Current Context
This section presents the research question while highlighting the recent trends in college tuition costs and the growing burden of student loan debt It also emphasizes the economic significance of the study for both students and the broader economy.
The cost of higher education has risen dramatically, with tuition and fees at private and public universities increasing significantly faster than inflation, leading to financial strain on students and families From the 2006-2007 to the 2016-2017 academic years, tuition at private four-year institutions rose by 68%, while public four-year colleges saw an alarming 112% increase (CollegeBoard) This surge in costs has made college degrees a costly investment, forcing many students to rely on loans, which have contributed to a staggering $1.4 trillion in student loan debt in the U.S and high delinquency rates among recent graduates Despite these challenges, evidence suggests that the financial benefits of a bachelor’s degree still outweigh the rising expenses for most individuals, prompting the question of whether the pursuit of a master’s degree is a worthwhile investment given the additional financial burden.
Pursuing a master's degree involves various expenses, such as tuition and fees for graduate programs, the opportunity cost of lost wages during studies, and potential student loan debt This thesis aims to evaluate the financial benefits of obtaining a graduate degree.
This study aims to evaluate whether the increased earnings from a master’s degree throughout a career surpass those from a bachelor’s degree It will focus on three academic fields: Business, Law, and Science, Technology, and Medicine (STEM) By analyzing early and mid-career earnings data alongside various cost factors for each concentration, the research seeks to identify the key variables that significantly impact the net returns of obtaining a master’s degree.
The financial well-being of college graduates significantly impacts both the economy and society Higher education often leads to skilled workers who contribute substantially to the workforce, driving economic growth through higher salaries and increased consumption However, if graduates' earnings do not adequately offset their student loan debt, their financial flexibility diminishes, hindering economic progress Additionally, falling behind on loan payments can damage credit scores, further restricting their ability to purchase major goods and creating a cycle of rising debt and reduced consumption This study aims to inform students about the key factors influencing the returns on graduate education, ultimately guiding the economy toward greater prosperity by enhancing the financial security and flexibility of college graduates.
Chapter Two Review of Literature
Historical Context of College Costs
This article will explore the history of the student loan system, highlighting the four primary sources of federal student loans and the differences in borrowing for undergraduate versus graduate students Additionally, it will examine the key factors that have led to the increasing outstanding student loan debt and the escalating costs of higher education.
Section I: Implementation of Student Loan System
Attending college or university represents a significant financial commitment, often one of the largest expenses individuals face in their lifetime Prospective students must invest considerable money in tuition and fees while also forgoing potential earnings This investment is made with the expectation that a college degree will result in substantially higher future income To support those who cannot afford these immediate costs, the U.S federal government enacted the Higher Education Act in 1965, establishing the first student loan program to guarantee repayment to lenders Currently, there are four primary sources of federal student loans: Stafford Loans (Subsidized), Stafford Loans (Unsubsidized), Parent Loans for Undergraduate Programs (PLUS), and the Perkins Loans Program Before exploring the causes of the growing student loan debt and the advantages of obtaining an advanced degree, it's important to understand the various types of federal aid available for higher education and their distinctions.
The Stafford Loans Program, established in 1965, is the largest federal student loan initiative, primarily designed to assist eligible undergraduate students from low-income backgrounds Initially consisting only of subsidized loans, this program provides significant benefits, including a lower interest rate of 3.76% and a temporary repayment deferral, during which the U.S Department of Education covers interest costs while students are enrolled and up to six months after graduation.
$5.5 billion during the 2005-2006 academic year up to $23 billion for the 2015-2016 academic year
Unsubsidized Stafford Loans, introduced in 1992, offer financial assistance to underprivileged students and those ineligible for subsidized loans, but they come with significant drawbacks Unlike subsidized loans, borrowers must pay interest during all periods, including while in school, leading to the accumulation and capitalization of unpaid interest on the principal amount This can result in high debt levels if borrowers do not make regular payments Despite these risks, the popularity of unsubsidized Stafford Loans has surged in the United States, increasing from nearly $5 billion in 2006 to over $49 billion by 2016.
Direct PLUS loans, established in 1980, are designed for parents of dependent undergraduate students and graduate/professional students, with eligibility and loan amounts based on credit scores and the cost of attendance minus other financial aid These loans carry higher interest rates than Stafford Loans, currently around 6.3% Interest accrual varies: students are not charged while enrolled at least half-time and for six months post-graduation, whereas parents start payments immediately upon receiving the loan The popularity of Direct PLUS loans has surged, increasing from $2.2 billion in the 2005-2006 academic year to $20 billion in 2015-2016.
The Federal Perkins Loan Program, formerly known as the National Defense Student Loan Program, offers financial assistance to undergraduate and graduate students with significant financial need Funded by the federal government, these loans are allocated to students by participating colleges and universities Recipients benefit from a low interest rate of 5% and are not required to begin repayment until nine months after graduation or leaving school However, due to limited participation among academic institutions and the program's focus on extreme financial need, the total loan amounts tend to be lower compared to other student loan options In the 2014-2015 academic year, the program provided over $1 billion in loans to 528,000 students nationwide.
