Thursday, May 4, 2017

The value of High School AP/College Credit classes

At the time of this writing, the Net Present Value of one (high school) AP/CC credit is approximately $3,400 in the State of Michigan.

The Net Present Value of taking enough AP/CC classes to eliminate one year of University is approximately $100,000.

I got to thinking about the economic value of Advanced Placement/College Credit (henceforth AP/CC) classes. Part of my interest is due to the fact that Southern Belle received her Florida certification for teaching Advanced/Gifted classes and part is because the young man I transport each school morning is a junior in high school and is working on his Associates degree.

Most people focus on the avoidance of one year's worth of college tuition. While this might be a huge motivator to parents, it is rarely a major consideration to the students. After all, most of them expect their parents or the Government to pay that tuition. That may or may not be a realistic expectation.

The median (middle) tuition for a Michigan resident is very close to $10,000.

This analysis will show that the benefits of AB/CC classes is ten times greater than that.

Room and Board
For one thing, the cost of attending one year of college also includes room, board and miscellaneous expenses. For all practical purposes those costs double the cost of a year in college to $20,000 per year.

Opportunity costs
Graduating one year earlier means that the former student is making money, rather than spending money the year they would normally be a senior. According to one source the median annual salary for a new graduate with a Bachelor's degree is $50,500.

At this point a sophisticated analysis needs to start discounting future cash flows because a dollar today is worth more than a dollar earned/spent in the future.

For the record, I will use a discount rate of 6% and an inflation rate (where applicable) of 3%. These are solid, long-term averages and if anything reduce the estimated value of AP/CC classes.

It is a sad fact that most regional Michigan Universities have a 6 year graduation rate of approximately 20%. I am going to be very generous and suggest that many of those students transfer to other universities and that the effective graduation rate is really 50%. That is, half of the students who start University graduate with a degree.

Using a smooth, exponential decay rate (a more sophisticated version of double-declining depreciation) of 0.84^years suggests that 60% of the students will complete their third year if 50% complete four years.  

Using the same calculations for 20%, then the formula would be 0.67^years and 30% would complete three years and attain their degree.

Promotional pay
I propose that most employees will receive a raise of 3% a year over the life of their career. In truth, they are likely to receive more than that early in their career and then they will flat-line five-or-ten years into their career unless they move up the ladder to a job with more responsibility. The art of analytical modeling involves the integrating of simplification and realism

This assumption means that the student who graduated one year earlier will always make 3% more (in any given calendar year) than their fellow student who did not opt for any AP/CC classes.

Career longevity
As a practical matter, many of the students will work until they reach a certain age. Both populations will be modeled as working until age 66. That is, the AP/CC students will work 45 years and the non-AP/CC students will be modeled as working 44 years. They will both be the same age when they retire.

Putting it all together
The Net Present Value of the future income/expense stream for the AP/CC student is $560,020.56 

This is much lower than you will see in most analysis because there is still a 40% chance the AP/CC student will drop out of University and because the future income stream is discounted at 6%. Furthermore, the three years of $20,000 per year (increasing by 3% per year) is also boiled into that NPV.

The NPV of the future income/expense stream for the non-AP/CC student is $405,857.55

The difference between the two...the Net Present Value...of taking enough AP/CC classes to eliminate one year of University is approximately $150,000

Weaknesses in the analysis

Admittedly, students who drop out of college will undoubtedly make something. They are dropped out of the first order analysis for computational simplicity. So, in the interest of being conservative, let us suppose that the student who started college but dropped out makes half of what the college graduate makes. 

Throwing that into the model lowers the NPV difference to $103,000

Students do not always take AP/CC credits in even increments of "30 college credit equivalents", i.e. one year of college. A critic might dismiss this analysis on that basis.

The response to those criticisms is that University students sometimes find themselves attending classes for less than a full load of credits, especially during their last year of studies. Whether one is attending college for one class or for a full load, the fact remains that they cannot be employed as a holder of a Bachelor's degree and earn the higher wages.

Whether they shave one full year off their college experience or some smaller fraction, it is valuable to quantify the NPV to the College Credit Equivalent. Knowing that they have a head start, class availability permitting, the intelligent student can arrange their schedules to graduate earlier than they might otherwise be able.

At the time of this writing, the Net Present Value of one AP/CC credit is approximately $3,400 in the State of Michigan. That is far, far more than most people usually estimate. I think many students would make different choices if they knew the many ways that AP/CC credits will positively impact their future income stream.

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