College Planning: Return on Investment is a Critical Consideration

Affiance Financial |

By Andrea Jackley & Bryan Vancura

If your child is applying to college, he or she is likely feeling stressed over admission criteria and acceptance rates. As a parent, you’re also concerned about paying a significant portion, if not all, of the tuition bill. Certainly factors such as a good academic and social fit, location, and reputation should play a significant role in your child’s college choice—but while almost everyone considers the cost of the schools on their list, it’s possible to take your analysis one step further and calculate the return-on-investment (ROI). Determining college ROI is a complicated process, with experts from numerous disciplines weighing in with a variety of opinions. While there are no guarantees as to accuracy, estimating the ROI of your chosen school can give you some idea of what your child can expect to gain financially from his or her college education. 

With these caveats in mind, here are a few tips to help you figure out the estimated “bang for your buck” at the top schools on your list.

1. Calculate the First Year's Net Cost

The first step in figuring the ROI of your top schools is to calculate the annual net cost of each. Separately add-up the yearly tuition, room and board, books, and transportation costs for all the colleges on your list; this is your total cost per school for the current year. You might find the following online tool helpful:

Next, subtract any grants and/or scholarship offers from the total cost; this provides you with the net price for each school. Use the illustration below as a guide:  

Costs:

Tuition and fees: $      
Housing and meals: $  
Books and supplies: $  
Transportation: $         
Other: $                     

Total Costs: $                     

(- subtract)     

Financial aid: $
Grants from the school: $
Federal Pell grant: $
Grants from your state: $
Other Scholarships: $

Total Aid: $            

=    Net Price: $            

2. Estimate the Four-Year Cost

Don’t assume the cost of the school you choose will remain constant. From the 2007-08 academic year to present, the average tuition and fees at both public four-year colleges and universities rose 31% above and beyond the rate of inflation, according to the College Board Advocacy & Policy Center [1]. Therefore, it’s important to take the total annual costs of the schools on your list and increase them yearly by no less than the current rate of inflation over number of years you expect to be in school. If you think can barely manage the costs of a particular school during the first year, you should rethink your plan. Keep in mind that freshmen often receive more aid in the form of grants than sophomores, juniors and seniors when considering how you’re going to pay for school.  

3. Determine Funding Sources   

There are several options to consider when determining how you will pay for college. The obvious options include financial aid, such as grants and scholarships, and student loans. There are also work-study programs available to students who qualify. Finally, you’ll want to consider family contributions to cover your remaining costs. As a rule of thumb, total student debt at graduation—including parental loans you expect your child to repay—should not exceed the student’s starting salary at graduation. There are plenty of tools that can help you determine what to expect from a starting salary, including:

If you and your child need to take on debt to pay for college, consider that federal loans have traditionally been one of the safest options because they provide special repayment plans, such as income-based and graduated payment plans. These plans can help ease your child’s financial burden, if it becomes necessary down the road. Subsidized Stafford Loans are especially beneficial because interest doesn’t begin to accrue until the repayment period begins. Remember that the interest owed on other types of loans can begin accruing from the time you take them. 

Once you’ve completed these steps, combine them to determine your estimated ROI for each school. Subtract the cost of attending your school from the earnings differential between that of a college graduate and a high school graduate (reference payscale.com) to find the value of that degree [2]. It’s also worth noting that factors such as potential networking opportunities at a particular school can add to the value it provides.

Taking the time to review this simplified version of your and your child’s favorite schools’ ROIs can help streamline the process of narrowing them down. It can also give you some peace of mind when making your final decision. The bottom line is that you want to choose a college that makes your child happy, offers him or her a great start to a future professional life, and does it all for a best-in-class price.

 

Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC. Full-service Broker Dealer, member FINRA, SIPC. Cetera Advisor Networks LLC and Affiance Financial are not affiliated. Advisory services also offered through Affiance Financial.

 

Notes:
[1] http://trends.collegeboard.org/sites/default/files/college-pricing-2012-...
[2] http://www.businessweek.com/articles/2012-04-09/measuring-college-roi