Return-on-Investment in Education

During this time of the year, when millions of students are deciding which college to go to and what program to enroll in, one question that is often asked is, "What is the RoI of the program?" RoI means "Return on Investment.

Now, RoI of education is a bit complicated, because it is not just the additional money that you can potentially earn, but also the quality of job, and the quality of life, happiness, and the privileges of connections and so on. But let us assume that everything can be reduced to a number, the financial returns.

What is the financial return of a program. Well, one has to see what would be the estimate of lifelong earnings of the person without doing that program, and compare that with the estimated earnings of the person after doing the program. The difference between the two can be attributed as return due to that program. Now, you can sense that this is not easy. One can perhaps model an average person but it does not work for an individual because your return on investment could be very different from my return on investment simply because you are more prone to doing a corporate job after the same degree while I am interested in becoming a teacher. The financial returns over the next 50 years in an uncertain world under two hypothetical conditions, impossible.

But still we need to decide whether to spend a very significant amount of money or not. Is there a proxy for RoI calculation. Yes, of course. Without this, what will all the consultants do. It is a simple proxy. You take your expense over the program, and look at the first month salary of an average student in the last batch graduated and computed in how many months one would get as much salary as the amount spent in the program. So, if the fees for a BTech program is 15 lakhs over 4 years and the average package in the university for that program is Rs 50,000 per month, then the RoI is 30 months (never mind that RoI in financial world is in terms of percentage, here months will do). One can question the exactness - you haven't taken into account the hostel/mess expense, you haven't taken the cost of time, you haven't taken into account the interest, and all that, but well, it was always supposed to be a proxy, an estimate.

But this has several problems. (And I am not even talking about how do you know these numbers. Everyone seems to present these numbers in the most confusing way.)

First, should you consider the highest salary in RoI computation or the average salary or the median salary. What is your expectation from the program - do you expect to be closer to the highest or average or what. One would say that what is the expectation of an average student. That should determine RoI of the program. But the expectation of an average student is the median placement offer and not the average placement offer. And I have never seen anyone talk about median. Everyone talks about average which could be significantly higher than median. Next, should you only consider jobs in the core engineering or all jobs of students graduating with that degree. If you look at all students, then you will get biased result. The RoI will be biased by the societal bias (good students getting to a program causing higher placement and not something that you learn in the program causing higher placement). On the other hand, if you look at only core jobs that is not right for the undergraduate programs because it is expected that you are learning to be ready for a non-core job.

OK. So we will toss a coin and take a decision of what jobs to consider for RoI. But then this method has other serious concern. If you have a choice between a 4-year BTech and a 5-year BTech-MTech dual degree (or integrated MTech), what would you choose. Your cost has gone up by at least 25% (if you don't include interest and the fees is not going up by inflation) and unless the median/average salary offer is also higher by 25% or more, it does not make sense to do MTech. In certain industries, and certain kinds of jobs, MTech is still considered very valuable and over 50 years of career, you will be compensated for that one year extra education.

Similarly, there are disciplines which have a slower start but you get to the same point in due course. So if you are taking a decision based only on first month salary, you will not choose disciplines with slower start. The reason why some of the engineering disciplines are less popular today is that first people tend to over-estimate earnings based on highest salaries offered in certain popular disciplines, and second, the core engineering have a slower start of the career.

There are other slow-start careers like Design (this is changing though). In disciplines like Design where one works with other designers in small firms, the importance of working with better known designers is so much that you may have to work for a much smaller salary initially till you establish yourself. And, therefore, the number of students interested in design are less and as the opportunities for earning better salaries right in the beginning are improving, the number of students getting interested in design are increasing.

The obvious question then is this. If estimating lifelong earnings is impossible, and just considering the estimated first month salary is deeply flawed, how do we choose between the two programs.

My answer is this. If you are taking education loan, and you don't have family support to pay that loan, then you really have no option but to look at the first month expected salary. (But even in this situation, you should only decide whether you will be able to pay the EMI, and not compare programs on where you will have more savings or less savings after paying EMI.)

In general, if you are being funded through parental savings, then think like this. What are people doing 5-10 years after doing that program. If it is a new program, can you guess based on a "similar" program. If it is a new college, can you guess based on similar program in other colleges where you think the quality of education is likely to be similar. And if that profile is to your liking, both in terms of job content and reasonable financial gains, it is ok to do that course. And if you have a choice between several such courses, choose the discipline you are interested in, or choose the college where you think the quality of education (broadly defined) will be better.

This advice is based on my life principle that while it is important to have financial security and enjoy the good things of life, beyond a certain level of prosperity, one should look for happiness, impact, time for family, and such, and money should become secondary. And if money is primary for you, go back to previous paragraph and see which program leads to best jobs after 5-10 years and one way to check that is to check linkedin profiles of alumni. So check out 5-10 years and not one month.