Understanding an Institution’s Return on Investment: Measuring the Price-to-Earnings Premium

Title: 2023 Price-to-Earnings Premium for Four-Year Colleges

Author: Emily Rounds

Source: Third Way

Measuring an institution’s return on investment (ROI) remains a key factor in the college selection and enrollment process and provides valuable information for policymakers and higher education administrators. A new report from the Third Way provides one metric for understanding returns on investment at different institutions of higher education, the price-to-earnings premium (PEP).

PEP is a number that measures the total number of years it will take the average student to regain their investment to attend a given college or university. It is calculated by dividing the total net price of the bachelor’s degree (assuming four years of tuition) by the difference between the median earnings of a former student from that college ten years after their enrollment with the median earnings of a high school diploma holder.

A lower PEP value signifies fewer years to recover the net cost of pursuing a college degree. On the other hand, a higher PEP metric means the institution burdens students with much higher tuitions, fails to deliver a consistent earnings premium, or both.

Key takeaways from the analysis include:          

Private nonprofit and public institutions provide high-value returns: Private nonprofit and public institutions show excellent returns for their students, as students at 85 percent of public and private non-profit colleges (combined) can recoup their net tuition costs within 10 years and 57 percent of institutions enable students to regain their investment within 5 years. This contrasts with the 45 percent of private for-profit colleges that leave students struggling to recoup their spent money 26 years or more after enrollment or position students to never see ROI on their degrees. It is not surprising that public institutions, which usually charge lower tuition rates, measure well on this ROI metric. The median net tuition of a bachelor’s degree from public institutions in the dataset is $56,796, which is over $31,000 less than the median net tuition from a private non-profit college ($87,848).

Hispanic-Serving Institutions (HSIs) dominate the PEP: HSIs are institutions that enroll at least 25 percent Hispanic students, including many colleges in public university systems. HSIs excelled in the PEP analysis, with 77 percent of the 177 HSIs included in the analysis enabling their students to recoup their tuition within five years.

This report shows that most colleges and universities continue to provide an excellent ROI across the country, allowing students to recoup their spent tuition money and increase their wage premiums. However, individual ROI continues to vary based on a range of factors, including total time enrolled, type of institution attended, and major pursued. The data also demonstrates that some institutions consistently fail to provide their students with a reasonable ROI.

To read the full report including the institutional PEP data, click here.

—Austin Freeman