Question

. In the lecture notes about higher education, there’s an example showing the net present value of getting a bachelors degree. This includes a box with some text that goes something like this, “Is This Poor Analysis a Result of the Instructors Laziness or His Ignorance? For a fun, in-class exercise, how many problems can you identify with the analysis presented above? There are at least two that I know of, excluding the issues presented below.” A. For the student in question, there is an important cost of attending college that is not included in the calculations, although it is mentioned in the lecture notes. As a hint, the usual assumption is that a student who finishes in four years is going to school full time and not engaged in other things. B. The cost of room and board is included as a cost of attending college. Should it be? C. Oh, yeah, what is the marginal cost of having one more student in a class? Should the analysis of attending college be based on the average cost or the marginal cost of college attendance?

Answer 1

The advantages of getting a bachelor’s degree aren’t merely restricted to theoretical and moral conclusions like “the higher one’s education, the better”. Nowadays, there are numbers to quantify the net present value of getting a bachelor’s degree which conclude correctly whether it is profitable for a person to get into higher education after completing school or its better to simply join the workforce. This net present value can be calculated on the basis of costs and benefits associated with getting a bachelor’s degree. It is also very important to note that this Net Present Value depends on which institution the bachelor’s degree is sought from. It also depends on the person getting the bachelor’s degree; as to whether there is any immediate pressure on him for joining the workforce or not. It has to rightly take into account the opportunity cost of getting a bachelor’s degree. Opportunity cost refers to the cost of sacrificing the next best alternative. If getting a bachelor’s degree directly means losing out on an immediately available job, the forgone salary can be considered a measure of the opportunity cost of getting a college degree. Some of the problems associated with the given example already include the following:

1. The first is already talking about the costs of attending college which have not been taken into account properly. These include direct tuition and other expenses. It is assumed that the student is not engaged in other activities. However, this assumption is unrealistic because it might be possible for a student to be involved in other activities, some of which might even make him get paid.
2. Secondly, the issue of whether the cost of room and board should be included has a question mark.
3. Thirdly, it asks about the cost of having one more student in the class. It is also debatable whether the average or marginal cost should be taken into account in this analysis.

However, in addition to these issues, two other issues that can be identified are:

• An analysis always should have two sides, just like a coin. If costs make up one side of the story, then benefits should also be taken into account. In any net present value calculation, the cash flow diagram not only includes a big initial outflow of money (admission expenses) followed by periodic small costs incurred (tuition fees, house rent, etc) but also includes the inflow of money. For example, the net present value of getting a bachelor’s degree will differ based on scholarships available. It also has to take into account the expected salary of the graduate after getting a bachelor’s degree. This benefit point-of-view is completely ignored. However, it is actually this benefit in terms of expected salary that will make the student decide whether he’ll be able to pay for loans and meet other expenses in addition to leading a comfortable life.
• Secondly, the time span for calculating the net present value of getting a bachelor’s degree shouldn’t necessarily be restricted to the four years of getting that degree. It is in fact in the first 4 to 6 years AFTER graduation that the payment of loans in instalments will be done. It is also after graduating and getting a job that a regular cash inflow will feature. Thus, unknowingly, the cash flow of getting a college degree is still going on and it doesn’t stop at completion of the bachelor’s course.

Besides these two issues, two other issues also seemed worth discussing:

• Another issue which I think is very pertinent but hasn’t been taken into consideration is the appropriate adjustment for inflation. The periodic expenses of tuition fees and other costs of living expenses get affected by inflation and might not remain constant, but increase over time. That would also affect the net present value of getting the degree. The nominal expected salary not taking into consideration the possible costs of living in future, wouldn’t really give the proper net present value of the degree.
• Lastly, some qualitative factors also play very important roles and sometimes might outweigh the quantitative factors. Sometimes, even with a negative quantitative net present value, positive qualitative factors like earning respect, continuing the tradition of good educational background of the family might also impact the decision. However, this factor features last and doesn’t contribute to the numerical calculation of net present value, like the other three issues mentioned above.