Calculating ROI For Higher Education: Is It Worth It?

Published October 16, 2013

money wall hands

When looking at higher education, return on investment (ROI) should be of great concern. ROI is different from starting salary, job placement %’s, or any other stats facilities of higher education like to tout these days. The difference is that ROI is the actual return. It works like this:

Starting Salary / Cost Of Education = ROI

That is a very simple way to looka t ROI. The truth is, however, that it is essentially incorrect. You are going to make money some how. Heck, anyone can walk into McDonalds and get hired. Therefore, you really need to only count the portion of your newly-forecasted salary that is over and above what you can command now. Therefore, it should look more like this:

(Starting Salary – Current Salary) / Cost Of Education = ROI

Starting Salary

The starting salary may be slightly hard to predict. If that’s the case, go with the schools averages, the national average per the US Labor Department, or perhaps a local average if you know where you will be working.

Current Salary

Pretty straight forward… how much do you make? Or, better yet, how much could you make assuming you didn’t go to school.

Cost Of Education

This is the price of tuition plus lost salary and living expenses. For example, if you’re going to go back to school for four years and get a bachelor’s degree, instead of an associate degree, and you currently make $20,000 per year, you have to add $80,000 to the cost because you will lose that money while in school. If you plan to work through school, subtract from the lost wages what you think you will recoup.

On top of that, add any money you will have to borrow or use from savings for living expenses as well as the cost of the actual tuition of the school you are planning to attend.

Now, let’s put in some real numbers…

Jane Doe currently makes the average paralegal salary of $46,680 per year. She wants to go back to school to earn a double major in criminal justice and psychology to be a forensic psychologist! However, she is 35 years old and is wondering if this is a smart financial decision. Let’s run through the numbers.

On the cost side, we have her lost wages. That is $46,680 x 3.5 years (she is going to graduate early!). That total is $163,380. Wow, that’s a lot of money. Additionally, the school she is going to attend cost $20,00 per year. That is an additional $70,000. She figure she can live on around $10,000 per year which puts her out another $35,000. All together, that is a grand total of $268,000!

An average forensic psychologist makes between $78,000 to $86,000 per year. We will take the average of the two. A forensic psychologist may not earn that starting out, but we will assume so for the sake of simplicity. The average she can expect to earn is then $82,000 per year.

Now that we have all of our numbers, we can plug them into our formula: (Starting Salary – Current Salary) / Total Cost.

($82,000-$46,680) / $268,000 = 13.18% !

That is a pretty good ROI. The next step is to consider payback. She will be making another $35,320 per year from the time she is 39 years old (at graduation) until she retires at 65. That is an additional 26 years making that $35,320. With some simple arithmetic, we can see that she will pay herself back in 8 years, 3 months and some change. After that, the rest is pure profit.

In our little example, we can definitely see that returning to school is a smart financial decision for Jane Doe. Assuming all of the numbers work out like that, she shoud probably do it. However, now all decisions are strictly financial. One must decide if their new career will be more or less enjoyable, more or less stress, as well as a myriad of other factors. All of these can help swing the pendulum in various directions.

 

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