Liberal Arts Colleges Have Excellent Return on Investment, but Economic Challenges Could Persist for Low-Income Students

For the last decade, employer surveys and economic trend research from AAC&U have shown, again and again, that a high-quality liberal education provides students with valuable skills and hands-on experiences that employers desire in the employees they hire and promote. Still, as enrollments continue to decline, many institutions—especially liberal arts colleges—struggle to show their value to prospective students.

New research from Georgetown University's Center on Education and the Workforce could help colleges make their case. The report, ROI of Liberal Arts Colleges: Value Adds Up Over Time, found that, within ten years of enrolling in a liberal arts college, students' return on investment (ROI)—defined as expected lifetime earnings minus the cost of attendance—is relatively low. But after forty years, liberal arts colleges prove to be excellent investments, with median ROIs higher than most other four-year institutions.

Still, the benefits are not universal. ROIs at liberal arts colleges vary drastically by geographic location, the disciplines students major in, and the income of students and their families. Overall, more selective institutions that are located in the Northeast, have lots of students studying in fields like engineering, or enroll students from high-income families have higher ROIs than other liberal arts institutions, raising concerns that low-income or underserved students in the Southeast, Midwest, or Southwest may continue facing economic challenges after graduation.

Liberal Arts Colleges Have Higher ROIs than Most Four-Year Institutions

• Ten years after students enroll, the median ROI for four-year liberal arts colleges ($62,000) is much lower than the median for all colleges ($107,000). One partial explanation could be that students graduating from two-year institutions paid less in tuition and have more time to earn money in their new careers.
• After forty years, the value of a liberal arts education becomes clearer. The median ROI for four-year liberal arts colleges is $918,000, 25 percent more than all colleges ($723,000) and slightly above four-year institutions focused on business ($913,000) or engineering and technology ($917,000) (see figure 1).

Figure 1.

Students’ Majors May Affect ROI

• The study’s findings vary widely across the range of liberal arts colleges, with an ROI of $766,000 at the 25th percentile and $1.05 million at the 75th percentile.
• The disciplines that students major in could have an effect on future ROIs. Institutions where many students major in STEM fields have a higher forty-year ROI than those with fewer STEM majors, while institutions with lots of students majoring in the arts tend to have a lower ROI.
• Still, “not all STEM majors have high returns,” the report said. For example, engineering majors experience higher ROIs than students studying biology or natural resource science.

Low-Income Students Could Face Persisting Economic Challenges

• According to the report, selective institutions, which “tend to enroll students from families with high incomes,” have higher ROIs, while “less selective colleges have more students from lower-income families” and have lower ROIs.
• Institutions with a higher share of students receiving Pell Grants also have lower ROIs, while institutions with fewer students receiving Pell Grants have higher ROIs. However, this is not true in all cases, as some institutions with similar percentages of Pell Grant recipients have very different ROIs (see figure 2).

Figure 2.

• Many institutions with high ROIs also have high graduation rates, and institutions with low ROIs have low graduation rates, “perhaps reflecting that students who complete their degrees are likely to realize the full return on their investment,” the report found. “Liberal arts institutions with graduation rates below 25 percent all have median ROIs below $800,000.”
• Another possible cause is geographical. Students who study near a metropolitan area tend to live and work nearby after graduation, and many liberal arts institutions are clustered in New England and Mid-Atlantic states with higher incomes (see figure 3).
• For example, regions in New England and the Mid-Atlantic have “per capita incomes of about $65,000 or higher,” and institutions in these areas have forty-year ROIs of more than $1 million. In the Southeast and Southwest, however, per capita incomes are less than $50,000, and institutions have ROIs of $781,000 and $708,000, respectively.
• But the report found that location “can also work against some colleges. Many of the small liberal arts colleges that are in financial danger or have closed are in New England or the Midwest, the areas with the steepest decline in the traditional college-age population.”
• Institutions who do not rely on local student populations but attract students from across the country will be better positioned to withstand changes to the local population.

Figure 3.

Unless otherwise cited, all information and graphics are from ROI of Liberal Arts Colleges: Value Adds Up Over Time, a report published in January 2020 by Georgetown University's Center on Education and the Workforce.