How are ROI concerns impacting students' enrollment decisions?

The increasing importance of return-on-investment in college choice

Complaints about the value of higher education have increased in recent years, reflecting the assumption that universities are not preparing students to succeed in today's economy. Today, “value for money” is a leading factor driving college choice.

While the intrinsic value of a four-year degree cannot be measured by short-term salary alone, this metric has become a leading focus for prospective students. Unfortunately, near-term salary measurements have limited validity—while welders, for example, may see higher salaries in their first years post-graduation, philosophy students, who are more likely to proceed to graduate school, enjoy a significantly greater lifetime return on their educational investment, making over $40,000 more than welders 20 years post-graduation (i.e., $97,000 compared to $58,000).

40k

The lost class: Long-term negative consequences from graduating in a recession

Questions about the return-on-investment (ROI) of a college degree come on the heels of a challenging period for college graduates. As shown below, un- and under-employment of graduates from four-year institutions during the recent recession rose over 100% compared to 2006, affecting 20% of all four-year graduates—or 1.4 million students.

Un- and under employment

Although employment has started to return to baseline levels, the graduates who were unfortunate enough to complete during the recession will continue to feel the recession’s impact for years to come. Lisa Kahn, Associate Professor of Economics at Yale University, estimates that even 17 years later these graduates will be earning approximately 10% less than graduates who completed their degree when the economy was strong. The earnings deficit experienced by “the lost class,” or the recession-period graduates, has spurred negative press coverage and skepticism among students and parents about the ROI of a college degree.

A new kind of ranking: Career concerns spur new search tools based on measurable outcomes

The public focus on the value of higher education with salaries and employment has prompted efforts to quantify it. Prior to 2010, prospective students lacked information on what graduates from different institutions would likely earn after graduation. Today, analyses of salary outcomes are widely available through a wealth of new “value rankings,” some of which are shown below.

New resourcesr

Not the bottom line: Near-term salaries are a poor proxy for ROI

Using near-term salaries alone to examine an institution’s ROI obscures the diverse and long-term benefits of a four-year degree. Disadvantages to these rankings include:

  • Limited sample sizes: Many rankings use self-reported salaries or only consider students who received federal aid.
  • Focus on early career salaries: Professional degrees confer immediate salary benefits but liberal arts graduates see greater lifetime salary growth.
  • Skew from graduate school placement: Lack of immediate earnings reduces averages.
  • Bias toward STEM: Lack of adjustment for program mix disadvantages institutions that emphasize lower-pay pursuits with high societal value, including social services, education, and volunteer work.

Money matters: Changing enrollment decisions spurred by access to salary data

For some families, enrollment decisions are becoming more about job outcomes than personal exploration and “fit.” Following the U.S. Department of Education College Scorecard’s launch, institutions with higher average salaries saw a surge of interest—resulting in thousands of additional inquiries for large institutions with high salary outcomes, especially from students with the highest test scores. No relationship was seen between this increased interest and other data reported by the scorecard, such as graduation rates or average cost of attendance.

Launch

Salary data also plays a role in how students select majors. As shown in the chart above, 12% of students in an experiment at New York University decided to change majors in response to earnings data. Even changes among a small fraction of students can lead to the over-enrollment of career-focused programs and unused capacity elsewhere.

Looking for lucrative majors: Program enrollment shifts from the “ROI Revolution”

The focus on near-term earnings has caused shifts in students’ major preferences. For example, four-year institutions have seen a 38% increase in the share of students enrolled in natural sciences since 1995, rising from 13.8% of all students to 19%. At the same time, the proportion of students enrolled as humanities majors has been on a steady decline since the onset of the recession in 2007.

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The shift in major preferences creates challenges for institutions, which struggle to accommodate surging demand for some programs while looking to fill unused capacity in the arts and humanities. Changes in program mix can be extreme, especially for institutions that have grown the enrollment of out-of-state or international students, who disproportionately favor career-oriented degree tracks (e.g., engineering, computer science, and business).

Conclusions

Long-term trends in employment and economic shifts have prompted students and their families to evaluate the career and salary implications of both institutions and academic programs. This shift toward ROI will persist for the foreseeable future, impacting student enrollment preferences. As a result, institutions must track post-graduation outcomes and develop marketing strategies to shape perceptions of their ROI in the marketplace for prospective students.

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