Calculating return on investment (ROI) in an MBA is complicated and many candidates do not take into account all the elements within this important indicator. This time Grad School Guru explains a little more in detail the variables that should be taken into account when choosing a master’s program.
Statistics alone don’t tell the whole story
Considering that many candidates will incur a large debt to be able to start a master’s program, it is always good to perform calculations that help make an informed decision. Estimating how long that debt will be paid or when the benefit of having done an MBA will really begin to pay off financially is essential.
So how do you calculate the ROI of an educational program? Let’s imagine that the dream master’s degree costs 60,000 USD and that the salary before starting it was 50,000 USD per year. When starting a 2-year program for example, we will stop earning 100,000 USD in income. This will be the opportunity cost. Additionally, the living costs incurred during a 2-year program (housing, food, books, etc.) must be calculated.
After graduation let’s say we are offered a job with a starting salary of $ 70,000. So a basic method to calculate the return in this case would be:
Sum of Costs:
Program Cost 60,000 USD
Opportunity cost when completing the program 100,000 USD
Total: 160,000 USD
Sum of Income:
Salary after the program 70,000 USD
Salary Before the Program 50,000 USD
Salary Differential 20,000 USD
Now we divide 160,000 USD / 20,000 USD = 8 years.
This means that for this simple calculation our MBA would be paid in 8 years, from where it would begin to generate economic benefits. A couple of things that must also be taken into account about this calculation is that it is static and therefore does not include annual increases in salary, nor does it include a “sign-in bonus” that is customary to have as part of the initial payment of companies to your new workers. It also does not include other expenses during the program. So this method should be used only as a reference and with great care since many things can change and modify the return.
The difficulty of properly measuring ROI cannot be limited to numbers and statistics alone. Intellectual capacity, development of managerial skills, network expansion and business contacts cannot be calculated numerically, however they can have a significant impact on ROI.
Forbes magazine ranks MBA programs based on their respective published ROI. This survey is conducted every 5 years and contains probably one of the most relevant indicators when selecting a master’s program.
On a purely ROI basis, going to Wharton, Stanford, or Kellogg is not as convenient as going to HEC or Katz Graduate School of Business (University of Pittsburgh). This has more to do with the cost of the programs, therefore it is not surprising that those programs with not so high enrollment are better positioned in the ranking. HEC then shows an ROI of 66.5%, here students with an average salary of 49,788 USD before starting the program and a tuition of 61,709 USD, ended up with a salary of 123,694 USD. In other words, these graduates will do more in one year than in 3 if they did not have a diploma!
And so how did the top end in calculating their ROI? Wharton 6.3%, Kellogg 9.8%, Columbia 13.0%, Stanford 13.5% and Harvard with 14.8%. There are various reasons, but the two most important are cost and duration, since most programs in the US last 2 years, considerably increasing the opportunity cost.
Now, despite having the worst ROI, Wharton is in the top 10 for post-MBA pay and the greatest potential for long-term growth.
So, there are many variables to consider in this calculation and the weight of each of these will depend on each candidate.
If you are evaluating different options and would like to find out more about these topics, make an appointment with us and we will help you!