Report: New Metric Aims to Improve how to Measure the Economic Value Of Higher Ed

By Owen Daugherty, NASFAA Staff Reporter

With the value of higher education being heavily scrutinized and a variety of metrics falling short, a new report aims to measure a student’s return on investment (ROI) by analyzing just how long it will take the individual to pay back their tuition.

The report from Third Way, a public policy-focused think tank, introduces the Price-To-Earnings Premium (PEP), an innovative way to calculate the ROI of various higher education programs, broken down by four-year bachelor’s degree, two-year associate degree, and one-year certificate programs.

Authored by Michael Itzkowitz, a senior fellow at Third Way, the report takes the practice of analyzing the value of stock investments and applies it to measure the value of a degree. 

“We thought, similarly to how investors can evaluate the price of stocks using a price-to-earnings ratio, maybe there was some way to accurately gauge how long it takes students to recoup their out of pocket expenses at each institution of higher education,” he said.

The report used publicly available data from the Department of Education (ED) and Census Bureau to develop the PEP, which measures how long it takes on average for students from a given college program to recover the costs they paid for their education. The measure stands out due to the availability of data that gives a more granular look at earnings and college pricing, rather than a national average. 

Doug Webber, an associate professor and director of graduate studies in Temple University’s the school’s economics department, got an early look at the report and noted the importance of the accessible data.

“One of the big reasons why this type of thing hasn't been done that much before is just because it's only recently that we've actually had the data available to make these kind of comparisons,” he said, adding that this exercise is “important because the investment in college is a lot more like buying a house than buying a loaf of bread.”

Webber added that there is an appetite among legislators and policymakers for crafting better accountability standards for higher education institutions to ensure students are getting a good value.

“The biggest place that this research could have an impact is hopefully influencing the direction of policy, and I do have hope that this type of report might push some legislators to say, ‘there's a problem here. It's really clear how disparate the outcomes are,’” he said.

First, Itzkowitz calculated the amount a student pays out-of-pocket to attend each institution, which is the amount paid after accounting for scholarships and grants. Four years of cost for a bachelor’s degree, two for an associate’s degree, and one year for a certificate are assumed in this report.

Then, the median salary for graduates of each institution within 10 years after they initially enroll is compared to the median salary of someone with a high school diploma within the state where the school is located. The out-of-pocket cost is then divided by the difference of the median salaries of the institution’s graduates and their peers with a high school diploma. The result shows how many years it would take a student to recoup the total net price.

“Any additional premium that [students] get can then be used to recoup the cost that they ended up paying out of pocket in the first place,” Itzkowitz said.

Take the University of North Carolina-Greensboro, for example, as the report uses to highlight the earnings premium of a bachelor’s degree. At a net cost of $11,758 per year, the cost of a bachelor’s degree, on average after four years, comes out to $47,032. The median salary for a student within 10 years after initial enrollment is $37,500, compared to the average high school graduate in the state who never attended college, who earns roughly $22,000 annually.

Thus, the “wage premium” is about $15,500 between the two respective students, meaning it would take a UNC-Greensboro graduate approximately three years to recoup the total net price of $47,032 to earn a four-year degree.  

For Greenfield Community College in Massachusetts, which primarily awards two-year associate degrees, it would cost the average student $23,600 to earn their degree. The median salary of former students 10 years after enrolling at Greenfield is $32,300, compared to the typical high school graduate in the state who makes $27,357 annually. With an annual earnings premium of roughly $5,000, it would take Greenfield graduates roughly five years to recoup their investment. 

Overall, the report found that at nearly two-thirds of higher education institutions in the country, students recoup the costs of paying for their education within five years of reaching their average wage premium. The results were even more promising for institutions granting two-year associate degrees, where 77% show their typical student earning enough to cover their educational expenses within five years of completion.

Additionally, the report found that students at 51% of for-profit institutions are earning less income 10 years after enrollment than the average high school graduate, which Itzkowitz said highlights a “vast room for improvement within the sector as a whole.”

Itzkowitz is hoping the report’s findings add to the ongoing policy discussions surrounding the value of higher education and said they are particularly salient as the economy has soured and prospective students are looking to make prudent financial decisions.

“There is interest in this and I think that lawmakers are figuring out ways that they can best implement a policy that fairly and rigorously evaluates educational quality to better ensure better outcomes for students and taxpayers,” he said, adding that there is “minimal consensus” on how students can accurately gauge the value that their getting from institutions.

Itzkowitz analyzed all 50 states for this report, a task that he said was made possible by the readily available data from ED, something he noted will give legislators and administrators alike a more comprehensive view.

“Rather than looking at a national average of what percentage of students earn beyond the typical high school graduate nationally, we were able to disaggregate this by state with the understanding that different states will provide different levels of earnings depending on the cost of living and economic opportunity within each state,” he said.


Publication Date: 4/9/2020

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