Calculating The Value Of Your MBA: Is A Wharton MBA Really Worth $3.2 Million?

What is your MBA worth?

It’s a question that a lot of people have tried to figure out. One of the most recent number-crunching exercises by academics offers a surprising conclusion: Most master’s programs in computer science, engineering, and nursing boast ROI above $500,000. But the median payoff on graduate degrees in several other fields–including the MBA, America’s most popular graduate degree–has a negative return on investment.

The study is called Is Grad School Worth It? A Comprehensive Return on Investment Analysis.It examines the net economic value for nearly 14,000 graduate credentials at 1,441 universities across the U.S., is among the most comprehensive ever published. The primary author, Preston Cooper, a research fellow at The Foundation for Research on Equal Opportunity, defines the ROI of a graduate degree as the increase in lifetime earnings a student can expect from that degree, minus the direct and indirect costs of attending graduate school.

Putting A Value On Your MBA Degree

Cooper’s analysis found that the median master’s degree increases lifetime earnings by a surprisingly little amount: $83,000, after subtracting the costs of graduate school. But there is enormous variation by program and especially by school. The authors contend that master’s degrees in engineering, computer science, and nursing virtually guarantee their graduates a financial return. The most lucrative graduate degrees are professional programs in law, medicine, and business. Almost half of medical degrees have ROI above $1 million as do at least two dozen MBA programs. Not surprisingly, programs in the arts and humanities rarely pay off at all. Overall, in fact, 40% of master’s degrees fail to produce a positive return.

Cooper claims that the median master’s degree in computer science or engineering increases net lifetime earnings by over $900,000. At the other end of the spectrum, a master’s degree in the arts or humanities has a median return of negative $400,000.

The authors cranked out their analysis by using U.S. Census data from The College Scorecard, a U.S. Department of Education dataset that reports median earnings for graduates of 11,600 master’s degree programs, 1,600 doctoral programs and 700 professional programs. They acknowledge, however, that the data source has a major limitation: it only reports median earnings for the first two years after graduation, which may not be representative of lifetime earnings. So the authors used the American Community Survey (ACS) to extrapolate earnings throughout graduates’ careers.

A Business School Brand Makes A Difference

“Earnings immediately after graduation can be misleading,” acknowledges Cooper. “For instance, graduates of Master of Business Administration (MBA) programs and graduates of medical programs both have median earnings close to $67,000 in the first two years after finishing their degrees. But by age 45, people with medical degrees have seen their median earnings balloon to $137,000, while MBA graduates earn only $88,000.”

He also found wide variations from school to school. “Earnings for graduates of law programs exceed $155,000 when averaging across the 225 law degrees in the dataset,” Cooper points out. “But median earnings across these law programs are just $118,000. The lucrative earnings often associated with law degrees are concentrated among a small number of elite programs. This phenomenon may skew the public perception of these degrees’ value. It is thus important to recognize that not all programs in the same field can guarantee stellar earnings.”

The MBA is a primary example–and the data shows why rankings have value to applicants. At graduation, a typical Wharton MBA earns median pay of $179,574. At the age of 45, the authors estimate that a Wharton MBA’s annual income rises to $287,141. The lifetime median return on investment of that Wharton MBA? A hefty $3,225,932, after subtracting the costs of getting the degree (see table on next page).

The ROI On MBAs From Kellogg, Booth, MIT & Columbia Exceeds $2.5 Million

At just about all the Top 25 MBA programs, the ROI is something of a no-brainer. At Northwestern University’s Kellogg School of Management, the ROI is $2,995,559; at Chicago Booth, it’s $2,547,297; at Columbia Business School, the median ROI is $2,583,931, and at MIT Sloan, it’s $2,648,994.

On the other hand, an MBA from the University of Texas in Dallas has a negative return of $62,863, according to the study. At Northeastern University’s D’Amore-McKim Business School, the negative ROI is much larger at $472,726.

There are plenty of surprises in the data. In what has to be a major red flag, the authors claim the ROI for a Harvard Business School MBA is less than a million at $971,932 (An earlier analysis of lifetime MBA pay by Payscale for Poets&Quants found that HBS MBAs earned median lifetime income of $8.5 million but that study did not subtract the cost of the degree nor did it reduce lifetime earnings by what a person would have earned if they did not get an MBA.) An MBA from Stanford Graduate School of Business, Cooper contends, is worth $2,120,946, much less than the Payscale estimate of $8,330,000. This new study, in fact, contends that Stanford MBAs have returns that are lower than the MBAs from Duke Fuqua ($2,432,517), Cornell Johnson ($2,559,222) or UC-Berkeley’s Haas School of Business ($2,558,360).

