Calculating the Marginal Return of College

Once again, guest blogger Mitchell Pauly takes us on a financial definitions ride through his fun, funny and informative take on finance definitions! This week’s insight: Marginal Return.

Does the phrase “marginal return” get your heart beating a-pitter-patter as it does mine? Well that is why I am writing the articles and you are reading them, my friend. I applaud you for giving it the old college try. Marginal return is not a hard calculation, so the math disinclined (or mambipambis, as I like to call them) can relax. I am going to provide you the formula, and I’ll even throw in an input or two for free. Now that’s a deal!

Average Returns

First, though, we need to talk about what average returns is and how it differs from a marginal return. An average return is a pretty straightforward calculation: simply average starting salary divided by average tuition. For example, at Boston College, the average tuition is $33,000/year while the average starting salary is $51,000/year, which yields a return on investment, or ROI, of $1.55 for every dollar of tuition. Another example is the University of Massachusetts Amherst, where tuition and fees average about $18,000/year and graduates earn an average starting salary of about $48,000/year, meaning the average ROI is $2.66. Obviously this is due to the lower tuition of a state school in combination with a marginally different starting salary. It’s pretty clear which would be the better option.

Marginal Returns

This is not a clean comparison, though, despite the fact I just totally did that. The reason is because it is not a marginal comparison, meaning that it fails to directly compare the two against each other, math-wise (instead the average ROI formula is comparing each college against zero). To do that, there is a little more math involved, and if I have tricked you into reading this far, just finish. Don’t be a quitter.

To calculate the marginal return of a one school against another, the formula is:

(Average Starting Salary X – Average Starting Salary Y) / (Average Tuition X – Average Tuition Y) = Marginal ROI

Essentially, College X is the college you want to compare to another (College Y). Let’s break it down in parts, using BC and UMass as our examples. To calculate the marginal starting salary of BC vs. UMass, it would be $51,000 - $48,000, or $3,000. To calculate the marginal tuition of BC vs. UMass, it would be $33,000 - $18,000, or $15,000. Dividing $3,000 by $15,000 yields a marginal ROI for BC of .20. Twenty cents therefore is the marginal ROI of BC for one year, when compared to UMass. To put it in other words, it sucks.

Recouping Your Costs

How long would it take to recoup tuition costs for one year at BC at .20? Remember first that in order to gain that $51,000 starting salary, you need to graduate, which means you must spend four years at BC. So divide .20 by four. This means the actual, adjusted marginal ROI for BC over UMass is .05. Yes, five cents. That means it would take you about twenty years to recoup the marginal cost of BC over UMass. That is pathetic.

Of course all of this is made worse still when one includes the interest paid on loans to finance college, the potential not to make the school’s average starting salary** and selection bias. I should mention here that it is possible to have a negative ROI. So pat yourself on the back (maybe grab a drink) and be proud that you are now armed with a way to financially compare two colleges; to find the one with the best marginal return on investment.

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**Here is a fun activity: an average social worker makes around $30,000/year…if they went to BC, what is their marginal rate of return over UMass? Extra credit for not forcing them into studying Economics after you get the answer.

Bio:
Mitchell Pauly is a Financial Professional with experience working for Fortune 500 companies and small businesses. He enjoys investing and personal finance, comedy and sports. In his spare time he writes for various publications about personal finance, with a mind towards young adults and parents of young adults.

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