Calculating ROI – or the earning potential of a degree

Dr. Michael Nietzel
Dr. Michael Nietzel

Dr. Michael Nietzel is a Senior Educational Policy Advisor to the Missouri Governor. He was appointed President of Missouri State University in 2005. He has also worked as the Director of Clinical Psychology at the University of Kentucky, where he was Chair of the Psychology Department, Dean of the Graduate School, and Provost.

Calculating ROI – or the earning potential of a degree

    The economic payoff from a college education continues to be a hot topic, mainly because the number one reason students give for going to college is that a degree will improve their chances of landing a desirable job and earning a good salary. A college degree is still seen as the best ticket to economic security.

    Measuring the financial benefits of college is also of interest to policy makers and university administrators as they consider where to invest their limited funds. And it’s a frequent topic for researchers studying economic inequalities and socio-economic mobility.

    These days, a popular measure of the tangible value of college is to compare the earnings of individuals who have earned a college degree to those who haven’t. Another measure— increasingly invoked in college rating schemes such as Forbes or by policy organizations like Brookings and The Equality of Opportunity Project — is to compare the social mobility and career earnings of students who attend one college versus another, or who major in different academic fields.

    Consumers have several options for evaluating the return on investment (ROI) from attending a given college or declaring a particular major.

    Two widely used alumni earnings databases are the Department of Education’s College Scorecard and PayScale’s College Salary Report. A third, more recently developed measure is the Price-To-Earnings Premium, or PEP, developed by Third Way, the national think tank.

    How comparable are these 3 databases? Would a prospective student reach the same conclusion about the payoff from attending Stanford if she consulted the Scorecard or PayScale? How different would a university’s ROI look to a university trustee, depending on whether he examined the Scorecard or Third Way’s PEP?

    It turns out the methodologies and calculations behind the 3 databases differ in several ways so it should come as no surprise that the estimated economic payoff may vary, depending on which source is used.

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    Payscale’s College Salary Report

    This regularly updated report provides consumers with information about the early and mid-career median salaries of graduates from both public and private not-for-profit colleges at the associates and bachelor levels. Based on a salary survey self-reported and submitted by respondents, the salary data is broken down by major and college.  Note, it does not provide information about specific majors at different colleges.

    Third Way’s Price-to Earnings Premium (PEP)

    Third way calculates a PEP for a specific college. It also provides the amount of time it takes students to recoup their costs for a specific college degree. Relying on data gleaned from the U.S. Department of Education and the Census Bureau, Third Way investigators:

    1. Calculate the amount a student pays out of pocket to attend a given institution (i.e., the net amount after scholarships and grants are factored in). They assume 4 years of cost for a bachelor’s degree, 2 years for an associate degree, and 12months for a certificate.
    2. Using College Scorecard data, they calculate the median salaries of college graduates for specific majors within an institution (currently limited to 2 years after graduation) along with the median salaries of those with only a high school diploma within the same state where the college is located.
    3. Divide the amount in #1 by the difference between the median salaries of college graduates and the high school graduates, gathered in #2.
    4. The quotient, or PEP, tells you the number of years it would take for students to recoup the net costs of their education.

    PEP data at the individual program level are available in a spreadsheet that can be found here.

    How do the tools differ?

    1. Data Sources

    • The College Scorecard relies on the Integrated Postsecondary Education Data System (IPEDS)and National Student Loan Data System (NSLDS) for much of its data. It gathers students’ earnings data from de-identified tax records and then aggregates them at both the institutional and program level.
    • PayScale is a voluntary system where individuals complete an online survey and self-report their earnings and other data. In earlier years of its Salary Report, PayScale’s sample was criticized for being too small and unrepresentative. PayScale claims that its latest survey has grown to a sample of 3.5 million respondents, representing more than 4,000 degree-granting colleges.
    • The PEP is calculated using salary data from the College Scorecard based on graduates who are not attending another school for additional education. After programs were excluded for a variety of reasons (e.g., too few graduates), more than 38,000 programs enrolling more than 2 million students were included.

    2. Students included

    The Scorecard reports data only for students who receive federal financial aid, a group likely to be less economically secure than students who aren’t eligible for such support. It includes actual salaries, gathered from tax records, for students who have either attended a certain college or completed their degree programs and are not still enrolled in additional education.