When comparing federal student loans for undergraduate and graduate students, significant differences emerge Graduate borrowers face less favorable terms, as they do not have access to subsidized loans, leading to interest accruing while they study full-time Current interest rates for graduate subsidized loans are at 5.31%, with PLUS loans at 6.3%, whereas undergraduates benefit from a lower rate of 3.76% for both direct subsidized and unsubsidized loans Although federal rates for graduate students are generally lower than private lenders, which can charge between 9% to 18%, the higher borrowing limits for graduate students—up to $20,500 annually and a total of $138,500—make advanced degrees more accessible However, this increased borrowing capacity comes with greater risk due to larger outstanding balances and higher interest rates.
Graduate students should be vigilant about due payments and ensure that the potential increase in their future earnings from obtaining an advanced degree justifies the total amount of student loans they incur.
Section II: Factors Contributing to Massive Student Loan Debt Level
Student loan debt in the United States has surged dramatically over the past decade, reaching over $1.4 trillion and becoming the second largest source of household debt after mortgages With 40 million Americans affected, 7 million borrowers are currently in default, highlighting the economic and political controversy surrounding this issue The burden of student debt is restricting young Americans from making significant purchases, such as homes and cars, which are essential for personal growth and economic stimulation This financial strain raises questions about the value of college degrees today Factors contributing to the rapid accumulation of student debt include government policies and the rising costs of higher education, which have seen the total outstanding debt increase from $250 billion to more than fivefold in just ten years.
8 enrollment and tuition, and stagnant wage growth, all have contributed to the student loan debt crisis that exists today
Despite federal aid remaining stable in recent decades, the significant reduction in state funding for higher education has contributed to the increasing burden of student loans Opposition from influential right-wing politicians against tax increases, particularly for wealthy Americans, has hindered state governments' ability to raise adequate revenue to support state colleges and universities.
In conservative states like Texas, Virginia, and North Carolina, significant tax cuts were implemented during periods of budget tightening caused by economic challenges, including the savings and loan crisis, the dot-com bubble, and the 2007 financial crisis.
2008, states provided about $9,000 per student in higher education (Foroohar, 2016) Foroohar
(2016) tells us that today the average state aid per student for higher education has fallen to
$7,000, the lowest it has been in 30 years
The significant reduction in funding from state governments has led to a notable increase in tuition and fees at academic institutions According to Mitchell (2015), both public and private colleges have experienced sharp rises in costs, with private colleges seeing substantial increases in tuition from 1995 to 2015.
According to Mitchell (2015), tuition and fees at universities have surged by 179%, with in-state tuition at public national universities skyrocketing by 296% These increases far exceed the inflation rate, as the consumer price index has only risen by approximately 55% during the same timeframe Consequently, students and their families are shouldering much of the additional financial burden associated with higher education.
The reduction in state aid and increasing tuition fees have significantly impacted the financially disadvantaged Americans, exacerbating the existing wealth divide.
The rising cost of college education has disproportionately affected lower-income families, with those in the bottom quartile spending 84% of their income on a degree today, compared to 44% in 1990 Berman (2016) illustrates the decline in the Federal Pell Grant's value, which once covered over half of a four-year college's expenses but now accounts for less than a third As state financial assistance dwindles and tuition continues to soar, accumulating student loan debt has become unavoidable for most students seeking higher education.
Value of Graduate School
This section presents an analysis of the wage premium associated with holding a master’s degree compared to a bachelor’s degree It also highlights the specific skills and attributes developed through advanced education that enhance the employability of graduates in the job market.
Research consistently shows that earning a bachelor's degree is crucial for economic opportunities and higher future earnings According to Carnevale (2009), the college premium has significantly increased since 1999, with individuals holding a bachelor's degree earning 84% more over their lifetime compared to those with only a high school diploma This translates to an average value of approximately $2.8 million for a bachelor's degree While a four-year degree already offers substantial advantages, there is ongoing debate about the necessity and worth of pursuing an advanced degree Evaluating the value of a post-baccalaureate degree requires careful consideration of potential future earnings alongside the additional student loan debt incurred.
According to Torpey and Terrell (2015), the financial benefits of obtaining a graduate degree differ greatly across various industries and occupations, yet there is an overall significant wage advantage for individuals holding a post-baccalaureate degree In 2013, full-time workers aged 25 and older with a master’s degree earned a median annual wage of $68,000, which represents a $12,000 wage premium compared to those with only a bachelor’s degree.
Individuals with a master's degree earn significantly higher lifetime salaries, averaging $400,000 more than those with a bachelor's degree and approximately $1.4 million more than high school diploma holders, according to an analysis by Torpey and Terell This substantial salary increase highlights the financial benefits of pursuing advanced education.
