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College is an Investment, and It’s Not What It Seems

April 17, 2018

Beneath it all, colleges who seem alike may be totally different financial bets, and colleges who seem worlds apart may be more similar than originally thought.

 Parents and students today are better equipped than ever before to make an informed decision about the right college and career path. Even so, there is way too much information for any one person to process, so psychologically, we try to create buckets. “Boston University is similar to Boston College,” we might say, “so I’ll think about them the same way until the final financial aid decision comes and see who gives my daughter more.” But beneath it all, colleges who seem alike may be totally different financial bets, and colleges who seem worlds apart, may be more similar than originally thought.

 

Financially, there are two main considerations: cost and return. Thanks to scholarships and financial aid, the cost of a college is rarely the sticker price. As a potential customer, you should take a look at the net tuition, or tuition after financial aid.

 

Return is how much graduates make over time. A school whose graduates earn more on average may end up being a better financial decision for you, even if your other choice costs more up front; you could end up making back in salary more than the addition cost in tuition.

 

To take a look at the relationship between return and cost, we use a measure called Return on Investment, or ROI for short. We measure the difference between cost and total earnings in the 10 years post-graduation, and divide it by total cost. The higher the ROI, the better a financial bet the school is on average.

 

And by looking at the complete financial picture of going to a college, you may find that some schools are surprisingly good investments, while some are surprisingly bad.

 

Different Income Levels

Let’s start by taking a look at how different aid packages could change the ROI of a school radically.

 

Consider Boston College, just down the road from Edmit’s office. If you come from a family that earns around $55,000 per year, you should expect to pay just over $15,000 a year after financial aid and scholarships. If your family earns around $40,000, your expected net cost goes down, but not a ton, to $10,000.

 

In percentage terms, though, that difference changes everything. At $15,000 a year, you should expect to earn back your money 12 times from the salary that you earn over the 10 years post-graduation. That’s impressive, to be sure; if the same student went to BU, the ROI would be only 5. However, at $10,000 per year, your ROI at BC jumps to 19.

 

State vs Private

As a general rule, private schools are expensive, and public ones in your state are cheap, right? Even if that were always true (it’s not), it doesn’t mean that private schools are worth the extra cost

 

Suppose you’re from a family that earns $110,000 a year. You’re a good student, and get into two schools in St. Louis: University of Missouri- St. Louis and Washington University in St. Louis. Missouri will cost you $13,413 a year on average, not much more than if your family earned half as much. Wash U, on the other hand, has generous support for lower income families, but will cost you a whopping $46,889, close to the sticker price.

 

Wash U is a good school, so you’ll make back your money almost 2.8 times over the 10 years after graduation. If you go to University of Missouri, though, you’ll make it back 6.8 times. In other words, if you’re from a high-earning family, the more expensive school actually becomes a worse financial decision. Just because you can afford the fancy school, doesn’t mean you should.

 

Different School Aid Policies

It may not be apparent on paper (and certainly isn’t in a school’s marketing materials!), but a school’s financial aid practices may make it significantly different from a school that otherwise seems very similar.

 

Take Fordham and Villanova, for example. Both are private schools with similar sticker prices ($51,000), US News rankings (61 and 45 respectively), and sizes (15,600 and 10,800). But the ROIs of each school vary widely.

 

For a family earning between $30,000 and $48,000 a year, the ROI of Fordham is 4.2; after taking into account the estimated financial aid, a graduate of Fordham should expect to make back their money 4.2 times over in the decade following graduation. The same student at Villanova, though, has an ROI of 7.6- almost double!

 

Maximize your ROI with Edmit

There are two ways to increase the return of your investment: increase what you get paid afterward, and minimize the amount you spend. Here at Edmit, we can help you get the information you need to find the right school for you, and go to bat to make sure you’re paying as little as possible.

 

Jon Fish is the co-founder of Level Education and comes from a background in startups and economics. He holds degrees from Ohio State University and Brandeis University, and can most likely be found with a coffee in hand.