Our ROI calculations before took complex
career situations of two different individuals over a 30-year period and
brought everything down to a number. But are such models accurate?
The old adage of “Garbage In Garbage Out” is relevant
here. The model itself isn’t smart
enough to know the difference between right and wrong. But it does accurately calculate the ROI based on
the numbers given to it.
Reasonable people can disagree about the various inputs to
the model, such as the starting salaries of the two individuals or their 3% and
5% raises, respectively. Critics may
question if the raises are as certain as the rising sun. People get laid off, others get promoted,
what happens to raises then? What if the
college attendee worked while he studied and made some payments towards his
loan - lowering his “in the hole” amount?
These are all valid situations that can be modeled just as
effectively as our original model. But
adding complexity doesn’t mean that our original model is inaccurate. In fact, it is pretty good for what we are
trying to determine: “Does college pay off, and if so, under what circumstances?”
Sensitivity Analysis: Does a difference in starting salaries matter?
This is why financial analysts and economists test their
models by tweaking the inputs a bit to reflect true world situations - and
seeing how the outputs vary. They use a
fancy name - Sensitivity Analysis -
to describe the effort but the idea is the same.
Let us consider several different real-world
scenarios. In our original model, the
two individuals had a $15,000 starting salary difference. What happens if the HS grad actually had a
higher starting salary of $30K bringing the difference in compensation down to
just $11,000? It is important to keep
all other variables the same.
In the adjoining table, the ROI of the TAMU grad drops to 18.54%,
but is still higher than the Fed estimate. Note
that he has to wait until Year 19 to overtake the HS grad, a slip of 4
additional years compared with the previous model. Clearly, the model is sensitive to the
starting salary difference - something our gut tells us.
Sensitivity Analysis: How impactful is the graduation rate?
Let us now look at additional scenarios. Everyone talks about how important graduation
rates are, but what does our model say? To do this, we will go back to our ROI calculations before and delay the TAMU grad’s graduation date by
two years.
The ROI for the TAMU grad drops to just 9%, nearly by three
quarters compared to the first model of graduating in 4 years. This
can be explained by the very late inflection point, in Year 22, the first time
that the college grad does better than the HS grad - see Column E. Also, the college grad carries the loan for
a longer period and is not done paying off his loan until Year 26.
If one must graduate late, what should be his starting compensation
at which he will have an ROI of 15%, the Fed estimate? The table below shows that our 6-year
graduate needs to negotiate a $43,000 starting salary to get to this goal.
The last two tables show how impactful delayed graduation
can be, so impactful that it in some cases it may not be worth going to college
at all. Students at elite institutions
know this because the Department of Education says that graduation rates are
the highest at post-secondary degree-granting institutions that are the most
selective (i.e., had the lowest admissions acceptance rates). For example, at 4-year institutions where the
acceptance rate was less than 25 percent of applicants, the 6-year graduation
rate was 89 percent; at 4-year institutions with open admissions policies, only
34 percent of students completed a bachelor's degree within 6 years.
UCLA’s Higher Education Research Institute has published an online Graduation Rate Calculator
which can be used to predict expected degree completion figures for a single
student or an entire cohort of students at a college or university based upon
ethnicity, gender, SAT scores and GPA.
It is a good tool to estimate how likely you are to graduate from
college in 4 years.
A Note About Rao Advisors Premium Services
Our promise is to empower you with as much high-quality, ethical and free advice as is possible via this website. But parents and students often ask us if they can engage with us for individual counseling sessions.
Individual counseling is part of the Premium Offering of Rao Advisors and involves a fee. Please contact us for more information.
Go back to "Rao Advisors - Home".
Our promise is to empower you with as much high-quality, ethical and free advice as is possible via this website. But parents and students often ask us if they can engage with us for individual counseling sessions.
Individual counseling is part of the Premium Offering of Rao Advisors and involves a fee. Please contact us for more information.
Go back to "Rao Advisors - Home".
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