Not all workers with advanced degrees earn higher salaries, as the value of a master’s degree varies by field Research by Torpey and Terrell (2015) indicates that some individuals with master’s degrees earn the same or less than those with bachelor’s degrees Carnevale (2015) highlights that an advanced degree does not guarantee increased future earnings, with 17% of bachelor’s degree holders earning more than the median salary of those with professional degrees Certain occupations, such as nursing and economics, require advanced degrees for entry-level positions, while the necessity of higher education in other fields is less clear The Bureau of Labor Statistics shows that business-related occupations offer the highest salary returns, with master’s degree holders in commodities, sales, and financial services earning 89% more than their bachelor’s degree counterparts Consequently, business has led in master’s degree awards from 2012-2013.
Education, Healthcare Services, and STEM, with wage premiums averaging between 25% and 40%
Lindley and Machin (2013) identify key skills enhanced by obtaining an advanced degree, making master's degree holders more attractive to employers Their research highlights significant improvements in cognitive, computer, and interpersonal skills among graduate students Specifically, individuals with a master's degree excel in presentations, mathematics, and statistics, as well as demonstrating greater efficiency in computer usage.
Technological advancements and an increasing reliance on computers across various industries have significantly enhanced the value of obtaining an advanced degree, as highlighted by Lindley and Machin (2013) They note that the rising demand for workers with postgraduate qualifications is closely linked to shifts in technology, particularly in computer usage and investment Additionally, Valleta (2015) emphasizes that the evolution of workplace technologies has diminished the demand for routine jobs, as computer-intensive equipment and processes have effectively replaced many operational tasks previously performed by employees.
In light of the 2015 theory on the impact of evolving technologies on workforce demand, along with Lindley and Machin’s 2013 findings that a master’s degree enhances computational skills, the trend to prioritize candidates with graduate education is increasingly evident.
Research indicates that graduate school alumni are more effective collaborators with computers compared to those with only a bachelor's degree According to Lindley and Machin (2013), this trend has significantly contributed to increasing wage premiums, as the skills and presence of postgraduates in the workforce have become increasingly valuable.
Postgraduate workers and college graduates are not perfect substitutes, as they typically engage in different occupations Postgraduates often occupy roles that demand advanced skills and a deeper understanding of computational methods.
Pursuing a master’s degree can lead to substantial wage premiums in various occupations; however, it is crucial to evaluate the true value of this degree by factoring in the costs and debt incurred from additional education.
According to Delisle (2014) the median cumulative debt for graduate students in 2012 was
The average student debt upon graduation varies significantly depending on the chosen program, with the median cumulative debt for MBA graduates at $42,000 in 2012, compared to $140,116 for JD graduates in law (Delisle, 2014) Despite law degrees requiring three years of study versus two years for MBAs, the disparity in debt levels remains substantial Additional factors influencing graduate school costs include the specific institution attended and the opportunity cost of lost income while studying According to Bloomberg BusinessWeek, the average total tuition for the top 20 business schools during the 2011-2012 academic year further underscores the financial considerations students must evaluate.
The total cost of attending an elite business school approaches $200,000, factoring in potential interest on borrowed funds, while the average starting salary for the Class of 2012 graduates from undergraduate institutions was $44,442 (O’Connor, 2012) In comparison, law school tuition at top institutions averaged around $50,000 per year, culminating in approximately $150,000 over the typical three-year program (O’Connor, 2012).
Law students face significant opportunity costs, investing nearly $300,000 for a J.D degree, which can increase further when factoring in loan interest Despite the high financial commitment associated with attending a prestigious graduate program, O’Connor highlights the potential long-term benefits of this investment.
A 2012 study highlights that the lifetime financial returns of obtaining an advanced degree in law or business justify the associated costs Specifically, MBA holders can expect to earn between $5 million and $8 million over a 40-year career, resulting in them spending only 3% to 5% of their lifetime earnings on business school expenses, including lost wages Furthermore, research from the Georgetown University Center on Education and Workforce indicates that business school graduates can earn as much, or even more, in 20 years than those with only a bachelor's degree earn over 40 years.
Review of Findings
This section will summarize the main ideas and conclusion drawn from current literature and preview the methodology which will be utilized to answer the research question for this study
Student debt has surged dramatically in recent decades, driven by factors like escalating tuition fees, increased enrollment, reduced state funding for higher education, stagnant wages, and limited returns from for-profit and community colleges It's crucial to recognize the distinct characteristics of the student loan system, particularly the differences between undergraduate and graduate borrowing Graduate students face unique challenges, such as the absence of subsidized loans, higher interest rates, and elevated borrowing limits.
Graduate students carry significant debt levels but are among the least likely to default on their loans due to the advanced skills they acquire In contrast, students from for-profit, community, and non-selective colleges face greater challenges in repaying their student loans While individuals with a master’s degree generally experience a positive wage premium that justifies the costs of further education, this return on investment varies across different fields.
In the upcoming chapter, I will present the methodology for assessing the true return on investment of a master’s degree This approach will include several case studies comparing median earnings for bachelor’s and master’s degree students across various academic concentrations Additionally, I will analyze average tuition costs, opportunity costs, and student debt associated with specific graduate programs to evaluate the value of a master’s degree at different institutions.
