What is the Value of Education?

By Bruce Firestone | Uncategorized

Feb 06

      The Value of Education      

A Case Study of the Perceived Value of An Architecture Degree, Carleton University, Ottawa, Canada

I wrote the following article more than ten years ago. At that time,
we made an effort to determine the rate of return on tertiary education,
namely, the value of an architecture degree from Carleton University.
Depending on our assumptions, we found that the IRR (Internal Rate of
Return) was in the range of 9.2% to 14.4% p.a.

More recently, a Seattle-based company (PayScale) estimated that the
30-year return on investment for students graduating from US Colleges
(they included more than 550 institutions in their sample) was 9% p.a.,
obviously similar in scale to the study we did from 1997 to 1998. (The data is shown below… at the end of this article.)

At the time, we were surprised to find that the IRR of education was
significantly below student personal discount rates (typically more than
20% as students predictably value ‘a dollar today much more highly than
a dollar received tomorrow’.) This finding would still appear to be as
valid today as it was in 1999.

This has some important policy implications for governments, higher
education institutions and parents: young people want to enroll in
Colleges and Universities, at least in part, for non-financial reasons.
After all, if their motivations were solely financial, they would follow
their own imperatives and just get a paying JOB as soon as possible and
not forgo significant wages for four or five years while attending
University. For Carleton’s SOA, that wait in 1999 was even longer: five
years for a B. Arch. and two years for a M. Arch. (Today, students can
do it one year faster: four at the Undergrad level and two at the
Master’s level.)

It is possible that students everywhere are deciding to attend
university to obtain professional degrees in greater numbers, despite
the disparity between their personal discount rates and the rate of
return on tertiary education,  because they fear that, without a higher
degree, they will be left further behind as the divergence in incomes
between those with university-level education and those with High School
becomes more pronounced. They may also fear disruption in income in
future years since joblessness in lower skilled occupations is generally
higher and they are more subject to layoffs and other market changes
such as increased competition from China and other developing nations in
a more closely interconnected global economy. Of course, there are also
the intangible returns from exercising one’s mind and talents to the
greatest degree possible.

In any event, there appears to be no better predictive measure of the
performance of a nation state’s economy than the proportion of the
population with tertiary education. More persons with university-level
education and more knowledge workers are important determinants of
future prosperity, more so than, say, ownership of natural resources.

Here is the work we did and published in 1999:

Why Try to Measure the Value to an Individual of their Education?

To some observers, the value of tertiary education and, indeed, all
levels of education cannot be truly measured. Education serves a wider
social purpose and so the measure of its costs and benefits may be less
important than the belief that education is a good thing. Thus,
individual and social investment in education is, ultimately, an act of

This is a view that the author subscribes to. The purpose of this
paper, however, is to measure from a student’s point of view their
perception of the value of their education. This is a factor in
determining their participation in university programs. Education is an
important national objective for almost all societies and it is
generally agreed that there are significant externalities for society as
a whole generated by increasing levels of participation in university
programs. Therefore, it is important to determine the perception by
students (and, by extension, their families) of the value of their
education since this will, in part, determine enrollment levels.

Perception of Value

Students do have a sense of the value of their education. They have a
sense of what they are gaining and losing during their university

Students in the Carleton School of Architecture come from all parts
of Canada and they are joined by foreign students from overseas who make
up a significant part of undergraduate enrollment (around 15%).

Students, in this non-scientific poll we conducted, are in their
second, third and fourth years and typically range from 21 to 30 years
of age. They are mature persons with firmly held beliefs. They are
highly motivated individuals. Their sense of the value of their
education is partly based on their perception of what they expect to
earn as architects versus what they would have earned without their
degrees. It is most often based on the difference between what they
would have earned as an architect as compared to a technical position;
they are, in most cases, not comparing their futures as architects with,
say, a future as burger flippers.

Students generally have a quite accurate picture of their costs:
tuition, extra travel, books and supplies. These are costs that they
would not otherwise incur if they were in the work-a-day world instead
of studying. They also have an understanding of how much they would earn
if they were in a job instead of at school.

