Thoughts on college ROI

(Update:  this argument was restated and greatly improved in a later post here.)

I heard this week that Georgetown University now costs $65k per year, all in.  I verified it afterward:  tuition is $35k, the rest living expenses.

Costs are similar at many private schools.

You see gee-whiz stories like this all the time, but I’m not going to do that.  Let’s try a little arithmetic instead.

Let’s say you borrowed the entire cost of a 4-year private college education, as many people do.  Student loans are 30-year amortized, just like home loans, so at 5% interest, your payment is about $1400 a month for 30 years.

But that’s an after-tax expense.  Student loans get almost no tax deduction; let’s say you qualify for the maximum deduction, $2500 per year.  Result:  your PRETAX cost to service that debt is a bit over $24,000 per year.

Here’s where it gets interesting.  The median college graduate’s income is about $45,000 per year, while the median high school grad’s income is $26,000.

In short, college increases your pretax income by a median $19,000.  You then pay out $24,000 on those student loans, and… well, I hope you learned enough arithmetic at that fancy college to realize YOU ARE HOSED to the tune of a $5,000 net loss per year, for the next 30 years.

Even the above dramatically understates the problem, because it ignores that the high school grad pays a much lower marginal tax rate;  that tuition is still rising faster than incomes;  and, most importantly, that the interest rate on your student loans in the future is highly, highly likely to be much higher than 5%.

In short, it doesn’t work.  It can’t work.  Unless you have a full scholarship or wealthy parents, you have only a few logical choices.

  1. Go to an inexpensive public university.
  2. Go to a top-tier private school that is highly likely to increase your income by much more than the median.  It’s Ivy League or bust — literally.
  3. Choose only a major that pays far more than the median.  Art history majors, be afraid.
  4. Borrow the full amount, then default and skip the country.
  5. Don’t go to college.

Tough decisions coming, folks.  And to think that, just a couple of years ago, your hardest choice was, “Escalade or Navigator?”  HELOC-funded, of course.

10 Responses to “Thoughts on college ROI”

  1. Eric Says:


    Your total cost yearly for Georgetown looks $10K high. They don’t provide financial aid info.

    Looking at Caltech, total yearly cost is $48.5K

    Full-time freshman enrollment: 236
    Number who applied for need-based aid: 166
    Number who were judged to have need: 116
    Number who were offered aid: 116
    Number who had full need met: 116
    Average percent of need met: 100%
    Average financial aid package: $31,069
    Average need-based loan: $2,261
    Average need-based scholarship or grant award: $28,846
    Average non-need based aid: $30,190
    Average indebtedness at graduation: $9,871

    Your hypothetical student has parents with no savings, no extra income available to contribute toward yearly college costs, but earn too much for their child to qualify for any sort of aid. How common is this?

    I suspect the sticker price is a prestige thing, and nobody actually pays retail…

  2. admin Says:

    The Georgetown cost was an actual data point, a parent complaining about what it cost him last year. I think the College Board estimates are low: in 1996-98, Stanford GSB was costing me $40k/yr, significantly higher than published estimates, despite no unusual or extravagant expenses. Classmates reported similar.

    How common is a parent with high income but no net worth? I suspect it recently became extremely common: everyone’s net worth was in houses and stocks.

    Further, I suspect a huge generational divide in net worth. In the 1970s, thirtysomethings had higher income and net worth than sixtysomethings. Today it’s the opposite. This looks likely to continue, as high inflation and rising interest rates (both nearly certain) put a lid on asset appreciation.

  3. Eric Says:

    According to

    Undergraduates can’t borrow more than $12,500 per year. So unless they are career students they can’t dig themselves into the hole you describe.

    Graduate students are limited to $20,500 per year, with a total debt cap of $138,500 (except med students at $224,000). But that’s a different topic.

  4. William Mitchell Says:

    That’s only the maximum for federally subsidized loans. Obviously it leaves a huge gap. Families commonly then fill that gap either with unsubsidized private loans, or by tapping home equity. Both of these have the capacity to dig a very deep hole, because both are generally variable-rate loans.

    But both those sources dried up last year. Would be interesting to know what people in that situation do now.

    By coincidence, this morning NakedCapitalism posted a related anecdote, citing a woman who incurred $26,000 in loans (approximately the maximum per your comment) for a 2-year junior college degree. Yves suggests this was simply a bad investment.

    And that was supposed to be my point. Seems like my mention of debt was distracting. The core point is that I suspect most private colleges are now negative ROI for most students, regardless of how it is financed. I will post again soon to try to make that point more succinctly.

  5. Eric Says:

    Unsecured, non-govt backed quarter-million dollar loans for 22 year olds? Stupid, but not surprising. They may still be available:

    Another symptom of a massive credit bubble. Your ROI calculation is similar to price-to-rent for houses.

    But I think comparing median incomes is too simple. Imagine Harvard raised its tuition to $1B/year, but only Bill Gates children paid it in full. ROI for medians wouldn’t tell you much.

    You need to look at correlation between parents and children’s income, and how that is affected by reversing the private college choice. I expect parents and children’s income is highly correlated. For the medium wealthy skipping private college won’t improve declining incomes, and for the wealthiest college probably doesn’t matter.

    If your take-away is “private college prices, like houses and other things bought with credit, got inflated by the credit bubble”, I agree.

    If your take-away is “children without wealthy parents shouldn’t pay full price for private college”, I also agree.

    I know one huge positive ROI grad school case: Folks with Indian and Chinese undergraduate degrees, getting one-year EE masters in the US, and then Oracle jobs.

  6. Eric Says:

    “Princeton led the starting-level median income pack with $66,500, followed by Harvard with $63,400. The Ivy with the highest mid-career median salary, at $134,000, was Dartmouth College, followed by Princeton, Yale, Harvard and Penn.

    The statistics confirm a broader trend showing that where students go to college impacts how much money they eventually make. Both the starting and mid-level paychecks of Ivy League alumni are a third higher than those of liberal-arts college graduates.”

    Does this provide positive ROI?

  7. admin Says:

    I think it supports the assertion that Ivy Leagues are the only good value in private college. But I still need to think about all the considerations in an ROI calculation.

    College may turn out to be yet another area in which too-cheap credit has led to overinvestment. That would be the most logical situation.

  8. Eric Says:

    An alternative explanation would be that private universities are burdened with some of the same problems as GM: employee and retiree health care and pension costs. Public schools may have the same costs, but diffuse them among all the taxpayers via general state budget problems. Do we know the “all-in” costs per student are really lower for public schools, or do they just charge less?

    If true, this would be good motivation for Ivy-league Republicans to get behind Obamacare :-)

  9. William Mitchell Says:

    Pretty good point, it might all come down to unfunded pension liabilities.

  10. Nostradoofus» Blog Archive » College makes you poorer – part 2 Says:

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