Key Takeaways:

  • College costs are high, even taking financial aid into account.
  • On average, college has a positive ROI for graduates.
  • Your costs, how long you take to graduate, and economic conditions will impact your ROI.
  • There are also considerable differences in ROI based on the major, graduate school, and career path of a student.

As the price of a college education continues to rise, many Americans are questioning whether a college degree is still worth it. A college education is an investment of your time and money, and in order to make smarter financial decisions about college, it’s important to be aware of how much you can expect to get out of your investment. This article covers all you need to know about return on investment, or ROI.

How much are Americans investing in college education?

What is the average amount an American student spends on a college degree? Contrary to what you might expect, calculating the average cost of a college education can be surprisingly difficult. The National Center for Education Statistics estimates the prices for undergraduate tuition, fees, room, and board for the 2015-16 academic year to be at $19,189 at public four-year schools, $43,191 at private nonprofit four-year schools, and $9,939 at public two-year schools. Based on these numbers, it may be tempting to conclude that the average total cost of a college education is around $76,000 at a public four-year school and $172,000 at a private nonprofit four-year school. But thanks to grants and scholarships, many students end up paying significantly less than the “sticker price” of college, or the amount published as a college’s tuition and fees. The amount owed in tuition and fees after all grant aid, called the net price of college, can vary considerably depending on the student.

According to a 2018 report by the Urban Institute, among students who started college in the 2015-16 academic year, 66 percent of students at public four-year schools paid $5,000 or less in tuition and fees after all grant aid in their first enrollment year. At private nonprofit four-year schools, the net price of college was most varied: although 25 percent of students paid $2,500 or less, 22 percent of students paid more than $20,000. These numbers are significantly lower than the sticker price of college, estimated to be at $3,440 at public two-year colleges; $9,410 and $23,890 at public four-year colleges for in-state and out-of-state students, respectively; and $32,410 at private four-year colleges.

Although the net price of college is often considerably lower than the sticker price, it can still be a significant financial burden for many students and their families. The average American college graduate carries $37,172 in student loan debt. This is a burden that follows a student long after they’ve graduated. According to a 2017 report by the National Center for Education Statistics, 63 percent of students who began in the 2003-04 academic year took out federal education loans within 12 years of entering postsecondary education. Of these students, only 23.5 percent paid off their loans or had them forgiven by 2015, and the average amount owed 12 years after entering postsecondary education was $24,000 (the median amount was $9,400). Students who attended private nonprofit 4-year universities had the most debt, with an average of $31,800 (median of $11,200).

The picture gets more bleak when you look at those who went on to graduate school. What’s perhaps most staggering in the whole report is that the 11.1 percent of students who had borrowed to attend graduate school owed an average amount of $70,000 (median amount of $48,000) 12 years after entering postsecondary education.

Average lifetime ROI of a college education

Is a college degree worth this investment? A 2014 study by Jaison Abel and Richard Deitz of the Federal Reserve Bank of New York found that since 2000, the average ROI for a bachelor’s degree has remained steady at around 15 percent, “easily surpassing the threshold for a sound investment.” (This ROI was calculated based on the cost of an undergraduate education and the college wage premium—or wages college graduates can expect to earn relative to the wages of high school graduates until the age of retirement, at 65.) Even in the midst of falling wages in the wake of the Great Recession combined with sharply rising tuition over the last decade, the value of a college degree hasn’t flagged for the simple fact that the wages of those without a degree have been falling even more rapidly. In fact, as those with only a high school degree continue to fall behind, getting a college degree may be more important than ever. While we often hear of students saddled with student loan debt (aggregate student loans in the U.S. are at more than $1.5 trillion as of 2018), the widening wage disparity has kept the college wage premium “at an all-time high.” Abel and Deitz add that college graduates with a bachelor’s degree earn an average of 75 percent more in wages than high school graduates, amounting to over $1 million over a lifetime. A different report from 2011 by the Georgetown University Center on Education and the Workforce puts the lifetime college wage premium at 84 percent, adding up to about $2.8 million on average.

