Introduction
The Return on Education Model is a tool for exploring the difference in financial return among various scenarios for investing in an education. The model compares a user-defined scenario for investing in an education to that user’s alternate career that did not require further training. It calculates the Net Present Value (NPV) of the cash flow difference between the proposed career and the alternate career. In addition, the model determines the number of years that individual would need to work in the proposed career to receive the first positive financial return on that investment. This model does not account for taxes or various loan repayment options because it is intended to assist decision-making, not provide detailed financial planning.
The same investment can have different relative returns
No single set of assumptions can accurately determine the career value of an education for a broad range of individuals. For example, if two people make the same investment in an education, the one whose alternate career would have generated the lowest total compensation of the two would receive a relatively higher return.
To address this relative return variability for individuals, the Return on Education Model allows users to input assumptions that match their particular situation such as their alternate career projected earnings, the cost of acquiring the education, borrowing expenses, and the projected total compensation from the proposed career. These parameters can vary considerably and all contribute to the relative rate of return to an individual.
Alternate Career Approach
An alternate career approach isolates and personalizes the additional return on the additional investment in an education for a proposed career over and above that which would have been received from the alternate career that did not require additional training. For example, if a student is considering a post-undergraduate education for a professional degree, the alternate career would be the career made possible by the undergraduate education. As such, an alternate career approach separates the financial return on the additional investment in post-undergraduate education from the return of the previous investment in the undergraduate education.
Institutional-use of the model
The Return on Education Model can be used by institutions to determine the financial competitiveness of their programs when compared to similar institutions. This is done by using inputs for a prototypical student of their choice, and adjusting the other parameters such as tuition to determine its long-term financial impact on the student. In addition, alternate career amounts can be adjusted to reflect the circumstances of the institution’s target student populations. And finally, institutions that are considering interventions to make education more affordable can use the model to gauge the impact of those interventions such as changes in borrowing costs, scholarships, and tuition.
Caution
Since the NPVs determined by the Return on Education Model are in comparison to a hypothetical alternate career, the level of total compensation chosen for the alternate career directly influences their values. For example, one could choose an alternate career first year income of $10,000 and make virtually any investment in additional education result in a positive NPV. As such, these NPVs are meaningful only in the context of the alternate career and are not meaningful in an absolute sense for establishing a single industry-wide value of an education for a proposed career, or for predicting the actual cash on hand at the end of the proposed career.
The Return on Education Model software is provided without warranty of any kind by Rick Mills Consulting LLC . All significant financial decisions should be made with the advice of a qualified financial planner.