Evaluating the Data
This section will provide relevant information on the data sources which will be used for this study; highlighting strengths and potential concerns of each source
This study utilizes data from four primary sources: the 2016-2017 PayScale College Salary Report, the Federal Student Aid Data Center, U.S News Higher Education, and Forbes: America’s Top Colleges Originally aimed at analyzing individual earnings and student loan data through regression analysis, the focus has shifted to evaluating return on investment at the institutional level due to data accessibility and confidentiality issues While using median and average measures introduces certain limitations and assumptions, these concerns will be comprehensively addressed in this section.
The 2016-2017 PayScale College Salary Report ranks over 1,000 colleges based on salary potential, utilizing data collected from employees who completed PayScale’s survey, which was then rigorously verified for accuracy A standout feature of this report is its ability to compare rankings across various degree types and academic majors, allowing users to analyze median earnings for both early and mid-career pay This comparison can be made between bachelor’s and master’s degree holders from the same institution and academic concentration, providing valuable insights into potential salary outcomes.
PayScale allows users to view the median earnings for individuals who graduate from Boston
A Bachelor of Arts (B.A.) in Business provides a foundation for individuals seeking to enter the workforce, while those with a Master of Business Administration (MBA) from Boston University typically enjoy higher median earnings The classification of a bachelor's degree is limited to individuals holding only that degree, ensuring clarity in data analysis Likewise, the master's degree category includes only those with a master's degree, eliminating any potential overlap in the samples This approach helps to prevent an overestimation of earnings associated with a bachelor's degree.
The report on school-level data interpretation raises important concerns, as it only includes institutions with statistically significant samples from PayScale, potentially omitting universities that may offer higher returns on investment This exclusion does not necessarily reflect the quality of these institutions but rather a lack of sufficient verified data for ranking For instance, PayScale provided median earnings data for only 37 law schools, with 28 having corresponding undergraduate programs for comparison The average sample size for included schools was 325, varying significantly by school size Additionally, the analysis assumes that individuals pursuing master’s degrees remain at the same university for their undergraduate studies, overlooking the common scenario where students transfer to different institutions for advanced degrees However, since the study focuses on median earnings, this factor is unlikely to significantly impact the findings.
The Federal Student Aid Data Center serves as a comprehensive resource for information on federal financial assistance programs, specifically providing detailed loan data by academic institution for approximately 6,000 schools participating in Title IV programs This study focuses on earnings and costs, particularly student loans, making the Data Center invaluable It categorizes student loan data into five direct loan programs: Subsidized, Unsubsidized – Undergraduate, Unsubsidized – Graduate, Parent PLUS, and Graduate PLUS However, for the purpose of evaluating the average student’s return on investment, Parent PLUS and Graduate PLUS loans are excluded, as they are awarded based on exceptional financial need and do not accurately reflect the average student borrower’s financial situation Analysis confirmed that a minimal number of students receive these loans, thus the study relies solely on subsidized and unsubsidized direct loans for both undergraduate and graduate students to estimate average loan amounts Average loan amounts are calculated by dividing the total loan disbursed by the number of recipients for each loan program at each school.
U.S News Higher Education provided valuable data on tuition and fees for both undergraduate and specific graduate programs, offering a clearer distinction between costs for various degrees, including MBA and JD programs This advantage makes U.S News a more reliable source compared to other college information platforms However, there is a notable flaw in the data provided by U.S News.
The absence of statistics on average scholarship and grant awards prevents an accurate estimation of the net price of attendance at various institutions While the National Center for Educational Statistics provides average net cost figures, these are limited to undergraduate levels, leading to inconsistencies in analyses that do not account for graduate school funding Consequently, the lack of comprehensive data on scholarships and grants for all degree types may result in an overestimation of tuition costs for both undergraduate and graduate programs Additionally, it is important to note that in-state tuition and fees at public universities can be significantly lower—ranging from $10,000 to $30,000—compared to out-of-state rates, reflecting that most public university students are state residents.
Average tuition costs at public universities may be underestimated because they often reflect in-state tuition rates While some students pay the higher out-of-state tuition, most benefit from the lower in-state rates, making this assumption more representative of the typical student experience.
U.S News Higher Education offers graduate program rankings based on various factors, including assessments from college deans and recruiters, post-graduation success metrics like employment rates and earnings, and average GPA and test scores However, the undergraduate rankings are not comparable due to the separation of liberal arts colleges, regional universities, and national universities into distinct categories, making a cohesive comparison impractical.
Forbes compiled a comprehensive ranking of America’s Top Colleges by consolidating various school types into a single list This ranking methodology focuses exclusively on the return on investment (ROI) associated with obtaining a bachelor’s degree from each institution.
This study will leverage data from various sources to analyze and calculate the total future earnings throughout a career, as well as the overall costs associated with obtaining a bachelor's and master's degree Table 3.1 provides a comprehensive overview of the factors included in the analysis and outlines the specific methods used for their calculation.
