At the end of the day, the decision whether to invest in higher education boils down to weighing the costs and benefits. As education gets more and more expensive, those who choose to go to college know that the investment involves initial costs but expect that their decision will pay off in the future through higher wages, better jobs, and a happier life. In other words, an individual will choose to go to college if the benefits of doing so outweigh the costs.

 

Although education involves not only individual loss and gain but also social costs and benefits, it is safe to say that most individuals, if not all, give the effects on the individual a much greater weight. Therefore, without loss of generality, I will focus on the individual costs and benefits of investing in education.

 

The costs of additional education are pretty definite. The obvious costs to schooling are the upfront ones – tuition, room and board, books, etc. The indirect costs, or opportunity costs, are the foregone earnings and income that one would have earned had he chosen to take a job instead of go to school. On the other hand, the benefits to schooling are more unclear. What do schools accomplish for a person, exactly? Some believe that it is purely to further ones human capital and equip them with the right knowledge, skills, and abilities for the work force. Others believe that there are more benefits to schooling than just learning. Michael Reich, a professor of economics at U.C. Berkeley, believes that schooling helps “transmit cognitive skills, build good work habits, socialize students to their expected lot in life, promote a shared experience and values in a democratic society, and permit merit-based opportunity.”

 

A model that most economists refer to when accounting for costs and benefits is the human capital model, where human capital is the concept that describes the set of skills and abilities a person can acquire and offer. To calculate if an education investment is worth it, many use the present value formula to compare the present value of expected future benefits to the costs in that time period. If the present value of future benefits exceeds the costs, then investing in more schooling is attractive. However, one downfall to this mechanism is that it involves individuals to know their own discount rates, or in other words, how much they “discount” a future gain compared to that gain right now. Therefore, present-oriented people like Sarah have high discount rates and are less likely to go to college. It is hard for statisticians and economists to determine individuals’ discount rates, let alone the average person. How does one go about measuring how much they prefer immediate gratification to future gain?

 

Others believe in the signaling model, the concept that schools serve more as signals of how productive a person is and will be when hired to an employer than as mediums of raising productivity levels. Thus, as opposed to the human capital model, the signaling model believes that those workers who went to better colleges were already more productive to begin with and thus are the ones to hire when compared to those who went to universities poorer in quality.

 

Whether an individual advocates the human capital model or the signaling model to decide on their education investment decision does not matter. The fact is that the average individual does not have the resources or correct knowledge to apply either of these models correctly. Thus, people’s decisions are affected by their abilities to learn, their aspirations and what they expect of their futures, and their access to financial resources. At the end of the day, people will not sit down to guess and check what their discount is, or find out whether employers hire by using schools as signals. Instead, they are more apt to think of if they have enough money to finance their investment, if the additional schooling will help their productivity level and widen their opportunities in the future, and if they have a the ability to pick up on new information.

 

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