Is Your College Degree Worth the Investment | How to Calculate the ROI of Your Degree and School

Troy Sharpe: Before spending tens of thousands, possibly hundreds of thousands of dollars on a college education, I’m going to teach you how to find out what is the estimated return on investment per degree and per college based on this amazing study I came across. Then I’m going to teach you a parallel concept in finance that may help you make a lot better decisions with your spending moving forward, and who knows? Maybe even you could transition that into a career in finance for your kid, grandchild, or maybe yourself.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, a certified financial planner professional, host of The Retirement Income Show, and also a certified tax specialist. First and foremost, we want to give a big kudos to Preston Cooper from The Foundation for Research on Equal Opportunity, that, I can imagine, spent months accumulating all of this data, doing the research, and putting it together in this study for you and for everyone else. Hopefully, tens of thousands of people would be positively impacted by this.

I’m just doing my small part to help you become aware of it. I’m also going to teach you in this video, a parallel concept in finance that you can use in your day-to-day life to help you make better decisions with money, and who knows? If you’re watching this and plan on sharing it with a child or grandchild or someone you know about to make a decision about which college to go to, which major that they should focus on, this could possibly change their career trajectory if it really hits home and maybe they’ll pursue a career in finance.

We’re going to have a link to this website in the description down below. If you want to take your time to peruse through it, I highly recommend it, but I’m going to go through the highlights, and then I’m going to talk about the financial planning concept that is parallel to this huge decision. Just a brief interruption here to remind you if you like this video, please subscribe to the channel. Hit that thumbs up. I love your feedback, so comment down below and remember to share this with someone who you think could benefit from this video.

Going to college is a very exciting time in someone’s life. They’re moving to a new city a lot of times, new friends, new everything, but we don’t often know what we want to major in. This information was not available to me whenever I was going to college. It took me some time to figure out what degree I wanted to pursue. My first two years, I had no idea. Something like this would have been very, very helpful.

In addition to this, the concept that I’m going to share with you would have been tremendously impactful for me and, more so, for a lot of my peers who chose to get degrees in fields that don’t necessarily pay a lot of money. Now or whenever we graduated or they graduated, they were saddled with a tremendous amount of debt. Truthfully, no way to really pay that back in a very bad situation. College actually ended up being negative for their long-term financial picture.

This article is going to help you find your college that you’re thinking about going to, your children or grandchild, and the degree. It calculates a net estimated return on investment for the dollars that you plan on spending to help you or your child have a better understanding of which degree should I or which direction should I go in. This is, I can’t tell you from a financial planning perspective, how important this decision is because it is the very first big investment decision a young person makes.

Oftentimes, they don’t look at it as an investment decision, but it is. Many kids are going to borrow tens of thousands if not hundreds of thousands of dollars. That’s a financial planning decision, the interest rate, the payments. You have to understand the other end of that economic equation. How much can I expect to earn once I get out of college and then how am I going to pay that debt down? This decision is, far and away, the biggest investment that any child up to this point in their life will have to make.

Okay, so this study analyzed 30,000 bachelor degrees across the United States of America. I’m going to go through the key summaries first and then we’re going to talk a little bit about the language they use and just show you where the tool is that you can do this search. Then, again, there’s a link in the description, so you can check this out for yourself. Okay, we’re going to jump right into the key summary or the key findings from this study that we’re going to cover a little bit more before we transition into the corollary in financial planning.

This report estimates the return on investment, which is defined by the increase in lifetime earnings minus the cost of college for 30,000 bachelor degrees in this country, United States of America. For students who graduate on time, the median bachelor degree has a net ROI of $306,000, but some of these degrees are worth millions. Some of them, actually, a lot of them, have a negative return on an investment.

That means after accounting for the cost of college, the estimated future earnings, you’re not making money. You’re losing. This is where the study, I think, does a tremendous job because it accounts for certain variables that I don’t think have been accounted for in previous studies similar to this. What they start to do is they account for the risk of dropping out. The ROI for the median bachelor’s degree drops from $306,000 to $129,000.
Once you account for the possibility that once someone starts college that they actually may not finish. Over a quarter of programs have a negative ROI when you take into account that risk factor. Again, college is not for everyone. It’s just not. Four and five engineering programs have a return on an investment above $500,000, but that is true for just 1% of psychology programs.

Elite schools such as Caltech and Penn dominate the list of highest ROI programs, but attending an elite school is not a golden ticket. Some Ivy League degrees have a negative ROI. Even if you go to a prestigious university, that does not guarantee you’re going to make a lot of money. You still have to make an excellent decision as far as the course of studies that you’re going to pursue.