Further, the author has found that his students have a sense of their
own personal discount rates. The author has measured this by
administering a brief test. The students are asked to loan their
professor (in theory only) a meaningful amount of money ($1,000) for a
year. No interest payments are made. After 12 months, the students get
their principal back with an interest kicker. How much does this
‘kicker’ have to be before the students will part with their money? The
‘kicker’ is raised in increments of $50. When students feel that the
amount is high enough, they so indicate.

The results in our non-scientific poll suggest a student discount
rate of about 23% per annum. Prima facie, this tends to make sense-
students are not inclined to part with their money without the promise
of a substantial return. Students and young people generally place a
high value on cash in their jeans as opposed to a promise of future
returns. One may assume that as they grow older, their personal discount
rates may decrease somewhat but one can usefully conclude from this
data that immediate gratification plays a significant role in the
decisions taken by young people.

If the perceived rate of return on their education is found to be
less than their personal discount rates, how do they justify their
investment in their education? There is evidence in our data that a high
percentage of students also place a non-monetary value on their
education: just under 84% of the respondents indicated thusly. They feel
that continuing their education provides them with other benefits such
as expanded consciousness, quality of life improvements or less
likelihood of periods of unemployment.

Also, we found that a greater use by students of OPM (other people’s
money) in the form of student loans and parents’ funds leads to a
greater willingness to enroll in the program. Student loans are interest
free and require no principal payments while the student attends
university. With a personal discount rate of 23%, the typical student
looks at student loans as near to ‘free’ money. A student with a
personal discount rate of 23% pa., who obtains $35,000 of student loans
during a five year architecture program and begins repayment after
graduation, places a present value on the student loans of just $12,432.
The results of the survey suggest that few of the Carleton students
surveyed would place a lifetime value on their degree of less than

The Survey

The survey took place in calendar years 1997 and 1998. Eighty-five
questionnaires were distributed to students by students in the Real
Estate Development class. We received 58 responses.

The sample size of 58 is a significant proportion of the total number
of undergraduate students enrolled in the program (292 in 1997/98). The
16 question survey was designed to measure the perceived value (from a
student’s point of view) of an undergraduate degree in architecture for
students enrolled in the Carleton University program.

Students were told that to help us in our research into the value of
education, we needed to obtain a comparison between the ‘earnings of
Architecture Graduates, with what they would otherwise earn…’. They were
also told that we need to ‘ascertain what typical student costs are
while at the University’. Students were assured of complete

Question 1 asked each student what they would be doing if they were
not studying in the School of Architecture. Included in the multiple
choice answers was ‘a) lying on a beach’. The purpose of this was to
determine if respondents were expecting to engage in non-commercial
activities during these years of their lives if they were not studying
(only one respondent was in this category).

We also included a veracity test in the questionnaire. This test
demonstrated that there was internal consistency in the survey results.

The survey did not include a question as to how much ‘free’ financial
support was obtained by the students from parents or family or other
sources. The survey attempted to measure only the amount of student
loans. The thinking behind this was to treat money from parents or other
family members as if it were the students’ own. In the event that they
did not obtain this support for their studies, the assumption was that
they would benefit from these funds in some other way (for example, by
way of assistance in purchasing a first car or home). So the money
expended was, in fact, theirs. Other researchers may wish to extend this
work by taking the opposite view.

Q12 measured the amount of student loans each student has obtained or
expected to obtain. 36 students out of 58 respondents obtained or
expected to obtain a total of $33,143 in student loans by the time of
graduation. The other 22 students either expected to have no student
loans or did not respond. For the purposes of this calculation, we did
not average down the results.

We first looked at the rate of return on investment in education on
the basis of a student with no student loans (Case A). Each dollar
invested in education was treated as equity, either cash in or money not
received from employment. In Case B, we looked at a student profile
based on binary decision tool- if students did receive student loans,
the average amount was approximately $33,000 (or $6,629 per year on
average for five years). This all or nothing (0 or 1) treatment of
student loans means that, where student loans are incurred, the equity
invested in education is reduced by $6,629 annually for each of the five
years of the program. As we will see, the favorable financial terms of
the Canadian student loan program increases the internal rate of return
on equity of a university education when compared to students who do not
participate in this government supported program. From the point of
view of the student group, the rate of return is actually somewhere in

If family support was equivalent to student loans for the other non
reporting students, then the Internal Rate of Return (IRR) of education
is further boosted (see Case C). However, this could be construed as a
bogus calculation since the ‘free’ money provided by family has an
opportunity cost associated with it (at least, as far as the parents are
concerned) and, indeed, may have an opportunity cost to the student as
well if these are funds that they would otherwise obtain from their
families for other purposes.


