bachelor’s degrees are up, humanities degrees are in clear retreat. English and History majors are becoming increasingly rare as students flock to STEM degrees. The number of computer science degrees has more than doubled in the past decade. Students are clearly following the money. 

Merit Aid: Finding a way to make the numbers work

The pricing model of education is somewhat akin to airline pricing. For the exact same seat and amenities and experience, two passengers, sitting side by side, may be paying vastly disparate fares. The reality is that more affluent students, paying higher tuition, subsidize higher-need students. But there’s a limit to how much you can charge any family. Even affluent families want to feel like they are getting a decent deal, and for many, this comes in the form of a discount or merit award. 

As list prices continue to rise, a greater share of affluent families are simply refusing to pay full price, even if they have the means. Jeff Selingo investigates this phenomenon in his newsletter and in The Intelligencer. Some parents admit to feeling foolish paying twice for the identical college experience for their kids: paying an exorbitant premium and getting nothing tangible in exchange.

Some families fall in the financial “donut hole:” too affluent for need-based aid, but not wealthy enough to bear the full price. I know of a family where the oldest daughter (of three) applied to 8 selective colleges, was accepted to all of them, and did not get sufficient aid awards to make attendance financially feasible at any of the schools. She ultimately took a gap year and applied to a new slate of schools, less selective, but much more likely to give her financial aid.

Dropping down in selectivity or prestige, “under-matching” to maximize merit aid, is an increasingly popular strategy to afford college. 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.

Staying in your home state

Many public schools are pitching the value of their honors colleges, offering much lower net pricing, irrespective of merit-based financial aid. Jeff Selingo notes the trend of “let’s try for Ivy U., and then if not, State U.” If the Ivies say no, we’re going to skip the next tier of private schools and head to UGA or GA Tech on the Hope scholarship, paying zero tuition. Staying in state will keep the parents’ savings intact, potentially allowing them to help with the next round of their child’s education. 

A provocative piece in Bloomberg calls into question the ROI of many private colleges that are not in the Ivy League, arguing that public flagships offer a much better financial return. Per the analysis provided by Georgetown University’s Center on Education and the Workforce, the 10-year return from public flagships frequently tops that of some of the most elite, sub-Ivy, 4-year colleges. The 10-year return on the top 63 private colleges is 49% below the Ivies and 9% below the state flagships. An example of this is the University of Georgia, with free tuition for high-performing in-state residents, yielding an annual cost of attendance of $27,329, and a 10-year Return on Investment of $170,000. This makes the ROI for UGA “31% higher than Wake Forest’s return of $130,000 and more than five times that of Tulane’s $31,000.”  After 10 years, the Ivies return $265,000 on average, elite private colleges return $135,000, and public flagships return $148,000. It’s clear the public flagships “punch above their weight” in driving wealth for graduates.

Lifetime Spend: Making graduate school part of the calculus

Many families are thinking about the cost of graduate school in addition to the cost of a bachelor’s degree. The bachelor’s gets your foot in the door for many fields, and a more advanced degree is essential to take the next steps in many professional fields. The growth in the price of graduate education has frequently surpassed the price growth of a bachelor’s degree. At Penn, where undergrads pay $88k a year, students pursuing a JD must pay $111k annually, and students pursuing an MBA are on the hook for $127k annually. These are big numbers, and it’s much tougher to get financial aid for graduate school. It’s expected that students will take out loans, which are often additive to loans from undergrad. If students and their families are looking for a deal in education, they are more likely to find it in undergrad than in grad school.

Beyond the numbers

Given the high price tag of college, decisions about the size of a family’s and a student’s investment will be very specific to each family. Any analysis focusing exclusively on financial return is obviously a reductive exercise. There is clearly more to college than a financial return; there is more to life than money. For many students, the point of college has nothing to do with the investment or return. For others, the investment and corresponding return is essential. All families need to consider the financial fit and their individual financial circumstances when making a decision about college. Ideally, talk with your kids candidly about the cost of college before they apply, particularly if a financial aid award of a certain size is necessary to make a particular college attainable. College can be both a positive, life-changing experience and a sound financial investment if families and students go into the process well-informed.

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