Okay, just a brief rundown of some of the definitions and terms we’ll see in this study or in chart we’re going to look at. Earnings at age 25 and 45, very self-explanatory. It’s the median earnings of a program graduate for that specific degree at that specific institution. ROI before completion, this looks at the estimated median earnings minus the direct costs and also indirect costs of college, assuming an on-time graduation.
After completion, this takes into account the risk that the student will drop out before finishing the degree, so this is more realistic. Then finally, down here, adjusting for completion and underlying spending subtracts out the full underlying cost of college before subsidies, and accounting for the risk that the student will drop out before finishing the degree.

There’s additional links in the article that you can click on to explain more about the methodology. I just want to make sure before we dive into the chart that you had a little understanding of what those terms actually mean. Now, we’re going to look at the big chart, which you can pull up all of these links from that same article that I went through that will be in the description below.

I just have three tabs up here because I’ve clicked on different links inside that article. Here, we have our headers. All of these headers you can click on and filter based on the lowest and highest outputs for that specific category. Same thing with major or institution. You can do a search up here. If you have a child or grandchild or you’re about to go to college yourself, this is a great tool to click on, look up, and start to explore.

Spend some time here, read through the methodology, read through the paper, and really start to learn what the investment that you’re possibly making as far as the cost of tuition, any loans that you’re taking, what the possible return on investment could be based on all the information and hard work that was put into the study. Now, looking at personal decisions when it comes to financial choices that we have every single day in life.
This concept is parallel to one that we call “opportunity cost” in finance. Instead of doing one certain thing, pursuing this degree or pursuing that college or spending this amount of money for tuition, what is the opportunity if we did something else? If we made a different decision, how do we quantify that cost? Now, this tool could help you compare, so that’s maybe more easily identifiable than it was prior to something like this.

Again, it’s just a study. These are medians. Things can possibly change, but the concept, when it comes to making decisions in our life– Let’s say you have two choices. You have one car you can buy for $60,000 or a lesser car you can buy for $30,000. Which one would you choose? Well, some of you may say the $30,000, some of you may say the $60,000. Now, what if I said you can choose between one car for $60,000 or one car for $30,000 with three years of free gas?

Now, have any of you changed your decision based on that additional information? That $30,000 spread between the more expensive and less expensive car, that’s the opportunity cost. What could we do with that extra money if we had it in our pocket? I just gave you one example of getting free gas for three years, but what if we invested that difference, that $30,000?

That’s the concept I really want you to understand when it comes to opportunity costs because there’s a compounding impact. Over time, what we save today is a fraction of what it could potentially be worth in the future. Okay, so here we have an example with some dollars, so $5,000. Now, you can replace this concept or replace this number with $10,000 or $100,000 or $2,000 or any number you want.

Instead of buying that more expensive piece of equipment or car or whatever that decision is, instead of buying that, if we took the money we saved by going with a lesser option or not spending that money at all, in 10 years at 7%, your money doubles every 10 years. There’s a Rule of 72. You can look up on the internet to do a calculation for different lengths of time or different interest rates that you could earn on that saved money.
This is pretty simple. Over a 10-year period, the $5,000 savings turns to $10,000. Over a 20-year period, the $10,000 turns into $20,000. Over a 30-year period, the $20,000 turns to $40,000. It doubles every 10 years. If you save $5,000 today and invest it and you can earn 7% over a 30-year period, you’re actually, I could argue, saving $40,000 on not spending that $5,000.

When you start to talk about, “Should I buy this? Should I buy that? Should I spend this? Should I spend that?” this was a core concept when it comes to financial planning, especially for younger people, to make better decisions with their money today. Now, I really want to blow your mind. This concept works the exact opposite when it comes to interest on credit cards.

If you have a 17% interest rate on your credit card or a 22% or a 12%, it’s the exact opposite. It’s taking that much longer to pay it off. This same effect is now hurting you as opposed to helping you. I hope you enjoyed what I went through today. I hope it helps you, your child, your grandchildren. Please share this video with them. Share the concepts with them. I’d sit down, I’d talk to them. Understand what I’m saying here. Help them understand the decisions that they’re making today.

The concepts themselves can change their decision-making over the course of time. Once you start to understand these concepts and you understand the power of money and time and financial planning, maybe you or your child or grandchild, once this hits home for them, maybe it’ll change their life’s trajectory. Maybe they will actually consider a major in finance. Also, comment down below, subscribe to the channel so we can keep you more connected to your money, and hit that thumbs-up button if you liked it.