41 Chapter 3: Investment analysis needed by students to find employment and settle into their careers. As discussed in Chapter 2, settling-in factors delay the onset of the benefits by one to three years for students who graduate with a certificate or a degree and by one to five years for degree-seeking students who do not complete during the analysis year. Beyond the first five years of the time horizon, students will leave the workforce for any number of reasons, whether death, retirement, or unemployment. We estimate the rate of attrition using the same data and assumptions applied in the calculation of the attrition rate in the economic impact analysis of Chapter 2.30 The likelihood of leaving the workforce increases as students age, so the attrition rate is more aggressive near the end of the time horizon than in the beginning. Column 4 of Table 3.2 shows the net higher earnings to students after accounting for both the settling-in patterns and attrition. Return on investment for students Having estimated the students’ costs and their future benefits stream, the next step is to discount the results to the present to reflect the time value of money. For the student perspective we assume a discount rate of 4.4% (see below). Because students tend to rely upon debt to pay for education – i.e. they are negative savers – their discount rate is based upon student loan interest rates.31 In Appendix 1, we conduct a sensitivity analysis of this discount rate. The present value of the benefits is then compared to student costs to derive the investment analysis results, expressed in terms of a benefit-cost ratio, rate of return, and payback period. The investment is feasible if returns match or exceed the minimum threshold values; i.e., a benefit-cost ratio greater than 1.0, a rate of return that exceeds the discount rate, and a reasonably short payback period. In Table 3.2, the net higher earnings of students yield a cumulative discounted sum of approximately $195.9 million, the present value of all of the future earnings increments (see the bottom section of Column 4). This may also be interpreted as the gross 30 See the discussion of the alumni impact in Chapter 2. The main sources for deriving the attrition rate are the National Center for Health Statistics, the Social Security Administration, and the Bureau of Labor Statistics. Note that we do not account for migration patterns in the student investment analysis because the higher earnings that students receive as a result of their education will accrue to them regardless of where they find employment. 31 The student discount rate is derived from the most recent three-year average baseline forecasts for the 10-year Treasury rate published by the Congressional Budget Office. See the Congressional Budget Office, Student Loan and Pell Grant Programs – May 2022 Baseline. https://www.cbo.gov/data/baseline-projections-selected-programs. Discount rate The discount rate is a rate of interest that converts future costs and benefits to present values. For example, $1,000 in higher earnings realized 30 years in the future is worth much less than $1,000 in the present. All future values must therefore be expressed in present value terms in order to compare them with investments (i.e., costs) made today. The selection of an appropriate discount rate, however, can become an arbitrary and controversial undertaking. As suggested in economic theory, the discount rate should reflect the investor’s opportunity cost of capital, i.e., the rate of return one could reasonably expect to obtain from alternative investment schemes. In this study we assume a 4.4% discount rate from the student perspective and a 0.2% discount rate from the perspectives of taxpayers and society.
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