Sunday, October 27, 2013

Increased earning income from bachelors, masters and doctoral (PhD) degrees

Education Tips by Burleson Consulting

If you are interested in the value of education, make sure to see my related  notes on the costs of professional school and the increasing numbers of millionaires in the USA.

What college worth?

With the costs of college increasing rapidly many students question the increased lifetime income from pursuing a masters or doctoral degree.  Here is a survey of article that discuss the improved earning power from masters and PhD degrees.

Masters, Doctorate and Professional earn millions more

In this US Government article titled "Lifetime Earnings Soar with Education: Masters degree worth $2.5 million income over a lifetime" we see that advanced masters and professional degrees are a great investment, and those who pursue post Bachelors degrees can earn millions of dollars more than those with a BA or BS degree:
  • High School Diploma - High school graduates can expect, on average, to earn $1.2 million in lifetime income.
  • Bachelors degree - Those with a bachelor's degree, $2.1 million over a lifetime:
    • High School to Bachelors - That average value of a 4-year degree is increased earnings income of $900,000, almost a million dollars.
  • Masters degree - People with a master's degree earn $2.5 million:
    • High School to Masters - Going from High school to a masters degree is worth $1.3 million dollars.
    • Bachelors to Masters degree - A Masters is worth $400,000 in additional lifetime income.
  • Doctoral degree - Persons with doctoral degrees earn an average of $3.4 million during their working life:
    • High school to Doctoral - Doctorate earn a whopping  $2.2 million dollars more than a High School graduate.
    • Bachelors to Doctorate - Doctoral degrees earn $1.3 million dollars more than a Bachelors degree.
    • Masters to Doctorate - Doctors earn $900 thousand more than a Masters degree holder.
  • Professional degree - Those with MD or JD professional degrees (medicine, law) do best with an average of $4.4 million dollars in lifetime earnings:
    • High school to Professional - Professionals can expect to earn  $3.2 million dollars more than a High School graduate.
    • Bachelors to Professional - Professional doctoral degree holders (MD, JD) earn $2.3 million dollars more than those with a Bachelors degree.
    • Masters to Professional - Professional degree holders earn $1.9 million dollars more than a an average Masters degree holder.

The effect of college major on lifetime earnings income

Everyone who has been to college knows that if you cannot succeed at pre-med or engineering, students fall-back into Business Administration or Nursing.  If they fail in Business or nursing they pursue liberal arts or social science  (i.e. Psychology, Economics), and if they fail all else, students graduate with degree in Education or Art History.  But what is the lifetime effect of college major on lifetime income?
This US government article notes that Engineers earn the most while Educations majors earn the least:
"Those working full time in engineering earned the highest average monthly pay ($4,680), while those with education degrees earned the lowest ($2,802) in 1996."
This MSN study notes that those who complete professional degrees can expect to earn more than a million dollars over those without a college degree. 
  • Education and Social Science lag behind in earnings - Those with Education degrees earn $200 thousand dollars less than the average for bachelors degree.  Social science majors earn $98k less than average, and nearly $400 less than computer scientists and engineers.
Bachelor's degree    
Lifetime gains are huge    
Average$308,588  Liberal arts$243,883
Business$349,028  Social science$210,080
Computers$443,180  Science$283,286
Engineering$497,930  Education$108,461

A Masters degree dramatically increases lifetime earnings, with MS in Engineering and MBA degrees having the highest payback:
Master's degree    
A mixed result    
Average$180,010  Social scienceLess than 0
Business$375,780  Science$136,873
Engineering$362,092  Education$106,388
Liberal artsLess than 0   
The big payoff are for professional degrees.
Professional degree 
Big-time payoff 
In sum, the amount of education is highly correlated with higher lifetime income, but the choice of degree type and college major also has a profound difference in lifetime income. 

