Is a college education an investment or a gamble? It depends on the type of student.

When companies or investors consider a project, they care about the internal rate of return, or IRR, a form of ROI. Investing in a project with a 5% internal rate of return is financially equivalent to putting your money in a savings account that pays 5% interest a year.

Stacker has built a statistical model that estimates how much people of different academic abilities and education levels can expect to earn and estimates the internal rates of return on pursuing a four-year degree. It considers the sum of all personal-level income, such as wages, bonuses, tips, rental income, and more. Borrowing from Bryan Caplan's aforementioned book, this analysis breaks students into four levels of academic ability, ranging from "excellent students," who have grades and test scores at roughly the 82nd percentile on tests, to "poor students," who are at roughly the 24th percentile of academic performance.

This model makes several simplifying assumptions. It assumes everyone who goes to a four-year college does so between 18 and 21, and anyone who drops out does so after two years. It also assumes full-time college students do not work and that everyone files taxes as single persons with no dependents and takes the standard tax deductions. It ignores the impact of state and local taxes, as well as living expenses, since people who do not go to college need housing too. Students who can live at home during college save a lot of money.

Overall, this analysis finds that college is a good bet, at least for those with a good academic record. Excellent students can expect an ROI of about 14.1% at public four-year colleges, while poor students can expect only a 4.6% return. For comparison, the S&P 500 Index, which tracks the performance of shares in the biggest listed companies in America, has provided a total return of around 10% a year over the past three decades.

The biggest reason some students can expect much better returns than others is graduation rates. Drawing from Caplan's research, this model assumes excellent students have a 66.5% chance of graduating with a bachelor's degree, while poor students have only a 6.1% chance.

These numbers also do not account for inflation, which would lower the expected returns on investment by two to three percentage points.

Considering not everyone who enters college gets a degree, would even an attempt at graduating make a difference? Yes, says a different analysis by Stacker using GSS data, which incorporates educational background and a measure of academic ability in the form of a miniature vocabulary quiz called Wordsum. Even when college students drop out, it is likely they will earn more than their peers who never went at all.

Part of what colleges do is filter for people who are already bright. By including a measure of academic ability, this analysis limits the credit given to colleges for the earnings of their future graduates. It also helps account for the fact that people with high academic ability tend to have better career options than those who don't, regardless of what diplomas they might hold.

GSS data shows that both the educational credentials a person has and their academic fitness—as measured by a short vocabulary quiz—matter when it comes to earnings. For example, a person who scored a 5 out of 10 on the Wordsum quiz can be expected to have a family income of around $65,000 a year if they graduated from high school but never went to college, $69,000 if they went to college but did not graduate, and $105,000 if they earned a bachelor's degree.

The fact that college graduates earn so much more than their peers who dropped out, even controlling for academic ability (as measured by Wordsum), could be partly because they are above average on some traits outside of those measured by the data. It also suggests employers value college degrees. To paraphrase Bryan Caplan, a high schooler who goes on to earn a bachelor's degree in underwater basket weaving will likely earn much more money than their equally intelligent peers who never went to college. Graduating is the hard part.

One of the biggest barriers to higher education (and, consequently, graduation) is the cost.

An October 2021 Pew Research Center survey found that roughly 3 in 5 U.S. adults do not have four-year college degrees mainly because they couldn't afford them. Another major reason was that they needed to work and support their families instead of finishing their education. One way some students have navigated this has been by applying to multiple colleges—some are more generous with their financial aid packages than others. This analysis, however, assumes students on average are paying the same as their peers. Anyone who pays full price for a four-year degree at a private college will have a much harder time getting a positive financial return on their tuition.

One's field of study also matters. While this analysis doesn't break college graduates by their majors, a recent study with a similar methodology by Liang Zhang of New York University and two other scholars does. In general, Zhang's study found that engineering and computer science majors produce the best rates of return, exceeding 13%. Business, health, math, and science degrees followed with IRRs between 10% to 13%. Behind them are degrees in biology and social science, which typically return between 8% and 9%. Education and humanities produced the lowest IRRs, especially for men. However, their numbers are adjusted for inflation and do not factor in dropout rates.

The economy is an ever-changing landscape and many things have shifted rapidly. Many recent developments have whittled away at the return on a college degree.

Pay for blue-collar jobs has been rising faster than pay for white-collar jobs. This increases the opportunity cost of college and lowers the ROI on degrees. For example, California enacted legislation in April 2024 requiring a $20 per hour minimum wage for fast-food workers. A person who eschews the job at McDonald's to go to college for four years would effectively be giving up $166,400 in pretax earnings, assuming they did not work while they studied.

Another major development is that interest rates have skyrocketed. Federal student loans for undergraduates now have a 6.53% interest rate, up from a low point of 2.75% in 2020, according to Federal Student Aid. Anyone who takes loans to go to college should know they could end up paying a lot more interest than people who went to college just a few years prior.

Despite these trends, college still has one more argument in its favor: leverage. Not many people would lend thousands of dollars to an 18-year-old to buy stocks, regardless of what the math says. But the federal government will happily lend money to that exact same 18-year-old if they want to spend it on tuition. A low financial return is better than none at all.

Conventional financial theory suggests that if the expected ROI is lower than the cost of financing, companies should pass on the project. Recent economic trends have made the decision to go to college harder than ever. College may still be a good investment, but only for the well-prepared.

Story editing by Carren Jao. Additional editing by Kelly Glass. Copy editing by Paris Close. Photo selection by Clarese Moller.