Next taking a look at the chronically underemployed, the New York Fed researchers add that although for much of their careers around a third of college graduates find themselves working jobs that do not require their degree, they still tend to earn more than high school graduates on average, and most settle into college-level jobs by age thirty. In general, they are far less likely to become or remain underemployed as well.

This is not to say, however, that all college students can expect the same ROI as there are many factors that affect a student’s ROI outcomes. According to the same 2018 report by the Urban Institute, “factors contributing to an individual’s ROI in higher education can be broken down into several (often interrelated) component parts, including the cost of higher education after grants; the length of time in school and the likelihood of certificate or degree completion; the earnings returns from a given level of degree, major, or institution; the student’s demographic background; and local economic conditions.” Although investing in college pays off for most students, it can be incredibly risky for some. Understanding each of these individual factors is an important and necessary part of making financially smart decisions about college. Here’s a brief breakdown:

Cost of higher education after grants

Unlike the sticker price of college, the net price can vary considerably depending on the student, and different financial aid packages can dramatically change a school’s ROI. For example, at schools like Yale and Harvard, which promise to meet 100 percent of students’ demonstrated financial need, low-income students may see a higher return on their investment than their peers. For students from high-income families, on the other hand, private universities might be the worse financial decision because their net price of college is much higher. For more information on calculating your ROI, check out Edmit’s article on the topic.

Length of time in school and the likelihood of certificate or degree completion

A startling 40 percent of students fail to earn a bachelor’s degree within 6 years of starting their undergrad. “Each additional year in school increases a student’s total cost of attendance and reduces the number of years the student can work in a job that requires a credential,” reports the Urban Institute. In fact, although we often hear about graduates saddled with student loan debt, “the even more damaging outcome is for students who take on debt but never complete their degree,” says the Department of Education, “[and] students’ ability to repay their loans depends more strongly on whether they graduate than on how much total debt they take on.” When deciding which college to attend, keep in mind that completion rates are lowest at for-profit schools and highest at public and private nonprofit four-year schools.

Earnings returns from a given level of degree, major, or institution

Depending on which level of degree you pursue, the major you select, and the institution you attend, your ROI could change dramatically. In general, more education leads to higher returns, and STEM and business majors have the highest lifetime earnings, but there are important exceptions. (For more information on the best and worst undergraduate, graduate, and doctoral degrees in terms of ROI, the second half of this article deals extensively with the subject.) Additionally, graduates from selective institutions tend to see higher returns than their peers, but there’s some dispute as to whether this can be attributed to the schools themselves.

The student’s demographic background

“Even when they enroll in the same institution, degree level, and major, students from different demographic backgrounds may experience different earnings returns,” reports the Urban Institute, “The demographic differences in earnings returns can reflect a student’s preferences for work in different sectors or on different schedules, but they can also reflect differences in a student’s access to job opportunities (e.g., the strength of connections to employers or the discrimination of employers against members of certain demographic groups).” Female students, for example, tend to see lower returns than male students even after multiple controls for education.

Local economic conditions

This might go without saying, but if the economy is bad when you graduate, your ROI will probably take a hit. Research has found that students who graduate into a recession see lower returns than those who graduate into a stronger economy.

Some of these factors, like demographic background and local economic conditions, are outside of your control. Others, however, are based on your decisions. In order to credibly predict your ROI, take as many of these factors into consideration as possible, and continually update your estimate with each major decision you make.

Finally, this article would not be complete without a long, hard look at the word “return.” Although this article is primarily concerned with financial return, you should know that many advantages of attaining a postsecondary degree have little to do with money. These include self-esteem, knowledge exposure, and other elements of personal value which are important for the formation of personality and character. According to a 2013 report by the College Board, attending college significantly lowers the likelihood of obesity and smoking, raises the probability of civic involvement, and improves overall health, quality of family life, social mobility, and job satisfaction. In other words, the benefits of a college education are not just financial. Students looking to make smart, well-informed decisions about college shouldn’t ignore this side of the college “return.”