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  • Mark Olivito

ROI#2: Available Studies & Evaluation Tools

Updated: Mar 17, 2022

I'm thankful that my son is only a Freshman in high school. Because if he were a senior, to be honest, I don't think that's enough time for a PARENT to study all they need too to be a smart partner in their kids decision making. Key word there is PARTNER. Too many parent's re-live are re-living their 17/18 year old selves through the eyes of their kid, having a VERY heavy hand in the process. Truth is, I can't really blame them given the costs at hand, but once again I digress.

In my mind, any investment comes down to ROI....
  • How much will I need to invest AFTER financial aid (NOT including loans, that's my money, not "free money")? The "EFC" or expected family contribution is a big variable which is a standardized process.

  • How quick will X$'s come back to me?

  • Will I make less, equal too, or more by making this investment?

  • What's the opportunity cost of attending? In other words, if I go to work right away, what am I capable of learning?

  • Are there "hacks" I can do to lower the investment (community college, transfer after, etc).

Thankful, there are some very helpful studies that make searching for your major and school much easier.

Here are the challenges with getting your hands on the right inputs:

Price you will pay: Sticker price? How much aid can you predict?

Start with the "Expected Family Contribution" which is standardized and a tool to see at least what the schools think YOU should be kicking in based on income, assets, size of household, age, etc. The tool appears to be more income sensitive vs asset sensitive when you play with it.

So when you have your EFC, compare that to the sticker price. Expected family contribution of $45,000 and a sticker price of $60,000? Now you need to solve for $15k through grants, scholarships and debt. Pell Grants tend to have an EFC threshold, best I can tell it's about $6k, if your EFC is less then this, you could be eligible.

Interesting factoid: The maximum Pell Grant eligibility per year is $6,495. So to be eligible for this, you need to have an EFC of about $6k or lower. Combine these 2 and you are at $12,495 worth of funding for those in the Pell Grant income range. Good luck finding a 4 year school with this price tag, so you'll need more school grants, scholarships and possible debt to close the gap.

Lets pause for a moment with your micro situation and look at the big picture.

The "headline numbers" I often hear are "a college graduate will out-earn a high school grad by over a $1mm!"

It's what a consider a dangerous headline. People love to read headlines. But does it apply to all majors? Of course not. In fact, one of the studies shows that about 1/3 of all programs do not return more then a high school degree.

But the tools that are published are a good starting point. Here's one of the great studies I've seen, published by FREOP & written by Preston Cooper, analyzing over 30,000 programs at nearly 1,800 colleges. His focus is not just on "earnings" but a full picture of ROI, accounting for regional differences, net overall cost, and an amazing attempt to consider a "counterfactual." Counterfactual is the high school graduate alternative.

To truly appreciate what Mr. Cooper has done, you should review his methodology, here's the link. I am really impressed at how thorough it is, and especially how he points out what may cause ROI to be over or under stated.

If your like me and you enjoy background listening, solid video with Preston below on the Bigger Pockets Money Podcast.

I invited Preston on zoom call to review his analysis and go through it relative to the Brick By Brick program......but as you can imagine everyone's schedule is tight, so hope to do that in the future.

Here's the major challenge I have with the study. Preston tackles the hardest area possible, which is trying to figure out the "counterfactual" earnings.

In the case of an economics grad at Swarthmore, here are the key data points:

* Assume annual "net tuition cost" of $5,445, even thought the sticker price is about $56,000. So back to YOU and your EFC, will that be YOUR net tuition?

* Starting pay in the first few years post grad = $76,549.

* COUNTERFACTUAL earnings? $24,562.

At $24,562, that's a full time equivalent hourly rate of $11.80, when the NJ minimum wage is actually $13/hour. So the only way this is possible is that the model assumes less then 40 hours per week (in this case the minimum wage would imply it's a 36 hour week).

I basically believe the counter-factual is low. This is probably VERY difficult to model, and I give all the credit in the world to Mr. Cooper for diving this deep.

All markets are local. In markets of Philly/Camden County, like much of the USA, you'll see "opening signs" everywhere. If you want to work at big Fortune 500 companies like Target, Amazon, etc, who are begging for people (without degrees) you can easily make $15/hour. At full time, that' brings earnings up 27% higher then the counterfactual earnings in this model. Does that make the model "not useful?" Absolutely not! Like I said, this is the best I've seen.

Here's the data that is REALLY needed to truly understand what a NON college degree is capable of earning. What the "Student x equivalent" that got INTO college A, but decides NOT to go to college, what did THEY earn. Swarthmore's acceptance rate is 9%, that is VERY selective. I have a hard time thinking that a student that had the ability to get accepted into that university could not earn significantly more then the counterfactual. Can I prove it?

No. Do those people exist that got into college, decided NOT to attend but enter the workforce? They sure do. How you capture that data is beyond me, but to truly understand IF it was college that drove a difference in lifetime earnings (vs. the core, inherent difference embedded in their 9% selectivity rate) you need to find the accepted people that opted out of college. How you would capture this is beyond me!

The other piece that I have YET to see anybody contemplate? Wealth, vs earnings. Career "Earnings" is just that, it's the sum total of your gross paychecks. It's the equivalent to a businesses revenue, the cash that comes into the door for selling it's goods/services. That is a FAR CRY however cash flow, what's left over after all expenses.

Cash flow provides the opportunity to invest, and anybody that has studied investing knows that TIME in the market and starting early, even if it's as little as 5% of your income matters tremendously over the course of lifetime.

But cash flow brings another variable in, which is EXPENSES. And that means living within your means and forcing yourself to save, no matter (or little you make). It's a discipline the country struggles with. But it's simple math. You can't save $10 out of $100 of earnings if your spending the full $100, or in many cases MORE than your earnings.

When kids finance college with heavy levels of debt, they are OFTEN unable to invest. Sometimes they are struggling to pay off their loans for 15 years. The key word is STRUGGLING. You don't need to look far to hear national news stories of a massive outcry to cancel student loans because of the "noose around their neck." Does this sound like a group of people investing 10% of their pay in the market?

I've run numbers a bunch of different ways over 40+ years looking at WEALTH of the high school grad, the indebted college grad, assuming living expenses, savings rates, etc. It is ABSOLUTELY head scratching the results when both turn 65. Why? The law of compounding returns.

At the heart of a "great career" is NOT just earnings, although that is certainly important. It's working towards financial freedom, where EVENTUALLY your investments will pay you more then your job. It's possible on even low incomes, but like most things, you need a strategy and discipline.

These are the areas of College ROI that are NOT being discussed, or at least the outcry of $1.7 TRILLION of student debt and all the hysteria flys in the face of massive 7 figure "college graduates out-earn high school grads" headlines lead you to believe.

I welcome Mr. Cooper to a call when available, I'm convinced that smart, thoughtful people like him that do this type of analysis for a living will continue to forge new ground and garner deeper insights.

The Brick by Brick Program is certainly going to be one small example to look at, and others are cropping up alongside of us too.

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.


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