How to think about the Return on Education for degree programs in Singapore

 

The Polytechnic semester has ended, but I have to constantly remind myself that, thanks to blog readers and friends who also work at a Polytechnic, there are now young and impressionable readers of this blog, and it behooves me to make it a little more useful and wholesome for everyone.

So this week, I'll be sharing a powerful framework to think about the value of an education that everyone can benefit from.

This concept, known as Return on Education (ROE), is useful for comparing the value of different qualifications. It is useful for students in tertiary education to assess the value of a university degree, so they can compare a 4-year degree at a local university with other educational options.

I'm actually going to use my own students in this example.

According to a web search on salary data for Temasek Polytechnic Information and Digital Graduates, the median income is $2,950. Suppose the student is an elite graduate with a high GPA > 3.9 and is considering a Business+Computer double degree at NTU, which offers the highest starting pay of $6,950 after four years.

We use the formula to calculate ROE (ignoring the effects of NS):

(Degree Median Income / Diploma Median Income) ^ (1/degree duration) - 100%

We can compute the ROE as ($6,950/$2,950)^(1/4) - 100%, which is 23%.

23%, according to the Gaokao book, is exceptionally high. This is the equivalent of a China Gaokao student qualifying for a program at Beijing, Tsinghua, or Fudan University. 

Let's consider another scenario. 

If you have a Diploma in Humanities, your starting pay is even higher than that of an Infocomm graduate. It is $3,200. If you are aiming for a Humanities degree from NUS, the salary is $4,300, but it is also a direct honors program that lasts 4 years.

We can compute the ROE as ($4,300/$3,200)^(1/4) - 100%, which is 7.6%.

A 7.6% ROE is objectively low, as the average ROE for China and the US is expected to be consistently 10% for a professional degree.

And this is not even the worst-case scenario for young people contemplating the value of local degrees. 

An A-level graduate is worth about $3,600 in the industry. If this person is contemplating a Music degree at Yong Siew Toh Conservatory, they would also need to spend 4 years, with a starting salary of about $3,820.

We can compute the ROE as ($3,820/$3,600)^(1/4) - 100%, which is 1.4%.

I think there is a decent chance that if I teach my students maths this way, I might lose my job, but the numbers clearly show that not all local degrees are built the same way, and we need a reasonable framework to think about the value of an education instead of merely appealing to a person's love of learning when trying to pick a university degree.

In the first case, where the ROE is 23%, I can conclude that no investment products outperform investing in this NTU program. My students who qualify for the program should even be happy, even, to take out a loan to get that degree. This also means that achieving sky-high GPAs in a Polytechnic and competing the heck out of your peers is a rational move.

In the second case, where the ROE is about 7%, the choice is almost on par with an investment in equity markets. A rational parent can even reason that it's better to put the money in a diversified equity portfolio for their child and push them into the industry earlier in life. I teach law at a polytechnic to working adults, so I do not have visibility into humanities education in a polytechnic, but I predict that with an ROE of 7+%, the humanities environment would be more chill. ( Certainly less cut-throat unless someone figures out the ROE for law school.)

The final case is so irrational that voluntarily putting the funds into your CPF yields better returns, but this is where a deeper understanding of society is needed to explain the existence of music schools in Singapore. With an ROE below 2%, the qualification serves as a means for the truly wealthy to signal their indifference to their economic needs. At this stage, we stop applying economic principles and instead apply Pierre Bourdieu's Sociology of Distinction to our analysis.

Currently, both my kids are fairly advanced piano players, with my son regularly playing solo fr his primary school, but even I know this might be unsustainable as they get older. But I don't mess around when parents signal to me that their kid is some ABRSM Grade 8 and gunning for a music degree. 

In this society, it's a pretty substantial flex.