College Education is it worth the cost? By: Amit D. Patel

College is expensive Cost a typical student almost $71,00 Students could earn $53,000 if they did not attend college Society will invest almost 111,000 in the typical 4- year public college education

Analyzing the Investment Decision To determine if college is a wise investment The three steps the decision requires:

Step one Identify and estimate the cost you expect to pay and the benefits you expect to receive and list them to date

Step two Adjust your estimates of C and B for date of occurrence Determines the future value –which is the value at a future date of sum of money

Step three Compare the adjusted cost and benefits using an investment decision rule The rules determine if an investment is financially sound by Present value decision rule- Present value of benefits is ≥ sum of the present value of cost Rate of return decision rule- rate of return on the investment is ≥ rate of return on the best alternative use of funds Rate of return- is the discount rate at which the sum of present value of cost is = to the sum of present value of benefits

Benefits and Cost Monetary benefits and costs- benefits and costs valued in dollars –The benefit to a college graduates is his or her increase in lifetime earnings after taxes Non Monetary benefits and costs- benefits impossible to value in dollars

Table 9.4 Social Benefit student benefits Increase in earnings, after taxes non-student benefits benefits from the government programs financed by increase in tax revenue benefits from education financed by non student private sources Social costs is the sum of student cost and non student cost Social Benefits Student costs net tuition,fees, books and transportation earnings foregone, after taxes Non student costs cost paid by the government cost paid by none student private sources Social benefits is the sum of student benefits and non students cost

Student PVNB and ROR Pvpnb = pvp-pvc Cost is represented by negative value of cost The increase in life time earnings after taxes or student benefits is represented by the positive value of Benefits

Social PVNB and ROR Rate of return is base on social benefits and social costs. Table 9.5 and 9.6

Nonmonetary student benefits and cost Student benefit would be value of leisure Student cost would be over education External benefits would by –Research spillovers –Knowledge spillovers – community benefit spillover External costs- extra demands of public goods

Is government support necessary: Three rational for government support in education 1.To ensure that society invest enough in college education 2.To ensure that student borrowing reflects the social risk of default 3.To increase enrollment of lower-income students

To ensure that society invest enough in college education Students invest as society desires 25% of the operating costs are covered by the institution 63% is covered by the government Without government the students could expect lower taxes for a higher tuition If this happens then the students would under invest in a college education, and a government subsidy would be need for the desired level of investment

Figure 9.3 Downward sloping curves indicate students wants degrees the lower the price Upward sloping curves indicate that more degrees will be provided the higher the price With the government subsidy they provide more degrees with a lower price

To ensure that student borrowing reflects the social risk of default Government loans are necessary to correct for market failure resulting from a difference between private and social risk of default

To increase enrollment of lower- income students Pell grants is a government program that helps students with low income families go to college State appropriations is the largest source fo support to college students is money appropriated by state legislatures to state colleges and universities. –Reduces the tuition by 70% –Goes to high or middle income families