Measuring the Return on Investment of Higher Education: Breaking Down the Complexity

Measuring the Return on Investment of Higher Education: Breaking Down the Complexity

Are Colleges Worth the Cost?

Research consistently demonstrates the direct benefits of a college education for individuals and communities, but the rising costs of a postsecondary education have increasingly sparked uncertainty about the value of higher education. Is the investment in college really worth the cost?

The U.S. Department of Education’s College Scorecard sheds light on this question, aggregating by institution and fields of study information on average annual costs, graduation rates, and median post-college earnings. In addition, several organizations have developed models to measure the return on investment (ROI) for students from different colleges and programs. For example, Georgetown University’s Center on Education and the Workforce ranks colleges and universities based on the net present value they generate for students, given net price and projected earnings.

However, calculating students’ financial return from higher education is complex and nuanced. Should ROI calculations include total cost of attendance or just tuition and fees? Should they factor in opportunity costs? Should they allow for demographic, social, and economic factors outside of institutions’ control, like labor market discrimination? Should they focus on available earnings data or estimate students’ projected lifetime earnings? In designing ROI models, researchers adopt different approaches to addressing these questions.

This explainer compares the methodological approaches of three ROI models. As demonstrated, the estimates are sensitive both to researchers’ choices and to societal factors that shape student outcomes and earnings potential—further elucidating both the insights that ROI models can provide and highlighting the persistent challenges of comprehensively measuring postsecondary ROI.

Let’s Find Out: A Look at Three ROI Models

Three policy organizations—Third Way, The Foundation for Research on Equal Opportunity (FREOPP), and the Bipartisan Policy Center—have developed ROI models that provide comparable findings for colleges’ ROI. Each model evaluates a combination of metrics related to net costs (models differ in whether they include living expenses as well as tuition and fees) and earnings premium (the estimated gain in earnings from enrollment in college).

FREOPP’s and BPC’s models also incorporate additional variables, including opportunity costs and demographic makeup, to provide a more robust ROI estimate. In addition, BPC focuses on institution-level ROI, while FREEOP evaluates program-level outcomes. Third Way has examined both institution- and program-level ROI.

Third Way’s Price-to-Earnings Premium Model (2020)

In 2020, Third Way introduced a new approach for measuring the economic value of higher education through calculating institutions’ “price-to-earnings premium.” To determine ROI, this model assesses the number of years it would take for a student to recoup the cost of their education (in real dollars), based on the average net price of attendance at an institution (tuition, fees, supplies, and living costs after grants and scholarships) relative to the additional amount that the median attendee earns beyond the typical high school graduate in the same state.

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