Finance Study Guide

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The 411 on College Education
STUDENT'S VERSION
This lesson printed from:
http://www.econedlink.org/lessons/index.php?lid=865&type=student INTRODUCTION
One of the most important financial decisions people make is whether to go to college. The price tag of a college education is rising, but so are the benefits. In this lesson, you will begin by learning about the relationship between level of education and the average unemployment rate; and level of education and median weekly income; financing options for college; the importance of filling out the Free Application for Federal Student Aid (FAFSA); and finally, college as an investment in human capital, examine the costs and benefits, and decide whether it is a good choice. TASK

In this lesson, you will learn to think about education as an investment in human capital. You will examine economic data showing how education is relates to unemployment and income. Next, you will discuss the Free Application for Federal Student Aid (FAFSA) and its importance to the financial aid process. You will learn about wage premiums and investigate the various college options available to students. Finally, you will read a short essay describing the financial costs and benefits of a college education. PROCESS

Investing in Education
Are you planning to go to college? What are the costs and benefits of college? Cost/benefit analysis is the process of examining the advantages (benefits) and disadvantages (costs) of each available alternative in arriving at a decision. The price tag of a college education keeps climbing higher every year. In fact, the price of a college education is climbing at a faster rate than the average price level of other goods and services. So, is a college education is really worth the price? In other words, do the costs outweigh the benefits? Economists think of a college education as an investment in human capital. They define human capital as the knowledge and skills that people obtain through education, experience, and training. To learn more about human capital, view this video: www.econedlink.org/interactives/index.php?iid=230&type=student Investment requires a person to pay for something now with the expectation that they will reap benefits in the future that make the investment worthwhile. In the case of a financial investment, this might mean buying stocks or bonds now with the hopes that the dividends, interest, and capital gains from the sale of the stock or bond, compensate for the risk that the asset might lose value. A business invests when they buy a piece of equipment or new technology with the expectation that the new equipment will increase the productivity of the business and increase profits in the future. In each of these cases, there is an up-front investment, with the hopes of higher income in the future. Investing in higher education is similar. It is an investment with the expectation that a higher future income will compensate the investor -- the student in this case -- for their risk. Examine the following data which shows the unemployment rate for college graduates (blue) and the graduation rate for high school graduates (red): research.stlouisfed.org/fredgraph.png?g=73B

1. What is the relationship between level of education and average unemployment rate? Examine the following data from the Bureau of Labor Statistics: bls.gov/emp/ep_chart_001.htm

Chart data [TXT]

2. What is the relationship between level of education and median weekly income? This financial return on investment in education is often described by economists as a wage premium, and is calculated as the ratio of the median wage of those with a bachelor’s degree to the wage of those who have only completed high school. Over time the premium has risen, from a 40 premium in the late 1970s and early 1980s to about 80 percent in more recent times. This means that a current college graduate will earn, on average, about 80 more than those with only a high...
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