Education is often seen as a necessity than an investment. Hence, many parents are ready to spend tremendous amount of money for their child’s education. Be it schools, colleges or tuitions, education requires a great deal of investment in terms of time as well as money. Higher education, especially, takes a toll on one’s finances. Therefore, one must make sure that this investment adds value to your career and life.
It is important to think about the product of this system BEFORE investing in it. In terms of education, return of investment is about finding a course or degree that benefits you in the long run without any added financial burden.
How to calculate ROI on education?
Step one: Calculate educational expenses
Whether one is pursuing higher education in India or abroad, some basic expenses such as entrance exam fees, college fees, tuition fees are to be considered. Along with this, duration of the course and career opportunities in the chosen field need to be considered. With this data at hand, one can determine whether to opt for a scholarship or education loan.
For example, a student wanting to get into an MBA program in any of the top colleges like ISB will have to pay approximately 25 to 34 lakhs for a two-year course.
Step two: Consider demographical data
The geography, industry growth, economic conditions of the individual should be considered. The individual should be aware of where the best opportunities for future employment would be.
Depending on where the college or university is located, the student will have to consider hostel fees or rent for the duration of the course. Since a post-graduate with an MBA is more likely to have more exposure in terms of job opportunities and work experience in developed cities, the cost of living would also be high.
Step three: Calculate potential earnings:
Once the career option is decided upon, the prospects of that career should be delved into. It is essential to find out the future of that particular field and calculate the potential income in future for minimum 30 years. This calculation is the sum of average salary growth for that job profile and the cost of living for the next 30 years.
Assuming that the average CTC for an MBA is 20 lakhs PA, after subtracting tax and cost of living, the in-hand amount is comparatively less.
Step four: Calculate ROI
Now, subtracting the educational expenses from the potential earnings would give the return of investment for the chosen educational and career path. The lower the ROI, higher the risk of financial debt.
Considering the individual does not have any other loans to pay off, it will take him/ her at least 2 years to earn back the money he/she spent on the MBA program.
So, the equation will look something like this:
INR 40 lakhs (in approximately 2-3 years) – INR 28 lakhs = INR 12 lakhs
The ROI here is very less, not to mention the opportunities for professional growth that are missed in the duration of the course.
On the other hand, if the students and the parents consider ROI first, they can opt for a college like FMS, where the fees for the same course are around 3 lakhs. So, the value of the degree remains high, while the expenses are reduced significantly. In this case, the ROI is significantly high.
INR 20 lakhs (pa) – INR 3 lakhs = INR 17 lakhs
The students and the parents do not have to worry about repaying debts in the future.
To sum up, calculating ROI on education is beneficial as it helps
1. To ensure that you get high-value education for the money spent.
The parents or students can re-evaluate whether the chosen educational path is worth the investment. They can opt for a low-cost high-value college or institute that will give the student the necessary resources for a successful future.
2. To be able to make the right career choices.
Investing huge amounts of money on a career path that is ‘in trend’ right now, may lead to frustration as the field of work may become saturated by the time the course ends. Also, for individuals dealing with ‘job vs higher education’ dilemma, it would give more clarity and help to avoid missed opportunities.
3. To build your resources
It helps the parents or students to plan their finances accordingly and look for other alternatives that are more cost-effective but equally beneficial.
4. To lower the risk of financial debts in future
Calculating ROI helps to lower any financial risks in the future in case educational loans are in the picture. It is helpful for financial stability and professional growth as one is not burdened with repaying educational loans.