ROI and College Choice

One way to think about picking a college, and even picking a major within a college, is to think about them as a financial investment. Obviously, considering things as purely a financial investment is naïve, as there are a lot of other benefits to attending college and earning a degree, although those benefits are considerably more difficult to quantify. Money, however, is pretty easy to quantify.

One way of determining how good a particular investment is to look at what’s known as Return on Investment (ROI), which is defined mathematically as:

ROI = (Gain from investment – Cost of investment) / (Cost of investment)

This is a broad definition of course, and depending on the specific inputs you consider as both gain and cost, the result can vary a bit. However, if you consider the same factors for everything you’re comparing, then you can get a useful comparison between the financial benefit of one option versus another option.

Let’s say you’re trying to decide between school A and school B. You know how much each school will cost you to attend, you know roughly how much you’ll need to take out in loans and at what interest rate, and you can estimate how much money you’ll generally be making after you graduate from each school. Knowing all of this, you can calculate ROI for each option. Know the graduation rates for both schools? You can factor that into your calculation as well. Can you estimate the percentage raise you can expect every year? Factor that in as well.

You can use this same idea for comparing different majors within any given school, too, or even different career paths. This can be especially useful in cases that aren’t quite intuitive, such as say, whether or not you should pick a major with a higher starting salary but generally lower income growth, or a major with a lower starting salary but generally higher income growth.

I’m not saying to make your decision based entirely on the financial aspect, but given that you can quantify that aspect, you really should actually quantify it instead of just guessing as to what it’ll probably be. The results might surprise you, either showing a bigger cost to one option than you had expected, or less cost to one option than you had expected.