Choosing Between Colleges? Try a Cost-Benefit Analysis

 March 30, 2021
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If you’re trying to choose a school, conducting a cost-benefit analysis of college could help. Tuition is more expensive than ever, so you want to make sure you get a solid return on your investment.

May 1 of each year is marked as “National College Decision Day,” when many college-bound Americans decide where they want to attend. Do some thinking ahead of time and weigh the financial benefits of a college education at your preferred schools against their overall cost.

How to conduct a cost-benefit analysis of college

The concept of a cost-benefit analysis is simple. You’re spending a certain amount of money, time and energy on college, so you want to make sure the rewards are worth the investment.

“When deciding on your school of choice, weighing the cost of attendance with the resulting benefit (return on investment) is imperative,” said Riley Adams, a certified public accountant and founder of the personal finance website Young and the Invested. “Not doing so can run the risk of carrying an unaffordable debt burden without the matching career outcomes resulting from your choices.”

Of course, a college education also comes with intangible rewards, like personal growth, learning and transformation. But with tuition costs so high, let’s focus on the financial aspects of this decision.

Here are four steps to take, along with some final advice on how to make the call:

1. Compare your costs of attendance
2. Take financial aid and student loans into account
3. Consider graduation and retention rates
4. Dig up data on job placement, incomes, other outcomes
● Plus: Weigh both costs and economic benefits of your college education

1. Compare your costs of attendance

To start your cost-benefit analysis, estimate the costs of attendance for each school you’re considering.

Along with tuition and fees, remember to list various living expenses, like room and board, meal plans, books and any other costs involved. While one school might have lower tuition rates than another, your cost of attendance could shoot up if, for example, it’s located in an expensive big city versus a more affordable rural area.

Make sure to include all the supplemental costs that go into attending a school, so you can make an apples-to-apples comparison among your choices.

2. Take financial aid and student loans into account

Once you’ve tracked down the cost of attendance for each school, take a closer look at your financial aid offers. Your financial aid package might include grants and scholarships, which you don’t have to pay back, along with student loans, which you do.

That last point may seem obvious, but it’s key to keep in mind that although student loans are often framed as part of your “award,” they come out of your own pocket, and — because of interest — you’ll very likely end up paying more than you initially borrowed.

“Consider the full cost of a loan,” advised Sabrina Manville, cofounder of Edmit, a company that helps families plan financially for college. “A benchmark we use is simple: Don’t take more in loans over four years than you’ll make in your first year out of college. This ensures you will be able to comfortably pay them back after interest is added on.”

Examine the details of your financial aid package at each school so you have a clear sense of how much each will cost you, both today and in the future, and keep applying for grants and scholarships to reduce the amount you’ll have to borrow in student loans.

3. Consider graduation and retention rates

Once you have a deeper understanding of the costs of college, it’s time to take a look at the benefits. One way to measure a school’s value is by looking at its graduation and retention rates.

Graduation rates suggest how many students earn their degree, while retention gives insight into how many students return year after year — and how many transfer elsewhere or drop out.

“Graduation rates will likely differ between your school selections and should be used as a weighting on your choice,” said Adams. “If a school costs more and has a lower graduation rate on average, this should drop the school’s attractiveness because the cost heads higher, and the risk of not graduating to finance the possible cost increases as well.”

In fact, students who take on student debt but don’t finish college tend to have lower net worth down the line than those who never went to college at all. So if a school on your list has an alarmingly low graduation or retention rate, this could be a red flag about the value of its education.

4. Dig up data on job placement, incomes

Perusing some post-graduation data will also give insight into the economic benefits of a college’s education. What’s the employment rate for graduates, particularly for those who majored in the subject you wish to study? Do they go on to high-paying jobs?

“Look at the average starting and mid-career salaries of people in your major who graduated from the same school,” said Stacy Caprio, founder of Her.CEO, a platform for entrepreneurs. “Calculate how long it would take the average graduate of your college and major to make back what you’ll be paying for tuition, and then decide if that sounds reasonable to you or not.”

Of course, statistics are only a benchmark — they won’t necessarily describe your individual experience.

“If graduation rates or earnings are lower at one school, it doesn’t mean you won’t graduate and will live a life of debt and unhappiness,” said Manville. “But it means that maybe that choice could be considered riskier — positive outcomes are more rare than in the comparison school.”

Outside of the data, you might also speak to alumni about their experiences, or talk with the career services office to find out what kind of support it offers students. Underemployment is a problem for many college graduates, so it’s helpful to think about career plans before you attend, in order to ensure you’re fully reaping the economic benefits of a college education.

Weigh both costs and economic benefits of your college education

Before spending your savings or borrowing loans for college, consider the return on your investment. While money isn’t the only factor that matters when choosing a college, you also don’t want to take on burdensome debt that’s difficult to pay off.

“Running a cost-benefit analysis in deciding what college to choose can save thousands, likely tens of thousands of dollars, in both the short term and long term,” said financial coach Kristine Stevenson Seale. “Creating a framework that takes the emotion out of the decision-making process will help eliminate costly mistakes.”

While you don’t have to go with the cheapest school, you want to make sure you’re comfortable with the cost and confident about the education you’ll receive. That way, you can find an affordable school that will fit your preferences and help you achieve your goals.

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