I've seen people put more mental energy on where they would like to go for vacation or Saturday night dinner then the college/post high school plan. It's crazy. Not everybody, but in general there is a "herd mentality" when junior becomes a senior......compile your list of schools, pick a couple of safety schools, lets see where you get into, what the financial aid packages look like, then evaluate the options. That's the extent of it. No real risk analysis, stress testing and hard look at assumptions.
Because like the old saying goes "if the only tool you have is a hammer, everything looks like a nail." When college IS the plan, and ONLY the plan, analytical discipline shrinks.
I'm a massive believer in truly understanding ROI. Return On Investment.
* What do you get for what you invest?
* By definition, "get" is an outcome or result.
* "Invest" is time, money and a concept called opportunity cost. Opportunity cost is simply the loss or gain from alternative that is given up by choosing one path vs the other.
I've thought a ton about the concept of ROI, my experience with it in my career, personal life and current work developing Brick by Brick. My career path has made ROI probably one of the top of mind functions I evaluate on a daily basis, and here's why.
For 25 years I've been in job roles in the Sales, Marketing & General Management area of some type of Consumer/Business To Business Marketing product. I've had roles where I have decision making autonomy on pricing and promotion, meaning that I had the responsibility to determine for another party what I would sell something for or promote in a certain way. And I've had the opportunity to acquire 2 businesses for large sums of $'s, which caused me to take a hard look at financing, outcomes and risk. Over time, these decisions have probably totaled over a half billion $'s in "value" or importance. By the way, although that's a big number, that does not make me "special" in this area, simply experienced and part of my various jobs, which many people in our economy experience.
Here is my take on the ROI challenge with the College Decision for a high school junior and senior, and their families, at a high level:
COST
Try figuring out the cost you will pay for an education. Is it the "sticker price" or do you want to use what the college call "net price" which is the price you pay after financial aid is given.
Is the "net price" inclusive of grants/scholarships (do NOT need to be paid back) or will debt (MUST be paid back, and can't be bankrupted out of)?
What is the interest rate you are given?
Will your financial package be the same for years 2-4 or will it be reduced, like many are?
What assumption will you make for how much your aid package will be reduced? 10%? 30%?
In short, determining COST is not easy, unless you take the full sticker price, add an 8% inflation per year and assume you can finish in 4 years, although the average is much closer to 5. If you can afford this with your families college fund great! But most can not.
Return
Then you need to figure out RETURN.
1) Will you graduate or not?
2) If yes, how many years will it take?
3) Will you get a job right at graduation, or will it take 3-6 months?
4) Will your job be in your field, or will it be a job that does not even require a degree?
5) What will your starting pay be? At the "average" of your chosen field, below or higher?
6) Will you be able to "grow" your annual compensation? If so, by how much per year? 1%? 10%? For how many years into the future?
7) What does your "cash flow" picture look like while in school, vs out of school and in the job market. What is cash flow? The money you have left over after all of your expenses.
8) If you have cash flow, what do you plan to do with it? 3 choices. Consume it (spend it), or save/invest it.
9) How many years do you want to look into the future? 3 years? 40?
What is Your Opportunity cost
1) If you don't go to college for the next 4-6 years, then what? Get a job, full time? Part time? Community college or online part time? Trade school? What are THOSE costs?
2) How much can you earn in a given job, and how quickly can get that job?
3) Will you be able to "grow" your annual compensation? If so, by how much per year? 1%? 10%? For how many years into the future?
4) What does your "cash flow" picture look like while in school, vs out of school and in the job market. What is cash flow? The money you have left over after all of your expenses.
5) If you have cash flow, what do you plan to do with it? 3 choices. Consume it (spend it), or save/invest it.
6) How many years do you want to look into the future? 3 years? 40?
The key to any ROI analysis is the quality of your inputs/data and the assumptions you make from them. AND, if you are assuming you are going to be the exception, average, or below average vs what the real data shows.
You can find plenty of data on this site:
* Statistics I cite below are coming from this site ("Source")
Let me take you through balancing hard data with the questions I posed. Note, this is not meant to be "rigorous" but it starts to move in the direction of balance the realities of the market for college grads with real facts.