The academic institution offers both undergraduate and graduate programs, with its undergraduate program being highly regarded in Forbes rankings that assess return on investment A lower rank signifies a better investment, highlighting the institution's commitment to providing valuable educational opportunities.
Business Rank U.S News ranking of MBA programs
Law Rank U.S News ranking of JD programs
STEM Rank U.S News rankings of master’s degree in engineering
The median salary for alumni with a bachelor's degree from a specific school ranges from early career pay for those with 0-5 years of experience to mid-career pay for those with over 10 years of experience Similarly, alumni holding a master's degree also see a distinction in median salaries, with early career pay reflecting earnings for individuals with 0-5 years of experience and mid-career pay for those with more than a decade in the workforce Additionally, the article notes the number of loan recipients for various loan types during the year 2015, highlighting the financial support available to students.
In the 2016 award year, the count of student borrowers includes those with Subsidized, Unsubsidized, and Graduate PLUS loans, while for Parent PLUS loans, it reflects the number of students for whom the loans were obtained.
During the 2015-2016 award year, the total dollar amount of loans disbursed for this loan type reflects the anticipated full disbursement of the loans initiated.
Methodology
This section will detail the calculation of return on investment (ROI) for obtaining a bachelor's and master's degree, examining the associated costs and benefits It will also compare the value of each degree type to provide a comprehensive understanding of their financial implications.
This case study analyzes the return on investment (ROI) of bachelor's and master's degrees across three academic concentrations: Business, Law, and STEM Each concentration features a varying sample size based on the availability of earnings data for different degree types By comparing the ROI of obtaining a bachelor's degree at a specific university with that of a master's degree in the same field, the study aims to identify which graduate schools provide the best financial investment.
The study analyzes business school observations using the PayScale 2016-2017 College Salary Report, specifically focusing on the "Best Schools for Business Majors by Salary Potential." This report ranks four-year institutions based on mid-career pay, defined as the median salary for alumni with over 10 years of experience The research highlights the top 50 schools for mid-career pay among business majors and compares these figures to the earnings of graduates holding Master of Business Administration degrees from each institution.
Due to the limited data from the PayScale report, a unique approach was employed in selecting institutions for analyzing law degrees Earnings information is available for only 37 graduate law schools, and among these, only 28 are associated with an undergraduate program.
26 university which analysis can be performed Thus, observations for law schools are limited to the
28 universities which earnings data is readily accessible
Collecting a sample size for STEM schools was challenging due to the absence of a specific degree type, unlike MBA or JD programs For instance, a bachelor's degree in mechanical engineering differs from one in computer science, leading to varied master's degree pursuits As data on STEM degrees is not clearly defined, schools were selected based on the percentage of degrees awarded in science, technology, engineering, and mathematics Only institutions that awarded 50% or more of their degrees in STEM and had a graduate school were included, resulting in a study of 18 schools.
To effectively compare the financial returns of a bachelor’s degree versus a master’s degree, it is essential to analyze the key components contributing to their monetary benefits, specifically early and mid-career pay This study employs a 3% annual discount rate to calculate the net present value of total future earnings for graduates from different institutions, reflecting the average return on financial investments Additionally, a sensitivity analysis will be conducted to assess the impact of minor adjustments to the discount rate on the return on investment For bachelor’s degree holders, the net present value of nominal future earnings is projected over a 43-year career, starting from age 22 at entry into the workforce.
27 age 65 Early career pay is the salary amount estimated for the first five years of work, while mid-career pay is used for the remaining 38 years of a work career
When calculating the net present value of future earnings for master's degree holders, it's essential to adjust both earnings and career length, which is estimated at 41 years for Business and STEM graduates and 40 years for law graduates due to the differing program durations Typically, Business and STEM master's programs last two years, while a JD program spans three years It is assumed that students pursue graduate studies immediately after completing their bachelor's degrees as full-time students; this assumption significantly affects the cost-benefit analysis of obtaining a master's degree Those with prior work experience often have an edge over recent graduates, as their experience can lead to admission into prestigious institutions associated with higher future earnings Additionally, experienced individuals may require lower student loans due to accumulated savings, and many employers may subsidize or fully cover graduate school costs, thus enhancing the return on investment This study assumes that Business and STEM graduates enter the workforce at age 24 and retire at 65, while law graduates begin their careers at age 25 and also retire at 65.
The early career earnings associated with specific master’s degrees will be considered for the initial five years, while mid-career salaries will apply for the subsequent years of an individual's career Additionally, a discount rate of 3% will be applied to the future earnings of master’s degree holders.
