Is a College Education Worth the Expense?

by Bridget Quigg, PayScale.com

"College tuition"--those two words together strike fear into the hearts of parents and students across the country. Paying for a degree before entering, or while new in, the job market can be a monumental struggle. Many schools now charge more than $100,000 or even $200,000 in tuition, room, and board, for that precious degree. But, in the end, is it worth the expense?

Online salary database PayScale.com decided to take this issue head on, and figure out how valuable a four-year college degree is over a 30-year period of work, for 554 U.S. colleges. They did so using a common business calculation: return on investment (ROI).

PayScale figured out how much more a college graduate of each school makes in 30 years of working, compared with a high school graduate, then subtracted tuition and room and board costs, factored in the school's graduation rate (non-graduates see little improvement in pay over high school graduates), did some number crunching, and came up with a handy guide for potential students and their funders: a breakdown of whether college tuition is worth the investment.

Which schools are worth your precious cash? According to PayScale's research, you should look for nationally recognized private schools, particularly those with an engineering focus. Hence, M.I.T. is at the top of the list, followed closely by Ivy League schools like Harvard, Stanford, and Princeton. A recent graduate of M.I.T. will have spent approximately $189,300 to get his or her degree. But that expense will yield the graduate $1,688,000 (in 2010 dollars) more in earnings than someone who didn't go to college.

And to help people writing tuition checks feel better about where they're putting their money, PayScale also calculated an annualized ROI for each school's tuition. Continuing with the M.I.T. example, PayScale found that the money spent on a degree there returns 12.6 percent per year over 30 years. Compared with the stock market's performance, that percentage of return is competitive. Over the last 30 years, with dividend earnings included, the S&P 500 has returned about 11 percent, according to Yale economist Robert Shiller.

"For every year of work, the typical M.I.T. grad earns $50,000 more than the typical high school grad," says Al Lee, PayScale's director of quantitative analysis, who led the study. However, M.I.T. isn't a typical school in terms of money growth. In fact, only 16 percent of schools on PayScale's list beat the S&P 500.

For example, George Washington University is a small private school with a high price tag--more than $200,000 in tuition, room, and board over four years (in 2009 dollars) for recent grads. What is the annualized return on that money over 30 years? It's 10 percent. That's a decent rate of return, but it doesn't outperform the S&P 500 or give you back what M.I.T. or Harvard would.

Lee recommends that if you're paying full price for a less well-known private school, you need to think hard about whether the non-financial advantages of attending that college make up for the lower return.

However, if you can get financial aid, it completely changes the picture. Finding scholarship money really improves your long-term return calculation. If you're really fortunate, you could take advantage of offers like Stanford's University Scholarship: students who are accepted to the school and whose families earn under $60,000 a year receive tuition, room, and board for free.

Keep in mind, each student is unique--so a low-earning graduate from a highly ranked school like Stanford may earn less than a high earner from a public school like the University of Washington. Engineering schools, though, tend to have a floor below which their graduates' earnings do not fall. They are usually a safe investment.

If you want to spend a little as possible on your tuition and earn back as much as you can, an in-state public school with a technical focus, like Georgia Tech, is your best bet, according to PayScale's research.

So, which 10 schools are the best investment? See the list below. They are all private and well recognized by most Americans. The closest public school to the top is the University of California at Berkeley. It ranks number 16, with a sizable annualized return of 13.1 percent. Check out the PayScale college ROI package to compare college costs and the potential return on investment for each school.

1. Massachusetts Institute of Technology (M.I.T.)

• Average Cost for College in 2009: $189,300
• 30-Year ROI (2010 Dollars): $1,688,000
• Annual ROI: 12.6%

2. California Institute of Technology (CalTech)

• Average Cost for College in 2009: $181,100
• 30-Year ROI (2010 Dollars): $1,644,000
• Annual ROI: 12.6%

3. Harvard University

• Average Cost for College in 2009: $189,600
• 30-Year ROI (2010 Dollars): $1,631,000
• Annual ROI: 12.5%

4. Harvey Mudd College

• Average Cost for College in 2009: $187,700
• 30-Year ROI (2010 Dollars): $1,627,000
• Annual ROI: 12.5%

5. Dartmouth College

• Average Cost for College in 2009: $188,400
• 30-Year ROI (2010 Dollars): $1,587,000
• Annual ROI: 12.4%

6. Stanford University

• Average Cost for College in 2009: $191,800
• 30-Year ROI (2010 Dollars): $1,565,000
• Annual ROI: 12.3%

7. Princeton University

• Average Cost for College in 2009: $187,700
• 30-Year ROI (2010 Dollars): $1,517,000
• Annual ROI: 12.3%

8. Yale University

• Average Cost for College in 2009: $194,200
• 30-Year ROI (2010 Dollars): $1,392,000
• Annual ROI: 11.9%

9. University of Notre Dame

• Average Cost for College in 2009: $181,900
• 30-Year ROI (2010 Dollars): $1,384,000
• Annual ROI: 12.1%

10. University of Pennsylvania

• Average Cost for College in 2009: $191,300
• 30-Year ROI (2010 Dollars): $1,361,000
• Annual ROI: 11.8%

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