1) Will you graduate or not?
40% of college students NEVER graduate. So obviously if you say you are one that WILL graduate, you are placing yourself in the 60% crowd and ignoring the VERY real risk of those that don't make it through.
2) If yes, how many years will it take?
For the remainder that DO graduate, 41% will graduate within 4 years, and nearly 60% will be 5+ years.
3) Will you get a job right at graduation, or will it take 3-6 months?
VERY hard to find data on the length of time from graduation to employment. But common sense tells me that 100% of college grads do NOT get a job immediately after graduation. Do more than half? Probably. What would I plan on? If I were being conservative, I'd plan on 6 months of a search. Moderate, 3 months. Best case scenario, right away. This is how you manage risk, conservative, moderate, aggressive scenarios.
4) Will your job be in your field, or will it be a job that does not even require a degree?
According to the NY Fed (source below), over 40% of recent college graduates ages 22-27 are considered "underemployed." What is underemployed? In short, it means your employed in a job that didn't require a degree to begin with. Does that mean your degree is useless? Not necessarily, but is this not a shockingly high number, especially given that the investment will likely be well north of 6 figures?
5) What will your starting pay be? At the "average" of your chosen field, below or higher?
Varies dramatically by major, by school, BUT GOOD data exists, but you need to know where to find it. Links below to helpful resources. And when you start to study MAJORS, that is a critical factor in determining where your salary will likely fall. Note, there are a LARGE % of degrees that when measured by dollars and cents, they have LITTLE TO NO incremental earning power of a high school graduate. That doesn't mean you shouldn't pursue a degree in X, but it ABSOLUTELY does mean you should know what you are in for, ESPECIALLY if you are financing your degree with debt. Not understanding this is negligent.
6) Will you be able to "grow" your annual compensation? If so, by how much per year? 1%? 10%? For how many years into the future?
This may be the hardest area to predict, how far you want to look out into the future and what level of increases. Some models take a shot at it.
6) What does your "cash flow" picture look like while in school, vs out of school and in the job market. What is cash flow? The money you have left over after all of your expenses.
This one is HIGHLY dependent on a number of variables, with one of the major ones being "will you have debt post graduation or not? How much and what will the monthly bill be?" That's an easy number to calculate, but far too many leave this analysis alone until WAY too late in the process when decisions need to be made. Other variables? Your salary. Your living expenses. Moving back in with family, or going to try and live on your own? Plan to start saving for retirement? New car or used? Etc.
7) If you have cash flow, what do you plan to do with it? 3 choices. Consume it (spend it), or save/invest it.
We have a general problem in America, both at the government level and individual level: Living within your means. In other words, spending equal to or MORE than you actually earn. We like to explain it away, but the formula of NOT living within your means is toxic, short term and especially long term. And there's an unavoidable truth that is simple math. The biggest asset one has for compiling wealth? TIME. Starting early with investing allows someone to compile wealth at tremendous levels, starting late is a forever game of catchup.
8) How many years do you want to look into the future? 3 years? 40?
No magic here, but I think a common sense question needs to be asked. What is the "impact of your degree" when you go for your first job at 23? How does that compare when your 38 and you've compiled 16 years of work experience, which matters more? If you believe that EXPERIENCE will matter more when your 38, then aren't you saying that your college degree matters tremendously for your EARLY career? If that answer is yes, the strategy then becomes about compiling GREAT experience, habits, connections and personal brand that ensure lifelong satisfaction.
The above narrative is NOT meant to be comprehensive, but it IS meant to jumpstart the analytical process of thinking long, hard and rigorous about one of the largest investments you will make in your life.
Helpful Links.
I have YET to see a college/career choice ROI model that contemplates "wealth" and living within your means. So I built my own, and happy to share it with all people that attend our zoom intro sessions.
Helpful links: Getting critical data points on debt, cost, salaries, etc
College ROI: Hats off to organizations the try and model the ROI of college. Here are 2 that I've found, each take different approaches. I strongly reccomend that you fully read their respective methodologies, approaches and assumptions can varry widely.