Whether you're helping your college-bound teen choose the perfect school or getting serious about that second degree yourself, you've likely experienced a bit of sticker shock over college prices.
And who can blame you?
Prices for tuition and fees have grown by over 1,200 percent over the past three decades. And recent research shows that private four-year universities now cost more than $30,000 a year. Out-of-state public schools aren't far behind at $22,000.
But these numbers shouldn't mean giving up on your dreams of sending your kids to your alma mater, or getting that coveted master's degree.
Instead, think about the degree as an asset — which means knowing how to calculate college return on investment, or college ROI.
"There's a lot of data showing that the increase in lifetime earnings, on average, exceeds the cost of an education for people who earn college degrees," says Mark Kantrowitz, senior vice president and publisher of Edvisors.com, which provides resources for planning and paying for college. "But you need to keep college debt in sync with your income. So if you're borrowing to pay for college, there's a presumption that you'll earn enough money to repay the debt."
That's just one nugget of advice that we gleaned when we asked educational experts to share what prospective students should keep in mind while calculating college ROI. In fact, they pinpointed five factors you should weigh when determining if that potentially pricey degree will really be worth it.
College ROI Factor No. 1: The net price you'll pay
"How much does it cost?!" is probably the first question you'll incredulously ask yourself when you check out a given school's annual tuition, but the real answer isn't actually what you see printed in the brochure.
"Sticker price and net price can be — and often are — totally different," says Mark Schneider, president of CollegeMeasures.org, an organization that helps prospective students evaluate schools based on different performance outcomes.
The net price is the school's full cost of attendance — including tuition, room and board, books and other fees students are required to pay — minus any need-based grants or scholarships you could potentially receive. In order to promote transparency with college pricing, the government now requires schools that participate in federal student aid programs to provide an online calculator so incoming freshman can get individualized estimates of their net costs.
However, there is a catch: What you pay your freshman year isn't necessarily what you'll pay every year. "A school may be able to guarantee you a scholarship or give you a great deal in year one, but you don't know what's going to happen in year two or three," Schneider explains.
That said, net costs are still a better way to calculate your true costs compared to just looking at tuition and room and board prices alone. For a handy resource, this list of best colleges for your money ranks schools by the value they offer based on multiple factors—including their net price.
College ROI Factor No. 2: Your potential debt
Knowing a school's net price may help lessen the sticker shock, but then comes the inevitable follow-up question: How much of that do I have to pay now versus later?
This is where your financial aid package comes in. What's the mix of grants, scholarships and loans being offered? Can you (or your teen) cover some costs with savings or a part-time job — or will most needs have to be met through borrowing?
The answers to these questions will help you estimate how much debt you may have to take on to earn the degree. And if you're borrowing, you should be comfortable with the idea of student loans hanging over you for a decade or more.
"As long as student loan debt at graduation is less than your annual starting salary, you'll be able to repay your student loans in 10 years or less," Kantrowitz says. "But if debt exceeds annual income, you might struggle to make monthly loan payments, and you may need an alternate repayment plan, such as extended payment or income-based repayment."
And don't forget that your new college town could be more expensive than where you currently live, so you may have to borrow more than you think to cover living costs.
"If the degree program requires you to move, and there are substantial cost of living differences, you should factor those [into your total costs] by multiplying the difference in the cost of living by the likely number of years it would take to complete the program," says Andrew Hanson, a senior analyst at Georgetown University's Center on Education and the Workforce.
College ROI Factor No. 3: How long it really takes to graduate
Just because your child attends a four-year university doesn't mean it will take only four years to get that diploma. In fact, the Department of Education reports that 59 percent of undergraduates in a four-year program actually graduate within six years.
So if you think that your teen (or you) may need more time to earn that degree, consider factoring in an extra year or even two of all those college-associated costs you've been carefully tabulating.
College ROI Factor No. 4: Your earning potential
What a graduate will earn after tossing the mortarboard is a key part of the college ROI calculation. Even if you're not quite sure what your child is going to major in, you have to make an educated guess.
"If you have no concept of your earning potential for your chosen field, it's difficult to make smart choices around student loans," says Lydia Frank, editorial and marketing director for PayScale, which releases college ROI rankings based on alumni earnings, as well as majors by their salary potential. "If somebody says, 'Hey, we'll give you $50,000 in loans to pay for school,' you won't know if that's a good deal if you don't have a sense of what you're likely to make post-graduation."
If you're dead-set on an occupation that doesn't pay very well, consider enrolling in a lower-cost college for a better ROI, suggests Kantrowitz. And Schneider offers up this example: "If I'm going to get a degree in mathematics, and my expected earnings are $48,000, taking on $25,000 in loans is a great investment. But if I've taken on $48,000 in loans, and my expected earnings are $25,000, that is trouble."
You should also consider whether you really need to get a degree from a fancy private college, or if you can get comparable results from a public university.
For example, engineers who earn degrees from an elite private college may be able to command the highest salaries after graduation, but those who graduate from much cheaper state schools may actually see a better bang for their buck.
"The improvement in income [for in-state grads] is slightly lower than at the most elite institutions, but the cost is about half — leading to much greater rates of return," explains Kantrowitz.
College ROI Factor No. 5: Missed income opportunities
This question is probably more important for working adults who are contemplating going back to school for an additional degree, but it's also something to consider for undergrads working toward a profession that requires a lot of extra schooling, like becoming a doctor.
Let's say you already have a good marketing job making $80,000 a year, but you decided to go back to school full-time for two years to get an MBA. Not only are you dishing out for a pricey graduate degree (the average MBA will cost about $60,000 per year), but you're also losing out on $160,000 in earnings right off the bat.
"The longer [amount of time] you spend getting that degree, the more you've laid out, and the more you've lost opportunities [to earn]," Schneider says.
In the end, the return on your college investment boils down to knowing what you're ultimately paying out of pocket for your education versus how much money your degree will help you earn over time.
And while financial factors may not be the only reasons why you or loved ones opt for a particular college, running the numbers can help make the decision a little easier.
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