Comparing Apples to Apples with Net Present Value

Obviously, the above lifetime earnings figures are enticing, and we are in awe that going from high school to becoming an attorney is worth 3.2 million dollars in increased lifetime earnings.  When kiddies see the lifetime value of a a college degree expressed in millions of dollars they say "Let's do it", but the "real value today" of a payout over 40 years is much, much lower.  Let's take a closer look at computing the net present value (NPV) to see the "real" costs and benefits of college.
In order to judge the "real" values of a college degree we must compare cost vs. benefits, at the same time, at the same date.  These are "lifetime" earnings, an amount spread-out over 40 years.  Plus, we have to consider the "time value" of money, and discount a future payout according to the opportunity cost of alternative investments.  We will need to find the algorithm for computing the net present value, factoring-in discounted cash flows to get the net present value for both, today's cost of college vs. today's net value of the lifetime earnings.
Hey, let's just use a web-based annuity calculator for NVP and FV.
Our apples-to-apples time point will be at graduation time, after we have spent the money for college and we are looking at the lifetime earnings.  Here are the equations and variables:
Future value of college costs
Here we add to get today's value of all the money you spent on college over the years.  For the costs, we must consider the "future" value of our investment, at the "opportunity cost".  This includes tuition, housing, cell phone and books.  The formula for the future value of money is FV=P(1+i)n.
The net present value is expressed with this equation:
PVD=FVD─────(1+i)nPVD = Present Value of a Dollar
FVD = Future Value of a Dollar
i = interest rate per time period
n = number of time periods
Let's start with the NPV for the leap from High School to Bachelors degree.  Total costs for a typical 4 year degree at a cheap state university might cost about $2k per month.  Here are rough per-month cost of college:
  • Tuition is 8 semesters at $4k each, $8k/year     =  $666/mo
  • 48 months rent at $400/mo                        =  $400/mo
  • 8 semesters of books at $600 each is $1.2k/year  =  $100/mo
  • Food, cell phone, beer at $500/mo                =  $500/mo
  • Airplane tickets to/from school is $1.2k/year    =  $400/mo
                                                     ~=  2,000/mo
Over the 48 months of a 4-year Bachelors degree we have a total of $99,168.  For simplicity, let's just call it $100k even.
Using the equation with a opportunity cost of 1% per month, today's (Graduation Day) net present value of this Bachelors degree costs $126,000.
Now, the BA or BS graduate can expect to earn $900k more cash over their 40 years of work.  This is only $1,875 extra per month.  Let's see what this expected $900k in future earnings is worth on graduation day.
Net present value of increased earnings
For lifetime earnings, we must consider the present value of a $900k annuity ($1,875 per month), spread out over 480 months at an opportunity cost of 1% per month: 
FV=P(1+i)nFV = Future Value of a Dollar
P = Principal
i = interest rate per year
n = number of years
Let's use a web-base net present value calculator.
On a yearly basis, we have 40 yearly payments of $22,500 at, say 10% interest.
We would have to invest $383k today to get an annuity totaling $900k in monthly payments of $1,875 each month for the next 480 months.
Hence, the "real" average value of a Bachelors degree is $257k:
  • NPV cost of college         $126k
  • NPV increased earnings   $383k
So, is a 4-year college degree worth the investment?  Ceteris Parabus, yes.  It's worth about $257k, or about a quarter-million dollars.  (subtract about $60k if you want to factor-in the lost wages from the student working 4 years at $20k/year with 10% interest).
On average, getting a bachelors degree is just like paying $126k for the right to claim extra earnings with an NPV of $383.

Determine Return on Investment (ROI) of an MBA Program

If you read Part 5 of this series, you have an idea of how much an MBA program can cost. Now, we should examine if an MBA is worth the cost by determining what kind of return on investment (ROI) will you get for your troubles.To determine your ROI, we need to examine a few things:
  • Cost of MBA program: Once you have decided on which program you wish to attend, you will know roughly how much it will cost.
  • Opportunity cost: This is the forgone salary while you attend your MBA program.
  • Post MBA salary: Of course, this is an unknown for you, but thankfully most MBA programs keep track of this information for past students. You may be able to make a reasonable estimate.

Example MBA ROI:

As an example, let us assume you currently earn $50,000 per year, and the MBA program you have been accepted to costs $20,000 per year. Assuming this is a 2 year course, you will spend $40,000 on tuition, and give up $100,000 in forgone salary. However, the total cost of your program is not just $40,000, it is really $140,000 because you missed out on your salary for two years*.
Next you take your post-MBA salary and determine how long it will take to make up that $140,000 difference. Let us assume your post MBA salary is $85,000. For easier math, we will say your MBA is directly responsible for adding the $35,000 to your annual salary. With the additional salary of $35,000 per year, you will earn back that $140,000 in 4 years. Although it will take you 4 years to earn back the cost of tuition and lost salary, everything you earn after that is “profit.” This is where your return on investment comes in. To determine you ROI, pick a time period and plug in the numbers.
*For this example, we will assume the salaries will remain constant. Raises and promotions are wild cards and lead to more difficult math.

Example 5 year MBA ROI:

Again, assuming no raises, we can determine a 5 year ROI of $35,000. This is determined by taking your post-MBA salary, subtracting your pre-MBA salary, and subtracting the total cost of the MBA (tuition and forgone salary).
Salary (5 * $85,000 = $425,000) – (5 * $50,000= $250,000) = $175,000
Total cost of MBA (tuition and forgone salary) = $140,000
Total ROI = Salary – Total cost of MBA = ($175,000 – $140,000) = $35,000.
For 10 years, we get $850,000 – $500,000 – $140,000 = $210,000.
This is only a rough way to determine your ROI because it does not take into account raises or promotions. For a more complete way to calculate ROI for an MBA program, check out Forbes online MBA calculator.

Which MBA Programs have the best ROI?

Many MBA ranking systems, such as BusinessWeek or US News, include details including pre and post MBA salary, cost of tuition, fees, and expenses, average time to pay off student debt, and other information that will help you determine how much it will cost, how much you might earn upon graduation, and how long it may take to pay it off. Keep in mind, these numbers are only averages.
Sometimes the best ROI is not where you think it might be.The Graduate Management Admission Council (GMAC) published this document, Examining the Value Added by Graduate Management Education, which mentioned the ROI for a top 10 school is dramatically lower than other schools. It is interesting to examine where the best deals for an MBA can be found.

Is an MBA worth the investment?

In many cases, getting an MBA is definitely worth it. Is is worth it for your situation? Only you can answer this. In my opinion, a decision as big as this requires more than just an examination of dollars and cents. How badly do you want an MBA? Is an MBA necessary for your chosen career path? Can you afford to take time away from work? Sometimes the raw numbers don’t give you the best answer for you. After all, the best investment you can ever make is in yourself.
ROI is just one thing to consider when deciding on an MBA program. Stay tuned for the next article in this series, Other Deciding Factors for Choosing Your Program.


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