    PayScale, on the other hand, includes students who have completed their bachelor (or associate) degree, but doesn’t limit its sample to recipients of federal aid. It sorts its data according to 2 different groups of students attending 4-year colleges:

    • bachelors only – just those students who earned their BA/BS from a given school and did not go on for an additional degree
    • all alumni – includes the students above plus those who earned additional graduate or professional degrees

    Like the Scorecard, PEP includes data only for students who received federal financial aid. In its initial iteration, it was restricted to institutional-level rather than program-level data.  It presented outcomes for students 10 years after attending a given school, regardless of whether they graduated. In a subsequent version that includes information about program-level ROI, it uses salary information for graduates only.

    3. Time period covered

    The Scorecard provides median earnings for alumni 2 years after graduation.

    PayScale reports salaries for 2 time periods being:

    • early-career salary – median salaries for alums 0-5 years after completion
    • mid-careersalary – salaries at 10+ years from graduation

    The PEP’s institutional-level data are based on salaries 10 years after students attended a given school. Its program-level ROI is based on graduate earnings, 2 years after degree completion.

    How is the data different?

    As one illustration of how such methodological differences matter, let’s consider a student who earned a B.S. in chemical engineering from the University of Illinois. What would we learn about that student’s likely earnings from each of the 3 sources?

    • The median salary according to the College Scorecard is $74,279
    • With Payscale, the data needs to be examined in several ways to approximate a comparison with the Scorecard’s figure. Payscale shows the early and mid-career earnings for a University of Illinois graduate with a bachelor’s degree to be $68,300 and $123,600 respectively. Including graduates who earned additional degrees, the comparable salaries are $70,200 and $131,200. The median early career earning for individuals with a bachelor’s degree in chemical engineering, regardless of college attended, is $76,900 while the median for mid-career is $135,900.
    • Based on Third Way’s PEP tool, the median salary is $74,279 which is identical to the Scorecard. In addition, it shows that, on average, students would need 1.4 years after graduation to recoup their out-of-pocket educational investment.

    What about a student fortunate enough to be accepted by both Harvard and Stanford?

    • According to the Scorecard, depending on the field of study, a Stanford graduate could expect annual earnings anywhere between $23,649 to $136,499, 2 years after graduating. A Harvard graduate would be looking at earnings between $23,353 to $128,737.
    • Payscale pegs the median early-career annual salary for Stanford graduates at $87,100 and their mid-career median at $156,500. The comparable Harvard figures are $80,900 and $156,200, respectively.

    Based on PEP scores, graduates of both Harvard and Stanford could expect to recoup their out-of-pocket educational costs in less than a year.

    Data limitations

    Although each of the 3 tools provides useful information, it’s important to keep in mind their limitations.

    • All of them are based on averages or medians so they are, at best, estimates of what a specific student can expect to earn from completing a particular program.
    • None of the tools measure lifetime earnings, which are likely, depending on the field of study, to have very different trajectories. In some fields, annual salaries may increase substantially over the course of a career; in others, entry compensation may not be very different from the amount paid at the end of a career.
    • Cost of living is not factored into the figures so 2 individuals completing the same program may be paid very different salaries depending on where they live.
    • Academic programs with few students are often excluded either because of an insufficient number of individuals to calculate a meaningful average or— in the case of the Scorecard and PEP— because of concerns about the privacy of individual students.
    • Other factors besides a college degree influence career earnings. For a good review of those factors, a new report from the Georgetown University Center on Education and the Workforce (CEW) reveals the impact that age, field of study, occupation, gender, race and ethnicity, and location can have on lifetime income.

    Of course, annual compensation or lifetime earnings is just one consideration in choosing where to attend college. Many students find their education to be worth the cost for several other reasons such as learning more about something they love, meeting new people, preparing for graduate school, and enriching their understanding of the world.

    But increasingly, economic payoff is an important contributing factor for many students’ college decisions. In such instances, more information is better than less. Although the Scorecard is the most comprehensive database and is updated regularly, consumers are best advised to consult various sources for estimates of future earnings potential and to remember the limitations of each one.

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