We used the internal rate of return to measure the value of
education. The IRR is the interest rate at which future earnings (the
difference between earnings as an architect and earnings in alternative
employment sans degree minus student loan repayments, if any) can be
discounted to today’s value such that they are exactly equal to the
investment in education discounted using the same interest rate.
Investment in education was measured by adding tuition, travel, books
and supplies costs to expected earnings lost from not being in full time
alternative employment and deducting actual earnings from part time

Private sector firms target return on equity in the 14% to 22% range
with most looking for 18% to 22% p.a. With discount rates this high,
events that occur after 20 years tend to have a small impact on rates of
return. In this example, we have used a rate of 12% p.a. to discount
net benefits over the 20 to 39 year time period. The discounted value of
additional earnings (in the amount of $474,400) was added to the net
benefits of year 19. We used a 12% personal discount rate because we
felt that it was compatible with the lowering of personal discount rates
as people age.

Including earnings from the latter stages of a career had a
significant impact on the rate of return on investment in education, as
we will see in one of our sensitivity tests. Our model shows an
increasing net benefit is derived from education as time passes; so
despite substantial discounting, the later years have a significant
impact on estimates of the value of education. It truly is a lifetime
investment in human capital.

The Data

Tabulating our data from the survey yields average results as shown
below for the costs (including opportunity costs) of attending the
University in the Architecture Program.

Year Tuition Books, Supplies Travel Alternative Employment
1 $3230 $1740 $2221 $22217
2 $3424 $1482 $2283 $24400
3 $4061 $1472 $2018 $25712
4 $3994 $2105 $4530 $28584
5 $4325 $1981 $2409 $31271
6-20 nil nil nil $31271*
* We have assumed that lower skilled employment remains flat in constant dollars.

The average offsetting revenues (from part time work while attending
university) and average salary expectations after graduation are shown

Year Part Time Salary Expectations Year Part Time Salary Expectations
Employment After Graduation*# Employment After Graduation*#
1 $5800 na 11 na $48402
2 $6374 na 12 na $52482
3 $6729 na 13 na $56562
4 $7004 na 14 na $60642
5 $8013 na 15 na $64722
6 na $29669 16 na $69334
7 na $33332 17 na $73947
8 na $36995 18 na $78559
9 na $40658 19 na $83172
10 na $44322 20 na $87784**
* The questionnaire asks for salary expectations upon graduation, after
five years, ten years, 20 years and just before retirement.
Interpolation is used for intervening years.
** An additional amount of $474,400 must be added; this represents the
present value (discounted at 12% p.a.) of the difference between
expected earnings as an architect and expected earnings in alternative
employment in the ensuing 20 years.
# It should be emphasized that these figures are based on the students’
expectations of future salaries. Student expectations are based on what
they expect to earn after graduation practicing not only in Canada but
also in the USA and overseas where salaries are often higher. As we will
see in the Results section below, rates of return based on these salary
expectations are in the 13% range. To the extent that Canadian
architects actually earn less, their rates of return on their investment
in their education will be lower as well.

The Results

From the above data, it is possible to calculate the rate of return
on a student’s investment in a degree in Architecture from Carleton
University over their career.

For students with no student loans and with the above profile, their IRR is 13.4% per annum (Case A).

For students who have student loans at Carleton in the School of
Architecture, their average amount of student loans (a mix of actual and
expected numbers) is $33,143 upon graduation or an average of $6,629
per year of debt. Thus, we reduce their equity investment by this amount
in years one to five and add principal and interest repayments after
graduation. The average expected interest rate on these loans is 7.4%
and the average time of repayment is nine years (this works out to
annual payments of $5,002 for nine years).

The use of student loans increases student rates of return on their education to 14.4% (Case B).

If parents give students the money equal to student loans with no
repayment expectations, the student’s IRR increases yet again to 16%
(Case C).

If we restrict our analysis to 20 years and ignore the balance of their careers, IRR drops to just 9.2%.

