Case of the Day: Higher Education as an Investment
Economists view higher education as investment in "human capital." Just as a firm incurs an immediate cost to build a factory, expecting to earn higher profits in the future as the factory produces output that can be sold, an individual incurs an immediate cost in hopes of earning higher income in the future. Just as a firm assesses the net present value of the factory in determining whether the investment should be undertaken, students (and their parents) should examine the net present value of their investment in higher education. The questions below explore the calculations that you (because you are a rational consumer) have undoubtedly done!
Because some of them involve equations, it will be easier for you to answer these questions on paper and hand them in at the beginning of class than trying to get Moodle to do something it isn't good at.
Questions for analysis
1. If the interest rate is r, what is the present value (as of the time of enrollment) of the opportunity costs of being a student at Reed for 4 years? Suppose that tuition at Reed is T each year, the student receives grants of G each year, and forgoes income of F each year. (For simplicity, assume that there are no student loans.)
2. Suppose that a Reed graduate earns a premium of P each year for the rest of her working life (from years 4 through W) over what she would have earned as a high-school graduate. What is the present value (as of time of enrollment) of the lifetime increase in earnings?
3. How could this student use the concept of net present value to assess whether attending Reed was better than not going to college?
4. How would a change in each of the following affect the net present value of a Reed education? (a) an increase in the interest rate, (b) an increase in her forgone income during her student years, (c) an increase in the earnings premium for Reed graduates, (d) the availability of students loans with a sub-market interest rate to reduce tuition payments and repay after graduation, (e) a lengthening of her working lifetime.
5. Non-monetary considerations may affect some students' college decisions. Suppose that we adjust the NPV calculation for the monetary value of these non-monetary factors. What non-monetary costs or benefits may occur during the Reed years and how would they affect this adjusted NPV? What non-monetary costs and benefits may occur after the Reed years and how would they affect adjusted NPV?