College is a costly investment, particularly for lower-income students, and the returns on investment in higher education can vary significantly across schools in America.
A report by the public policy think tank Third Way analyzed federal government data of earnings from two million students between 2005 to 2015, along with the cost of various programs, and found that public colleges and a bachelor’s degree both provide the best returns on investment while for-profit schools and certificate courses generally leave students with the worst outcomes.
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“The good news is that over half of the institutions in our study showed that low-income students were able to recoup educational costs within five years or less of graduation,” Third Way Senior Fellow Michael Itzkowitz, the author of the report, told Yahoo Finance. "There were also hundreds of schools that offer no return on investment whatsoever … [and] that’s some troubling news."
Itzkowitz stressed that the stakes for higher education are particularly high for low-income students, especially as tuition has consistently increased over the years, so evaluating the return on any investment is a key factor to any decision. (Users can sort by individual state or college type here.)
To calculate the return on investment, Itzkowitz used data from the Education Department’s College Scorecard platform between 2005 and 2015. (Itzkowitz oversaw College Scorecard during the Obama administration.)
The analysis is primarily based on the price-to-earnings premium, which factors in the out-of-pocket costs of college for students whose incomes were at or less than $30,000 (after grants and scholarships are accounted for). Third Way then calculated how much more these students earn after graduation compared to peers without a college degree. This difference is termed as an “earnings premium.”
“Let's just say hypothetically, if the average high school graduate with no college experience in Florida earned $22,000 a year, and someone who has attended the University of Florida earned $32,000 a year, they would say their earnings premium is $10,000,” Itzkowitz explained. If that student paid $40,000 to earn a bachelor's degree from the University of Florida, they would require four years to recoup the cost of college.
Alternatively, if a college graduate ends up earning less than a peer without a college degree, that would mean no amount of time would bring a relative return on that higher education investment.
For-profits stand out for wrong reason
The analysis highlighted a clear divergence when looking at the types of schools: Students at for-profit schools took a much longer time to recoup their investments or end up not recouping the cost at all.
According to the analysis, about 80% of low-income students who attended public colleges were likely to recoup their college investment within 10 years. At private schools, that number falls to 76%. And at for-profit schools, only 25% of low-income students were expected to recoup their cost of college within 10 years.
Furthermore, while only 13% of low-income students at publics and 6% at private schools ended up with zero ROI — i.e. they earn less than their high school graduate peers — a stunning 63% of graduates from for-profit schools that were analyzed fell into this category.
In other words, three-fifths of the low-income graduates from for-profit schools analyzed did not earn more income relative to their peers with just diplomas to cover the cost of their higher education.
And since their post-collegiate earnings are so low, Itzkowitz stated in the report, "it’s unlikely that low-income students who attend these institutions will ever be able to recoup their educational investment.”
Type of credential matters
The other clear divergence in the data identified involved credentials.
“Almost universally, a bachelor’s degree will offer some sort of return on investment for low income students,” Itzkowitz explained.
Though the cost of a four-year bachelor’s degree is likely to be higher than a two-year associate’s degree or a certificate, about 58% of low-income graduates earned enough to recoup the cost of college within five years or less, and about 82% of graduates ended up earning enough beyond their high school graduate peers to pay off college in less than ten years.
Associate’s degrees also provided stable returns: About 54% of graduates with an associate’s degree ended up recouping their costs in less than five years while around 70% end up doing so by 10 years.
Certificate programs were a different story: According to the data, exactly half of the schools offering certificate programs left students with zero ROI — i.e. worse off than those who never attended the program. Only 35% of graduates end up recouping the cost within five years.
“Even though it costs less for students to obtain a shorter-term credential because they're not in school as long," Itzkowitz said, "oftentimes they offer low-income students minimal earnings potential, at a large swath of these schools."
Access to schools with solid ROI
Another issue at play is access.
While there are many schools that provide a very high ROI, not all enroll a sizable number of low-income students.
For instance, while bachelor’s degree holders from Stanford University end up with an earnings premium of $105,000 as compared to peers who hold a high school diploma — so essentially they take very little time to recoup their college costs — the school only enrolls 15% of students who are eligible for a Pell Grant. (Pell Grants are available for undergraduates with financial need to pursue higher education.)
At Harvard University, another highly selective private college, bachelor’s degree programs leave students with an earnings premium of $102,000 to recoup college costs while the school only enrolls 15% of students who are eligible for Pell Grants.
Alternatively, many City University of New York (CUNY) schools provided a larger degree of access for low-income students, with more than half of graduates benefitting from Pell Grants, while also providing a solid ROI.
“The Third Way report is yet further confirmation of CUNY’s standing as the nation’s leading urban university system," a CUNY spokesperson told Yahoo Finance. "In keeping with our historic mission, CUNY’s singular quality, affordability and outcomes have helped generations of low-income, underserved and immigrant students realize the American Dream.”
Part of the reason why schools like CUNY are able to provide a good return on investment is because of strong state funding that keeps tuition affordable.
“State funding can be used to help subsidize the cost of tuition at public institutions,” Itzkowitz said. “But with less state money available, there will ultimately be less scholarships that can be offered to this critical student population. So if there is state disinvestment there, it does run the risk of having tuition costs rise, even for students that are most in need.”
—Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.
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