Thinking about Return on Investment

As seniors work through their final weeks of deciding where they'll go to college before the May 1 deadline, I want to acknowledge that money probably plays a big role in the decision and write some posts about financial matters.

First: Return On Investment, or ROI. ROI estimates how much money alumni from different schools earn compared to how much they paid to go to college. The idea is that some colleges can give you "more bang for your buck," and those types of comparisons are really compelling. 

There are some things to know.

Your future earnings are tied much more closely to what you major in than they are to where you go to school. While strong alumni networks and a good-reputation school can certainly be useful in helping you find a job quickly after school, there's not much connection between how much a job pays you and where you went to school. 

The metrics are based on averages. You're not going to be the average. So the stats may be interesting or even useful in comparing one school to another, but they cannot actually predict how much money you will make.

College is a big risk, not least of all financially. But there's not a list or chart that can take away that risk. As with any investment, past performance is not a guarantee of future results.

The list of highest-ROI schools is infuriatingly unhelpful. I checked MONEY's ranking of best college's based on a complex system for calculating ROI. But here's the problem: of the top 20 schools, 40% of them are considered "most selective," with acceptance rates in the 5%-15% range. Another 40% are "very selective," accepting less than half of their applicants. So the message for most people, rather than "here are some good deals you should check out," is more like "the schools that rejected you are also really great deals!" Blargh. What's more, 12 of the top 20 are state schools, and their ROI calculations are based on in-state tuition. Are they still a great deal if you're paying out-of-state? MONEY doesn't say, but I did find four of those 12 on the list of "Top 10 highest out-of-state tuitions." So probably not. 

I also looked at US News & World Report's list of "Best Value Colleges." 80% of their list are in the "most selective" category. Not that helpful.

(Interesting side note. One school that's in the top 20 on both the MONEY and US News lists is Brigham Young University. Now, B.Y.U. certainly isn't for everyone. But if you're Mormon or very involved in a religion even if it's not LDS, it does stand out as a good investment.)

So what do you use ROI for?

Gut check. If a school you're considering is way down low on the ROI lists, let that be a factor in your decision. Not the only factor. But consider it a warning.

Comparing two schools with widely different scores. I think it would be quite silly to choose, for example, Stony Brook over Ohio State simply because it's number #125 on MONEY's list compared to #130. But if you're choosing between a school that's in the top 70 versus the bottom 70, let that be a factor in your decision. Not the only factor.

Think of it like a house, not an investment account. If your family has any experience buying a house, then you might like to talk to them about it. Houses, like colleges, are also extremely expensive purchases that work both as financial investments and daily experiences, so houses are a better comparison that a 401(k) or E-trade account. No matter how much you like a house, you should probably not buy it if you don't expect to get your money back in resale. However, there's no good reason to spend a decade in a house you hate just because you think it will have great resale value. You have to balance those things, to the extent that you can even predict them. 

Want a shortcut to avoid all the charts, lists, and complex calculations? Just look at schools' graduation rates. A school you're more likely to graduate from is a school you're more likely to get an high-earning job from. 

I'd love your comments and questions. Please share this with someone who would like to read it. Next week: thinking about debt.