How Do I Calculate the Payback Period of a College Degree?

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When you’re weighing the costs of college, it’s important to consider the payback period of a degree because some degrees require greater financial investment. A payback period refers to the amount of time it takes for your investment to turn into income.

Businesses use the concept of a payback period to determine which investment opportunities they’d like to pursue, and you can use the same concept to determine which degree program fits your needs, goals and long-term budget. To calculate the payback period on your college degree, you need to know the total amount of your investment as well as the salary expectations for your industry.

Crunching the Numbers

When businesses calculate a payback period, they look at the investment’s cash flow projections. In other words, they analyze how much cash the project will generate in the short and long run. For calculating the return on investment of your college degree, you’ll look at income instead. As an example, let’s say that you invest $80,000 into your college education. This includes tuition, rooming and board, supply fees, food and other related expenses. You earn a teaching degree, which has a standard salary base of about $36,000 for first-year positions. Divide the investment by the projected earnings. If you used your teaching income solely to repay the cost of your college degree, then it would take 2.2 years to recoup that $80,000 bill.

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In essence, you’re looking at how long it will take for your degree to generate an income that makes up for your substantial investment. In this case, a teaching degree takes more than two years to generate income that balances your investment. Keep in mind that these calculations only relate to your expected income; the payback period has nothing to do with repaying student loans.

Degrees with Higher Price Tags

Some degrees come with higher price tags, but more expensive programs sometimes equate to better long-term income and a shorter payback period. For example, surgeons earn a substantially higher income than teachers do. They also attend school for at least twice the length that many teachers do. Their initial investment may be great, but their salaries are about five times that of a first-time teacher. Picking a career based solely on the payback period of a degree may not be the best method, but the financial risks are certainly worth considering.

Understanding the Expectations

You may be surprised to learn that advertising and marketing professionals actually have a higher return on investment rate than teachers or family physicians. It would take you just over five years to repay student loans as a marketing professional whereas a teacher might spend as many as 18.5 years repaying student loans. When you’re deciding on a degree program, look at the payback period not only for your industry in general but for that of similar or specialty fields. You may find a better investment opportunity in another area that still addresses your goals.

Deciding on a career path isn’t easy, and taking some time to weigh the options as well as their potential returns will better serve you in the long run. Before you enroll in a program, calculate the payback period of a degree to make sure that you’re ready to assume the financial risk associated with your chosen career path.