enterprise

# Third Way’s Price-To-Earnings Premium: A New Way To Measure The Economic Value Of College – Forbes

For those of you interested in measuring the value of a college degree or comparing the value of attending different types of higher education institutions, there’s a new measure available. It’s the Price-To-Earnings Premium, or PEP, a novel way to calculate the return on investment of various higher education programs. It was developed by Third Way, the national think tank.

The measure is viewed by its developers as an alternative to the Obama-era “Gainful Employment” regulation that evaluated programs by how much of their post-completion discretionary income former students had to pay to meet their educational debt obligations.

Modeled after the investor idea of a price-to-earning ratio as a gauge of stock value, the PEP measures the amount of time it takes on average for students from a given college program to recoup the costs of paying for their education, whether it be at the certificate, AA or bachelor’s degree level.

PEP Methodology

The methodology is fairly straightforward. Relying on data from the U.S. Department of Education and the Census Bureau, Third Way investigators:

1. Calculate the amount a student pays out-of pocket to attend a given institution (i.e, the net amount after scholarships and grants are factored in). Third Way assumes four years of cost for a bachelor’s degree, two for an associate’s degree, and one for a certificate.
2. Calculate the median salaries of attendees (ten years after attendance) and the median salaries of those with only a high school diploma within the state where the college is located.
3. Divide the amount in #1 by the difference between the median salaries of attendees and the high school graduates, gathered in #2.
4. Report that quotient – the PEP – which tells you the number of years it would take for students to recoup the net costs of their education.

PEP Examples

At almost two-thirds of higher education institutions in the U.S., students recoup the costs of paying for their education within just five years of reaping their average wage premium. That’s encouraging.

But all the news is not so good. It would take more than 10 years on average to recoup educational costs at 228 institutions, and 442 institutions offered no wage premium at all, meaning that their former students will not ever earn back their investment.

PEPs differ substantially by sector. As an example, attendees at 51% of for-profit institutions are earning less income ten years after attendance than the average high school graduate; they received no economic benefit from their attendance or their expenditures. By contrast, only 4% of public institutions and private (not-for-profit) colleges left their alumni in that same ROI lurch.

Students attending public and private institutions were much more likely to recoup their educational costs within five years than were students from for-profit schools. Attendees at 86% of public institutions and 54% of private colleges earned enough to have a positive ROI inside of five years, compared to only 24% from for-profit institutions.

Broken out by type of institution, the average attendee at 66% of bachelor’s-granting institutions, 77% of associate’s-degree colleges and 47% of certificate-granting schools have sufficient ROI to cover their educational expenses within five years of completion.

At the other end of the PEP spectrum, 1% of bachelor’s-granting, 7% of associate’s-granting and a whopping 39% of certificate-granting school provide no ROI for their graduates.

The top 1o four-year schools, rank-ordered by their PEP, or average number of years required for former students to pay down net educational costs, are:

California State University, Dominguez Hills .6

California State University, Los Angeles .8

Stanford .8

Princeton .8

Georgia Tech .8

Cuny Bernard M. Baruch College .9

Harvard 1.0

University of Texas, Rio Grande Valley 1.0

Spring Hill College (Alabama) 1.0

California State University, Bakersfield 1.1

That list illustrates that colleges can earn a good PEP score (the shorter the time to pay down net costs, the better) in two ways: low net costs, as is the case, for example, with the California State institutions where students are able to cover their college costs in less than one year; or high median earnings ten years after enrollment, as is the case with Stanford, Princeton, Georgia Tech and Harvard.

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It’s important to keep in mind several aspects of Third Way’s methodology that surely impact the results. First, PEP is based on attendees of a given school, rather than graduates, so that is likely to yield over-estimates of the average time to recoup educational costs than if only graduates were considered because non-graduates earn less than graduates. On the other hand, the assumption of one, two and four year completion times for different levels of credentials is likely to produce more generous PEP estimates because we know completion takes longer than that on average for each respective credential. Also, certain categories of students – those still in graduate school or the military, for example – are excluded from the calculations, which will affect the average PEP as well.

Overall, there is encouraging news, mixed with cautionary tales, in these results. As Michael Itzkowitz, a senior fellow in higher education at Third Way and the author of the PEP report, emphasized in a phone interview with me, “One of the biggest success stories are schools that focus on awarding associate’s degrees. These institutions – which are often more affordable – show their students earning enough to justify the cost of attending quicker than those that specialize in bachelor’s degrees or shorter-term credentials.”