Calculating the costs of attaining a bachelor’s degree and master’s degree involves several factors that must be taken into consideration to determine the total cost The
The total cost of attending a four-year undergraduate institution includes tuition and fees, calculated by multiplying the annual rate from U.S News Higher Education by four Additionally, the impact of student loans, both subsidized and unsubsidized, must be considered, with average amounts borrowed over the course of a bachelor's degree also multiplied by four Using a 3.76% interest rate, the average monthly payments for these loans are computed based on a standard 10-year repayment plan By multiplying the average monthly payments by 120, the total repayment amount, including accrued interest, is determined Finally, the combined total of subsidized and unsubsidized loan costs is added to the four-year tuition and fees to establish the overall cost of obtaining a bachelor's degree.
When calculating the total cost of obtaining a master’s degree, it's essential to first consider the cost of a bachelor’s degree, as it is a prerequisite for advanced studies Additional factors include master’s degree tuition, graduate student loans, and the opportunity cost of lost earnings To estimate tuition costs, annual figures from the U.S News Higher Education website are multiplied by two for Business and STEM degrees and by three for Law degrees, reflecting the duration of each program Only direct unsubsidized loans are included in this calculation, with an adjusted interest rate of 5.31% Furthermore, the opportunity cost is assessed by multiplying early career earnings from the Payscale Report by two for Business and STEM degrees and three for Law degrees By summing the costs of a bachelor’s degree, graduate tuition, loans, and opportunity costs, one can determine the total expense of pursuing a master’s degree at any institution.
This study will assess the financial benefits of a bachelor’s and master’s degree by calculating their Net Present Value (NPV) and total costs To accurately compare the advantages of a master’s degree against a bachelor’s degree, it is essential to first determine the true value of each degree This true value will be established by subtracting the total costs of obtaining each degree from the total NPV of future earnings associated with that degree.
This study will analyze the financial return on investment (ROI) of pursuing a master's degree compared to a bachelor's degree across various universities By subtracting the ROI of bachelor's degree holders from that of master's degree holders, we can assess the financial viability of obtaining a master's degree A positive result would suggest that investing in a master's degree is beneficial, while a negative result would indicate otherwise Following the ROI calculations for each institution, we will conduct a detailed analysis to uncover trends and correlations, aiming to understand why a master's degree from certain universities may offer greater financial advantages than others.
Chapter Four Results and Analysis
Calculation Results
This section analyzes the overall return on investment for three academic concentrations: Business, Law, and STEM It compares the total net returns for holders of both bachelor's and master's degrees across these fields.
Table 4.1 presents the Total Net Returns for B.A and MBA degrees across 50 academic institutions, revealing that 88% of these schools, or 44 in total, validate the financial benefits of pursuing a master's degree The average lifetime benefit of obtaining an MBA compared to a bachelor's degree in business is nearly $370,000 Northwestern University offers the highest return on investment for an MBA, with a net return exceeding a bachelor's degree by $1,218,817, while Loyola University in Maryland shows the least favorable outcome, with MBA holders earning $114,682 less than those with a bachelor's degree.
School Name Total Future Net
Return (MBA) Change in Total
Brigham Young University $2,087,430.00 $2,349,711.12 $262,281.13 California State University -
Creighton University $1,919,516.25 $1,873,278.79 ($46,237.47) George Mason University $2,021,356.94 $2,494,710.83 $473,353.89 George Washington
Georgetown University $2,689,004.93 $2,630,334.71 ($58,670.22) Georgia Institute of
Loyola University (MD) $2,383,368.00 $2,268,686.02 ($114,681.98) New York University $2,369,471.36 $2,858,371.39 $488,900.03 Northwestern University $1,957,064.56 $3,175,881.26 $1,218,816.70
Oklahoma State University $1,985,887.49 $2,040,506.72 $54,619.23 Pace University (NY) $1,983,091.77 $2,579,113.91 $596,022.14 Pennsylvania State
Texas A&M University $2,086,504.13 $2,683,944.08 $597,439.96 The College of William and
University of Connecticut $2,113,926.65 $2,685,637.32 $571,710.67 University of Georgia $2,002,628.14 $2,405,101.67 $402,473.53
University of North Carolina at Chapel Hill $2,067,303.95 $2,755,398.79 $688,094.84
University of Notre Dame $2,420,459.90 $2,716,493.42 $296,033.52 University of Pennsylvania $2,431,093.26 $3,394,690.26 $963,597.00 University of Southern
University of St Thomas $1,885,029.46 $2,088,463.76 $203,434.30 University of Texas – Austin $2,166,683.67 $2,936,616.74 $769,933.07
University of Virginia $2,331,712.75 $2,969,269.40 $637,556.65 University of Washington $2,195,077.89 $2,914,243.31 $719,165.43 Villanova University $2,140,771.82 $2,390,827.81 $250,055.99 Washington University in St
The analysis indicates that no single variable solely dictates the change in total net returns from pursuing an MBA at various institutions However, mid-career pay emerges as the most significant factor influencing this change, with higher mid-career earnings linked to greater positive net returns A strong correlation exists between mid-career earnings for B.A and MBA holders, revealing that a larger income gap between the two degrees correlates with increased net returns Consequently, students from undergraduate programs with high mid-career pay for business graduates may hesitate to pursue a master’s degree Notably, the six schools with a negative change in net returns to an MBA showed a median salary difference of $12,000 or less between B.A and MBA graduates, while the average change across all 50 schools in the study was considerably higher.
