By Nick Maggiulli, originally published at Of Dollars And Data.
When I was 27 years old I was at a crossroads. I was five years into my career, yet I was stagnating. Though I was making six figures, which was great for my 20s, I knew I couldn’t make much more at my job. Without an advanced degree, my future compensation would be an endless chain of 3% annual “cost of living” adjustments and nothing more. At that moment, I knew I had to make a change.
So I considered getting an MBA. I did research on different programs, the kinds of roles they led to, and what I could reasonably earn after graduation. Unfortunately, that’s where my MBA journey ended.
After looking through the data, I discovered that the post-MBA salary (back in 2017) wasn’t that much higher than what I was already making. So why would I give up two years of income and pay $150,000 just to get a job where I’d earn about the same? While money isn’t the only reason to get an MBA, financially, I couldn’t justify it.
But here’s the real issue I was wrestling with: even if my earnings did increase after getting an MBA, how would I know that this was due to the degree itself and not just my increased age/experience?
This is called a counterfactual, or an alternate version of the world. If I got an MBA, the counterfactual would be how much I would’ve earned without one.
Of course, we can’t actually know the counterfactual. We can’t reverse a decision in the past and see how reality would’ve played out instead.
But there is something we can do. We can compare the earnings of those who got their MBA to those who didn’t get their MBA, but are similar in many other ways. Then we can find the present value of non-MBA lifetime earnings and compare that to the present value of the MBA graduates’ lifetime earnings (after netting out the cost of the program and the years of lost income).
This is what Preston Cooper at the Foundation for Research on Equal Opportunity (FREOPP) did when analyzing the return on investment (ROI) of various graduate degrees. And, unfortunately, my gut feeling about the MBA was right. As Cooper noted:
High earnings are not as valuable if the counterfactual is also high. 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…many MBA programs fail to do this.
When you look at the ROI for different master’s degrees (adjusting for completion rates and spending), the MBA ends up being the second-worst performer financially (with only arts, humanities, and theology master’s degrees being worse):
In fact, 64% of MBA programs were estimated to have a negative ROI.
To be fair, the top-ranked programs I was considering are far less likely to have a negative ROI than the typical MBA program. In general, higher-ranked institutions tend to have a higher ROI across all of their master’s programs. You can see this in the chart below:
Many top MBA programs have a positive ROI because of the large boost in expected salary.
But this salary boost won’t apply to everyone. For example, many of my college friends and early coworkers were able to earn much more without an MBA by joining a large tech company or a fast-growing startup (and getting generous equity compensation). While these people could’ve gotten their MBA, they didn’t need to.
It reminds me of my argument on private school—those who benefit the most from it are those outside the traditional networks. I can say something similar about the MBA. Those who already have good earnings probably don’t need an MBA, and those who don’t, probably do. The academic research supports this as well.
Joseph Altonji and Zhengren Zhu used Texas administrative records to estimate the causal effect of specific graduate degrees on earnings and found that:
Students from lower-paying undergraduate majors benefit more from an MBA or JD. School specific returns are higher for higher ranked JD and MBA programs.
In other words, if you’re earning $60,000 a year, getting into a top-ranked MBA program has a hugely positive ROI. But if you’re already making $200,000 or more, I’m far less sure.
This doesn’t mean that master’s degrees are never worth the investment. Looking at the first chart above, you can see that master’s degrees in computer science/engineering, nursing, social work, and biology are all less likely to have a negative ROI.
But this is just master’s degrees. What about everything else? Let’s take a look.
Which Graduate Degrees Have the Highest ROI?
Outside of master’s degrees, the graduate degrees with the highest ROIs tend to be professional degrees in law, medicine, and dentistry (e.g., JD, MD, DDS). The chart below illustrates this by plotting the ROI breakdown for various professional and doctoral degrees:
Almost 40% of medical professional degrees and over 20% of law degrees have a lifetime ROI exceeding $1 million (after adjusting for completion rates and spending). This makes sense as the earnings at age 45 from some of these top programs can exceed $350,000 a year. You can examine the ROI across these graduate programs (and thousands of others) using this database from FREOPP.
Though both law school and medical school are quite expensive, this analysis suggests that the earnings premium associated with many of these degrees more than makes up for it.
Additionally, the degrees that take the longest to earn (e.g., doctorates) aren’t the ones that pay the most. Among non-STEM doctoral programs, 81% have a negative ROI. For doctorates in education, 84% have a negative ROI.
Ultimately, the thing that matters here isn’t the degree, but the earnings premium (how much your earnings jump relative to the counterfactual). Advanced nursing degrees are usually a better investment than humanities PhDs because that jump is so much larger.
Though I trust this data, it comes from a world that no longer exists. All of these studies looked at people who graduated in the pre-AI era. And while AI hasn’t destroyed the job market yet, there are arguments to be made about what it may do in the coming years. Some believe that the next generation of models could make some professional degrees obsolete. Others argue that they will make them even more valuable.
If I had to guess, I’d say that the premium for many graduate degrees (especially at top programs) will go up in the future. How so? As AI hollows out entry-level work (there’s already some evidence for this), counterfactual earnings will decline. As a result, the ROI of getting a graduate degree should go up.
Could AI eventually do more advanced jobs? Maybe, but I’m skeptical. AI is incredible for certain kinds of tasks, but I still believe there is no substitute for thinking.
More importantly, even if AI could do the job, that doesn’t mean it will be allowed to. For example, AI can pass the bar exam, but it isn’t allowed to argue in front of a jury.
So, should you go to graduate school? Only if you have the interest.
Because we can look at salaries and ROI all we want, but if you aren’t interested in what you do, none of it will matter. You could’ve enrolled me in the top medical school in the country and my earnings would be lower than they are today (because I would hate it). While the data can’t tell you what you’re interested in, it can tell you the cost of that interest.
Even so, being interested in something is the best investment you can make in your career. I know this because I did it myself.
What I Did Instead of Getting an MBA
Rather than get my MBA, at the beginning of 2017 I decided to start blogging about personal finance and investing. My goal was to write once a week. Nothing more. I had no plans to monetize, to write books, or to get sponsors. I just wanted to follow my interest.
And now, nearly a decade after that initial decision, I can say that it was better than any graduate degree or tech job I could’ve pursued. I don’t just say this because of the money (which has been a positive surprise), but because of the deep fulfillment I’ve gotten from it. Readers email me every week about how something I wrote gave them clarity on a big financial decision. That impact is worth more than money.
I didn’t always think this way. When I saw people making much more than me in big tech, I assumed I had made the wrong choice. It took me years to realize the value of what I actually had. I get to do something I truly love. Something that is completely my own.
I’ve been into data and personal finance since I was 18. The first time I heard about portfolio optimization in college, I became obsessed. Shortly after graduation, I built a spreadsheet for fun that simulated how long it would take me to become a millionaire under different savings and return assumptions:
This was Of Dollars And Data before Of Dollars And Data ever existed.
Millions of people have made money by being in the right place at the right time, but how many have followed their dreams and realized them?
I can’t guarantee that following your dreams will lead to anything. My story is filled with survivorship bias and I know it.
But on your deathbed, will you regret going after the thing you wanted, or not going after it at all?
Thank you for reading.
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This is post 518. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
Nick Maggiulli writes at Of Dollars And Data. Read this article on their site.