If parents pay all tuition, books, supplies and travel costs, the
student’s IRR is 16.1%. Our survey shows that there is a very close
correlation between these hard costs (books, supplies, extra travel and
tuition costs) and the total average amount of student loans. This
raises the confidence we have in the survey results.

The author was somewhat surprised to find the IRR of education to be
significantly below student personal discount rates. This finding has
some important policy implications for governments, higher education
institutions and parents.

There appears to be no better predictive measure of the performance
of a nation state’s economy than the proportion of the population with
tertiary education. More persons with university level education and
more knowledge workers are important determinants of future prosperity,
more so than, say, ownership of natural resources.

These facts are supported by the increasing divergence between the
earnings of university educated persons and those without a college
degree. The value of a degree is known by young people- the percentage
of high school graduates enrolling in college has increased in the USA
from 52% in 1970 to 66% today. We can hope that similar trends are
occurring in Canada as well.

Has the increase in enrollment experienced in the USA occurred in the
face of an IRR of education below personal discount rates there? One
would suppose that the IRR of architecture education in the United
States might be lower since tuition and other costs associated with
attending university there are substantially higher than comparable
Canadian universities. However, salaries for professionals also tend to
be higher in the USA so we are unable to come to any kind of informed
speculation about rates of return there.

It is also possible that students everywhere are deciding to attend
university to obtain professional degrees in greater numbers because
they fear that, without a higher degree, they will be left further
behind as the divergence in incomes become more pronounced. They may
also fear disruption in income in future years since joblessness in
lower skilled occupations is generally higher

Certain countries appear to recognize the fact that students need
encouragement to attend university. Australia and France make tertiary
education available to qualified students who are citizens for free.
Young people have very high personal discount rates- certainly higher
than the IRRs shown here. They place a very high value on immediate
gratification. They enjoy the benefits of immediate employment such as
owning a car, living independently from parents and so forth.
Anecdotally, males appear to have even higher personal discount rates
and even less tolerance for a four or five year wait for a ‘real’ pay
check. Perhaps that is, in part, why relatively fewer males and
relatively more females are enrolling at universities.

In any event, there can be no doubt that investment in human capital
has both individual benefits and significant externalities for society
as a whole. The numbers suggest that parental and family financial
support for university bound high school students is crucial to the
decision making process of young people. Parents and governments have
their responsibilities to extend support whether it is ‘free’ money,
student loans, reasonable or zero cost tuition, bursaries and
scholarships. By extending these initiatives, they are increasing the
personal rate of return on education to something closer to the
student’s personal discount rate. However, even with ‘free’ education,
only those young people who are highly motivated and willing to defer
gratification for a number of years will attend university- the
determination to succeed still must come from within.

Letter to the Editor- Do the Data Sometimes Hide the Truth?

In an article I wrote last year for ORSA, I concluded that the rate
of return on the investment students make in their degrees at Carleton’s
School of Architecture was in the order of 14% p.a. What I found
remarkable was that this was considerably less than their personal
discount rates, which we estimated were in the vicinity of 24% p.a. This
meant that students were enrolling because they were “other” directed
and motivated.

This year, my students and I considered another possible explanation
for this discrepancy. The scenario runs something like this- although
only one student polled said that he/she would, if not enrolled at the
School, spend their five years ‘lying on a beach’, it is possible that
more of these young people would, in fact, while away this time in not
very fruitful pursuits.

Students, when considering alternative employment, factor in,
subconsciously, their education. Thus, their estimates of their earning
power in alternative employment, as, for example, design/build
contractors or renovators, are higher than what would actually have
eventuated had they never attended the School. That is, they may have
spent their late teen years and early adulthood (from 19 to 23) as, say,
lift operators at Whistler, earning just enough to live and play.

If we change the model to conform with this view (i.e., their income
earned in alternative employment would be equal to their actual part
time student earnings) then, voila, the internal rate of return on their
architecture degrees becomes 23% p.a., matching their personal discount
rates to a fare-thee-well.

This might mean that the students have a better intuitive grasp of
the economic fundamentals than the model, which we originally

Dr. Bruce M. Firestone, Adjunct Research Professor, School of Architecture, Carleton University, Ottawa, Canada. 1999.

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.