MBAs That Buck The Negative ROI Trend

But MBAs from those business schools are clearly at the upper end of the spectrum. “One degree that frequently fails to pay off for graduates, perhaps surprisingly so, is the MBA,” the authors maintain. “More than 60% of MBAs and other business-related master’s degrees do not show a positive return. But there is a minority of programs that buck the trend: 10 percent of business degrees have an ROI above $1 million.

“The MBA has a long upper tail of elite programs with lucrative payoffs. Thirteen MBA programs at prestigious schools such as Yale, Penn (Wharton), and Chicago (Booth) offer a lifetime return exceeding $2 million. Perhaps this is to be expected from a degree whose value derives from the networking opportunities available: choice of institution makes an enormous difference to the ROI of an MBA. The handsome returns commonly associated with MBAs are only available at little more than a couple of handfuls of top schools.

“There seems to be a benefit associated with elite institutions. While 8% of master’s degrees overall offer a return above $1 million, that share rises to 41% among Ivy League and comparable universities. Research universities have slightly better programs than non-research schools: 10% of master’s degrees at research universities have ROI above $1 million, versus 5 percent at other institutions.”

Many MBA programs outside the Top 25 still offer positive returns, according to the analysis, but not nearly as much as MBAs that tend to dominate rankings year after year. Even so, lifetime returns at a number of well-known MBA programs that don’t rank in the Top 25 can be solid. At Fordham University’s Gabelli School of Business, the ROI is $757,884; at UC-Davis’ Graduate School of Management, the median lifetime ROI is $994,682; at Temple University’s Fox School of Business in Philadelphia, the ROI is $833,445; at Georgetown University’s McDonough School, the ROI is $871,100, and at Rutgers Business School in New Jersey, it’s $790,017

Thirteen MBA Programs Offer Lifetime Returns Of More Than $2 Million

The authors came up with their estimates of lifetime earnings by using what they call a “counterfactual earnings profile” that adjusted income based on demographics, local labor markets, student ability, and undergraduate majors. The “counterfactual” model allowed the academics to isolate the portion of earnings that are truly attributable to graduate degrees. That is particularly meaningful for MBA degrees because a high percentage of MBA students studied business in their undergraduate years and would therefore earn more than many others college graduates.

Cooper notes, for example, that a popular pathway to an MBA is a bachelor’s degree in business. “This pathway offers lifetime returns of $413,000. However, given that the MBA on its own has typically negative returns, the bachelor’s degree appears to be doing most of the heavy lifting,” he writes. “Not all lifetime learning pathways are financially valuable: students who combine a bachelor’s and a master’s degree in English literature usually come out behind.”

The counterfactual, Cooper adds, also explains why some degrees that boast high earnings won’t necessarily yield a high ROI. “High earnings are not as valuable if the counterfactual is also high,” he maintains. “The MBA is a prime example of this phenomenon. The nation’s most popular master’s degree boasts median earnings of $88,000 by the time its graduates are 45. This sounds impressive — it’s well above the median for all master’s degrees — until we consider that counterfactual earnings for MBA graduates at the same age are $83,000. MBA programs often draw from high-earning undergraduate majors such as business and accounting. This pushes up counterfactual earnings for MBA graduates. As a result, MBA programs have to ‘work harder’ to supply their students with earnings that exceed the opportunity cost. As we shall see, many MBA programs fail to do this.”

The Top 25 By ROI? Not A Single MBA. It’s Law Or Dentistry

But don’t be fooled by his conclusion that most MBAs have a negative return. “The MBA has a long upper tail of elite programs with lucrative payoffs,” says Cooper.  “Thirteen MBA programs at prestigious schools such as Yale, Penn (Wharton), and Chicago (Booth) offer a lifetime return exceeding $2 million. Perhaps this is to be expected from a degree whose value derives from the networking opportunities available: choice of the institution makes an enormous difference to the ROI of an MBA. The handsome returns commonly associated with MBAs are only available at a handful of top schools.”

Cooper found a benefit associated with elite institutions across the sample. “While 8% of master’s degrees overall offer a return above $1 million, that share rises to 41% among Ivy League and comparable universities,” he added. “Research universities have slightly better programs than non-research schools: 10 percent of master’s degrees at research universities have ROI above $1 million, versus 5% at other institutions.”

By the way, the study found that the top 25 advanced degrees by ROI were all in law or dentistry. The most lucrative advanced degree in the country — and the best degree overall — is the advanced dentistry professional program at the University of Colorado-Denver, which offers an ROI of nearly $11 million. The highest-ROI law degree is Columbia University’s, which offers an estimated payoff of $6.4 million.

(See Following Page For The Million-Dollar MBA Programs)