Running the numbers on your college education ROI

CHICAGO Mon Nov 5, 2012 5:50pm EST

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CHICAGO (Reuters) - Despite the sourness of the recent job market, a college degree is still a good investment. But picking your major is akin to assembling the right portfolio -- you have to be selective to maximize your returns.

Recent studies back this up: the Hamilton Project of the Brookings Institution shows that a college degree can yield a more than 15-percent return. That's better than double the average annual return of stocks over the last 60 years (6.8 percent), and five times the return of corporate bonds through 2010 (2.9 percent).

Even a hot investment like gold has only managed a 2 percent average return over that period.

What you study matters because the difference in lifetime earning potential from one degree to another can vary as much as 300 percent, according to a Georgetown University study. It all adds up to the conclusion that being selective about the type of degree you choose is more important than ever.

"On average, the rate of return on a college degree is about as high as it's ever been," said Michael Greenstone, director of the Hamilton Project of the Brookings Institution, the nonpartisan think tank, which conducted one of the studies. "We're now in a global labor market and we don't see these trends abating."

The other study was called "The College Payoff," and was conducted by the Georgetown University Center on Education and the Workforce earlier this year. It examined the relationship between lifetime earnings and degree choice.

If you're in the market for a college education -- either for yourself or your children -- think of it in terms of investment analysis.

What can your investment yield? Going through the exercise carefully won't give you a clear answer on whether a degree is worth pursuing, but it will give you some idea on whether your future earnings will justify the investment. The important thing is to acquire a suite of critical thinking skills and not to think short term when it comes to a degree. It should be a stepping stone, not a stumbling block.

Here are a few tips to figure it out:

1. Do the math.

Look at the total costs of the degree, which includes tuition, room and board, books, transportation and miscellaneous fees. One of the best online sources is the U.S. Department of Education's College Affordability and Transparency Center (collegecost.ed.gov/catc/).

What's most relevant isn't a college's "list" price, but what it will charge you after it offers an average financial aid package. There's another feature that will show you how much college costs are going up for individual universities.

Once you apply a cost-increase factor to a range of colleges, you can get a better idea of how much you'll pay after four years. This is a good starting point for a baseline estimate of a degree's cost. For example, on tuition alone, the University of Arizona raised its prices 49 percent between the 2008-2009 and 2010-2011 academic years.

2. Make strategic choices.

If you're unsure on what colleges you'll be attending, that's OK, because you can do a cost projection for fields of study you're considering in the DOE website. Thinking long-term, you can also do some projections on what lifetime earnings might be like.

Don't just think of future demand, either, when choosing a degree. There's a huge disparity between occupations due to a job's relative global importance within a growing industry.

For example, Computer/Information Systems Managers with bachelor's degrees can earn nearly $4 million over a career, compared with $1.5 million for social workers, according to the Georgetown University study.

In an information-based economy, "knowledge-intensive" jobs that require a great deal of technical expertise and experience tend to win out over public service professions -- at least in terms of salaries.

3. Think sub-sectors within industries.

Within healthcare, consider positions such as biomedical engineering, pharmaceutical research or alternative energy/transportation. The top two fastest-growing sub-sectors, according to IBIS World, are generic pharmaceuticals and solar-panel manufacturing. Both play into long-term trends listed above.

For example, pharmacists are projected to make $4.4 million in lifetime earnings, compared with $1 million for nursing/psychiatric or healthcare aides. Both professions will be in demand as the population ages, but the higher level of skills for those in the professions or research -- demanding graduate level education -- make a significant difference in total earnings.

4. Figure in the worth of even more schooling.

Graduate degrees can boost earnings even more. The median salary of someone with a master's degree was 26 percent more than a bachelor's degree, Georgetown found.

Again, the kind of degree matters. Workers in healthcare or life sciences saw salaries double in many cases when they earned a master's degree. Employees in journalism and the arts saw raises only up to 25 percent.

5. Consider the passion and purpose quotient.

Of course, finding something you're good at, feel passionate about and will sustain you through a career is never to be discounted. I've known successful lawyers who wished they were writers. My B.A. degree (psychology) had little to nothing to do with the profession I eventually found a passion for: journalism and writing.

Your passion/purpose quotient should focus on life goals. Setting a financial goal in tandem with a lifetime earnings target is important in this regard. "The importance that people attached to income at age 18 also anticipated their satisfaction with their income as adults," writes psychologist and Nobel Prize winner Daniel Kahneman in his best-seller "Thinking Fast and Slow."

Do you want to create a new drug, building or discover a new species? Then your college and professional path is simpler. If your path is less defined, look at the relationship between earnings and choice of degree. It will provide some guidance that will be helpful as you make one of the most important investments of your life.

(The author is a Reuters columnist and the opinions expressed are his own For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here; Editing by Beth Pinsker Gladstone and Dan Grebler)

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