Investing in Stocks Better Investment Than in College Degree

Payscale Inc. just released its 2011 College Return on Investment (ROI) Report and the results are likely to surprise many advocates for higher education. It appears from the Report that people who invest in themselves by attending any of the vast majority of post-secondary schools would have yielded a better return had they taken the same amount of money an invested it in an easily purchased and managed diversified stock portfolio.

Based on an analysis of PayScale’s 25 million career profiles, the Report examines the return on investment at 691 U.S. undergraduate institutions (up from 534 in 2010) that offer an on-campus residential experience. PayScale grouped the schools into eight categories: Private Research University; Liberal Arts School; Arts, Music & Design School; Business School; Engineering School; Ivy League School; Private School; and Public School.

PayScale findings indicate that a return on education investment is competitive with other investments over the last 30 years at most schools. At all schools, expected annual return on investment in education is competitive with current 30-year treasury bonds (yielding ~4.5 percent). And while the S & P 500 has returned about 11 percent annually over the last 30 years, besting all but 65 of 691 schools (9 percent), 369 (53 percent) of the schools are equal to or better than the more recent 20-year return of 8.8 percent. At many schools, investing in college costs, even at full price, has been competitive versus getting a job out of high school and putting the tuition money in the market or treasury bonds.

In addition to the two measures reported in the 2010 report, two additional measures that factor in financial aid are included in this report, for a total of four measure:

1. The first is the 30-Year Net Return on Investment (2011 Dollars). This is the dollar difference between the expected value of earnings as a college graduate over typical high school grad earnings (earnings differential) after subtracting the total cost of attending the specific school.
2. The second is the Annualized Return, which is the expected value of earnings differential divided by the total college cost, annualized to represent the compound average growth rate (percent gain) effectively received each year for 30 years after graduation.
3. The third is the 30-Year Net ROI Including Grants. This is calculated similarly to the above measures, but the cost of school is lessened by the average financial aid grant amount.
4. The fourth is the Annualized Return Including Grants. This also is calculated similarly to the above measures, but the cost of school is lessened by the average financial aid grant amount.

Here are five highlights from Payscale’s 2011 College Return on Investment (ROI) Report:

1. No matter how you calculate net ROI, Caltech, Harvey Mudd and MIT are at the top.
2. When it comes to schools with the highest Annualized ROIs for the “list price,” selective in-state public schools come out on top. The five schools with the highest 30-Year Annualized ROI (~13% or more) are Georgia Tech, University of Virginia (UVA), Colorado School of Mines, Virginia Tech and UC-Berkeley.
3. However, once we account for the average grants awarded to students (the “discounted price”), over half of the top 30 schools for annualized returns are private. The five schools with the highest 30-Year Annualized ROI including Grants (~16% or more) are University of Virginia (UVA), Georgia Tech, William and Mary, Princeton and Harvard.
4. It pays to be an engineer or from an engineering school. The three schools with the highest 30-year Net ROIs are engineering schools and roughly a third of the top 20 schools are engineering.
5. College does not typically offer a $1 million return as touted by many – only 30 schools on the list offer a return of $1 million or more in 2011 dollars – a mere 4 percent of the total number of schools in the study.

“Like any investment, it matters both what college you invest in and how much you pay for that education. A four-year degree is not a guaranteed ticket to a million dollar payday,” said Dr. Al Lee, Director of Quantitative Analysis at PayScale. “This year, we looked at the impact of financial aid on return on investment. This is a case of rich get richer: the schools that offer some of the best average financial aid grants also have the best paid graduates.”