The financial benefits of obtaining an MBA can be misleading, as evidenced by Georgetown University's findings While the median mid-career pay for MBA holders is $144,000, only slightly higher than the $136,000 earned by those with a bachelor's degree in business, the total net returns for an MBA are actually lower than those for bachelor's degree holders This highlights the importance of considering the overall return on investment when evaluating advanced degrees.
Graph 1: Median Mid-Career Salary (MBA)
Change in Total Net Returns
Median Mid Career Salary with MBA
Graph 2: Difference in Mid-Career Salary (MBA)
The ranking of the graduate business school significantly influenced changes in net returns, indicating that higher-ranked MBA programs tend to yield greater positive increases in total net returns when comparing different degree types.
The University of Pennsylvania and Northwestern University, ranked highest in the study, showed significant changes in total net returns, while the University of Utah and the College of William & Mary, ranked lower, displayed minimal changes This trend highlights the correlation between a school's ranking and the success of its graduates, as prestigious institutions tend to produce alumni who secure lucrative positions Moreover, attending elite schools provides access to valuable alumni networks, which are crucial for career advancement.
Change in Total Net Returns
Difference Between B.A and MBA Mid Career Salary
36 attainment Graph 3 (below) shows the relationship between business school rank and the change in total net returns between a bachelor’s and master’s degree
Sensitivity analysis evaluated the impact of the discount rate on the Net Present Value (NPV) of future earnings and total net returns The study primarily utilized a discount rate of 3%, while also examining rates of 2% and 4% to understand the variations in net returns At a 2% discount rate, the average financial benefit of obtaining an MBA compared to a B.A rose to $466,000 Notably, the number of institutions yielding positive returns on MBA investments remained consistent at 44 out of 50, indicating that changes in net returns were more pronounced with an increased discount rate.
Change in Total Net Returns
37 discount rate to 4% At a rate of 4%, the average financial benefit of an MBA decreased to just
A total of $291,000 was observed, with only 40 to 50 schools demonstrating positive net returns in comparison to a bachelor's degree This indicates that the overall results are significantly influenced by higher discount rates beyond the standard 3% used in the study Table 3 illustrates the varying outcomes associated with different net present value discount rates.
Pursuing an MBA is a valuable investment, as demonstrated by the study's findings The significant return on investment aligns with O’Connor's argument in Chapter 2, highlighting that the lifetime earnings from a master’s degree justify graduate school expenses Graduates experience an average wage premium of $26,000 in early career and $29,000 in mid-career, indicating that the increased earnings from an MBA outweigh the costs of obtaining the degree.
NPV Discount Rate Avg Change in Net
Positive Change in Net Returns
% of Schools with Positive Change in Net Returns
Table 4.3 illustrates the total net returns for bachelor's degree holders versus JD degree holders across 28 law schools, revealing that all institutions showed positive returns for obtaining a JD degree compared to a bachelor's in social sciences These findings align closely with O’Connor’s research, which advocates for the value of investing in a JD degree.
A Juris Doctor (JD) degree significantly enhances lifetime earnings, with estimates suggesting that JD holders earn nearly double compared to those with a bachelor's degree The University of Houston reported the highest increase in total net returns, with JD graduates earning an average of $1,559,286 more than their bachelor’s degree counterparts Conversely, the University of Washington showed the lowest increase at $100,737, yet still demonstrated a positive financial return for JD holders Overall, the average increase in total net returns across 28 law schools was just under $822,000 A JD degree is typically essential for high-level positions in the legal field, as individuals with only a bachelor’s degree in law-related majors may not qualify for many lucrative roles This requirement for a JD to access well-paying legal careers explains the high return on investment observed across the law schools studied.
School Name Total Future Net
Return (JD) Change in Total
University of Baltimore $1,483,097.50 $2,212,492.84 $729,395.34 University of California –
The University of Connecticut reported total funding of $2,226,204.88, with an increase to $2,370,894.61, reflecting a growth of $144,689.73 The University of Denver's funding rose significantly from $1,617,778.48 to $2,233,226.60, a difference of $615,448.11 The University of Florida experienced a substantial increase in funding, from $1,379,975.01 to $2,781,588.84, totaling an impressive growth of $1,401,613.83 Similarly, the University of Houston's funding escalated from $1,316,438.40 to $2,875,724.67, marking a rise of $1,559,286.27 The University of Miami's funds increased from $1,497,759.04 to $2,187,642.01, showing a growth of $689,882.97 The University of San Diego also saw an increase, with funding rising from $1,575,370.50 to $2,385,692.09, a difference of $810,321.59 The University of Texas – Austin's total funding grew from $1,847,650.91 to $2,919,516.27, reflecting an increase of $1,071,865.36 The University of the Pacific reported an increase from $1,731,124.66 to $2,354,754.74, totaling $623,630.09 Lastly, the University of Washington's funding saw a modest increase from $1,363,238.64 to $1,463,975.85, with a growth of $100,737.20.
