What Is The ROI Of Student Loans? – Is College Worth It?

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The following is a guest post by Jon Haver of PayMyStudentLoans.com. Jon graduated with $22.5k in student loans and now that it has been paid off, wants to show others how student loan forgiveness and consolidation can help keep student debt from controlling your life.

If you are looking at the thousands of college graduates with an average of $26,000 in student loans and wondering if going to college or getting an MBA in Finance makes financial sense, this article hopes to provide some context. I will review my personal experience and whether or not the $22.5k in student loans I took on getting my degree was financially the right decision.

ROI for My Education / Student Loans

With so many variables, it is difficult to talk about the “average” student, so here is a personal example, mine.

Now, this calculation may not receive a passing grade in any finance class, but it is a simple calculation to determine if my college loans were a good investment…

Before I went to college, I “could” have received a full time job in a factory where I worked for $15/hr. Instead, I went to a university, spent everything I made on my $15k/year school, and graduated with $22.5k in student loans 5 years later. When I graduated, I was lucky and received an engineering job that made $30/hr.

In Summary:

  • Pre-Education Earnings = $15/hr
  • 5 years in school and graduated with 22.5k in student loans
  • Post Education Earnings = $30/hr
  • Average Raise = 4%
  • Rate of Inflation = 3%

Assuming regardless of whether I went to school or not, I would earn a 4% raise per year and the rate of inflation would be 3%, here are the results if I could go back in time to the age of 19…

  • Value of my Lifetime Earnings when I was 19 (without my college degree) = $1.5M
  • Value of Lifetime Earnings when I was 19 (with my college degree) = $2.2M

So, for a $22.5k investment in my education, I received a $700k benefit, a 31x return on my investment.

Now, like I said, this calculation is far from perfect, but if you want to play with it, you can watch a video and download it from here – Student Loan ROI Calculator. There’s also a screen shot shown below so you can get a feel for the layout of the calculator.

When Does College Not Make Financial Sense?

So, for me, I am confident that I made the right financial decision to get an education. But, the question then becomes who is the “marginal” student who would be better off financially not going to school.

Excluding the obvious cases, like spending money on tuition and then dropping out (although I am not sure if Bill Gates or any of the other 10 richest dropouts are missing their tuition money).

For a positive ROI on $26k in students loans and 4 years in college, you need to increase your $/hr earnings by $8 over what you would earn without a degree.

This assumes you have an alternative to either make $20/hr or go to college.

If you can make $20/hr now without relying on other sources, then you will need to make $28/hr when you graduate to make your $26k and 4 years in college a good financial investment.

Factors This Simple Calculation Didn’t Consider

Life Experiences

This article looked at this question from a purely financial standpoint. I will leave it to others to determine the non-financial benefits of going to college.

Ability to Handle Job Change

The calculation above assumed you would have 1 job whether you went to college or not, and therefore, may not be appropriate. So, we should add an adjustment factor in for which option would provide you with a better ability to cope with a job change.

Rate of Salary Increases

You will have to ask yourself which job is more likely to get bigger raises each year.

Keeping Up With the Joneses

This factor is interesting. Based on the studies documented in the book, The Millionaire Mind, if you graduate college with a high paying job, you will want to make up for lost time and spend more than your non-college educated self to attain your “picture-perfect-life.”

How Did You Do – Did You Get a Positive ROI on Your Student Loans?

***Photo courtesy of http://www.flickr.com/photos/davidg37/8019253411/sizes/l/in/photostream/


  1. Interesting article! Based on your computation, I think if you really have the drive to make something better out of your college education then the investment is definitely worth it!
    My recent post What is a Spin Off and How Do They Work?

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