How to measure the ROI of an education
May 22, 2014
While it's easy to find advice about saving for college, it's sometimes harder to find advice on putting those savings to good use. Education is, after all, an investment, and no investment should be made unless you have reason to believe the return will be worth it.
The problem is, how do you calculate the return on investment (ROI) on an education? To do this, you need to estimate the value of two variables: the cost of college and the income you are likely to earn with your degree. Here are eight steps you can use to tackle this process.
1. Identify the target
Don't start by choosing a major. You should look past that and envision what career you hope to pursue. That choice will drive both the cost and the eventual reward of your investment in education.
2. Review past performance
The Bureau of Labor Statistics (BLS) website is a good source for recent data on average earnings by profession, so you can see what people in your chosen field typically earn.
3. Assess future prospects
The BLS produces an Occupational Outlook Handbook that projects the expected job growth for various professions. This can help you decide whether there will be strong demand for your prospective occupation.
4. Decide how to make the investment
Find out what qualifications you need to get a job in your chosen field, including what type and level of degree is required, and whether there are certain schools that are favored by hiring managers in the profession. Don't just choose a major that sounds related to that profession -- look at some employment ads to see what employers actually want.
Also, while the specifics of your education ROI will depend on a number of factors unique to your situation, a good starting point for identifying promising degrees is PayScale's College ROI report.
5. Define the price
Once you know what qualifications you will need, you can start to find out what getting those qualifications will cost.
6. Examine ways to lower that price
You can enhance ROI in one of two ways: by raising the return or by reducing the cost. Go to the federal government's financial aid website at fafsa.com to see how you might reduce your costs through either grants or low-cost loans.
7. Assess the risk of leverage
Anytime you borrow to make an investment, the financial leverage that results makes the investment riskier. An investment in education is no different. The more you borrow, the more you risk taking on a burden that exceeds, or at least erodes, the eventual return.
Saving in advance rather than borrowing will reduce your long-term cost, and thus enhance your ROI. As low as today's savings account rates might be in historical terms, it is still better to be earning interest than paying it.
8. Compare return, cost and uncertainty
Based on the above factors, you can make a career earnings projection that you can compare to the cost of your chosen degree to calculate the ROI. Researching employment prospects should also give you a sense of how much uncertainty is associated with pursuing your chosen career.
Attempting to make an upfront measurement of education ROI is not an exact science. However, going through the process should help you gain a better understanding of the costs, risks and potential rewards that will eventually determine that ROI.