The study reveals that variables influencing law school data closely mirror those of business schools, particularly highlighting that median mid-career earnings for JD degree holders significantly affect total net returns compared to bachelor’s degree holders Schools with higher mid-career salaries for JD graduates demonstrate a more substantial positive change in net returns The research indicates that a larger disparity in mid-career earnings between JD and bachelor’s degree holders correlates with an increase in net returns for those with a JD To illustrate this impact, a detailed examination of data from prestigious institutions like Harvard University and the University of California, Los Angeles, is essential, as their law graduates experience notable financial benefits.
Harvard boasts an impressive median mid-career salary of $197,000, closely followed by UCLA at $193,000, suggesting a higher change in net returns for JD degree holders at Harvard However, bachelor's degree holders in social sciences from Harvard already earn a substantial median mid-career salary of $130,000, significantly higher than the $98,500 earned by their counterparts at UCLA This highlights a notable $95,000 difference in mid-career earnings between JD degree holders and bachelor's degree holders at UCLA.
$67,000 difference at Harvard is a main factor in explaining why the change in net returns of a
The JD degree from UCLA offers significant advantages, even though its median mid-career salary is lower compared to other institutions Notably, the average wage premium for mid-career earnings among JD graduates across all schools in the study underscores the value of a law degree.
Summary of Results
This section highlights the key findings from the calculated results, explaining which variables had the most significant impact on the value of a master’s degree
This study reveals that pursuing a master’s degree in business and law yields positive net returns compared to a bachelor’s degree, while a master’s in STEM fields shows negative net returns relative to a bachelor's degree The most significant factor influencing the value of a master’s degree is the change in median mid-career earnings Specifically, the wage premium associated with a master’s degree correlates strongly with total net returns across all academic focuses Additionally, higher-ranked graduate business schools are linked to greater increases in future earnings for master's degree holders The superior education quality, robust alumni networks, and esteemed reputations of top-ranked business schools contribute to the high career earnings of their graduates In contrast, undergraduate rankings in STEM fields negatively impact the net returns of a master's degree, primarily due to the already high earnings associated with bachelor's degrees from prestigious STEM institutions.
Students from elite undergraduate STEM programs should reconsider the pursuit of advanced degrees solely for financial gain, as additional student loan debt does not significantly enhance monetary returns The only cost factor that showed a correlation with the net returns of a master’s degree was the tuition and fees associated with STEM schools Overall, when evaluating the impact of tuition costs, student loan amounts, and the opportunity costs of lost salaries, these factors had minimal influence on the perceived value of a master’s degree from the institutions studied.
Limitations
This section addresses limitations in this study, emphasizing that results are calculated for the average student, while introducing further research that could be conducted with access to certain data
The study's primary limitation lies in its focus on total net returns at the institutional level instead of the individual level While utilizing data on median earnings and costs for observed schools is beneficial due to its accessibility, it restricts the analysis of other influential variables affecting the real returns of a master’s degree Financial factors, including household income, student loan debt, and scholarship amounts, differ among students and are crucial in assessing whether pursuing graduate education is a worthwhile investment Additionally, the full tuition and fee costs do not always reflect the actual expenses incurred by students, as many benefit from scholarships, grants, and various forms of financial aid.
Race and gender can significantly influence the value of a master’s degree, particularly due to workforce discrimination Analyzing data at the school level limits the ability to assess the correlation between these individual variables and the overall net returns of a master’s versus a bachelor’s degree Collecting data on individual students with only a bachelor’s degree compared to those with a master’s could help identify additional factors affecting the return on investment of a master’s degree Further research utilizing individual-level data may clarify how specific personal characteristics impact the total net returns associated with obtaining a master’s degree.
The study faced limitations due to a small sample size of law and STEM schools, resulting in the exclusion of several prestigious institutions from the PayScale 2016-2017 College Salary Report due to insufficient verifiable earnings data Many graduate law schools featured in the report were independent, complicating comparisons between bachelor’s and master’s degree net returns Increased accessibility to school data could have expanded the sample size and validated the findings across a broader range of institutions.
Concluding Remarks
This section highlights the academic concentrations that showed significant improvements in total net returns when obtaining a master’s degree It also emphasizes the critical role of individual characteristics and personal circumstances in influencing the financial benefits of pursuing graduate education.
This study highlights the financial viability of pursuing a master's degree, particularly in business (MBA) and law (JD), for individuals focused on monetary returns While the financial outcomes vary by individual, median earnings and average costs indicate that these degrees often yield favorable returns In contrast, pursuing advanced degrees in STEM fields may not be as financially rewarding if monetary gain is the primary goal The significant difference in mid-career earnings between bachelor's and master's degree holders is a crucial factor in assessing the value of a master's degree Prospective students should evaluate their financial situations, but the findings suggest that the long-term wage premium for master's degrees in business and law generally makes them a sound financial investment.
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