Saving for College

Below is a full transcript of this video. It has not been edited or reviewed for accuracy or readability.

Meet Martina Flores.

Martina knows that education is important and that it will help her be successful in life. But with the rising costs of a college education, obtaining a degree seems almost impossible.

In this episode of "Continuing Fed-ucation," we're going to discuss:

• investing in human capital;
• factors to consider when choosing a college; and
• ways to fund higher education.

Economists use the word investment to refer to spending on capital, which can be either physical capital such as tools and equipment, or human capital such as education and training.

Investment in Human Capital is the effort that people put into acquiring education, training and experience to increase their productivity and earn higher income.

Martina is debating between a career as an elementary school teacher or a computer programmer. Either career requires a college degree. She has to decide which career is best for her and what college to attend.

There are some important points Martina should consider when she makes her decisions. One source of career information is The Occupational Outlook Handbook on the Bureau of Labor Statistics website.

Martina visits the BLS website and learns that in 2012 an elementary school teacher with a 4-year degree earned a median annual salary of $53,090, while a computer programmer with a 4-year degree earned a median annual salary of $74,280. She also learns that the expected job growth for elementary teachers over the next decade is 12 percent and for computer programmers, job growth is 8 percent.

Although the expected salary is lower, Martina really enjoys working with children and thinks she would prefer a teaching career. Now, Martina moves on to her next decision: What college should she attend? There are some important things for Martina to consider here as well. One is return on investment.

Return on investment, or "ROI," is a term used in relation to a financial investment such as the purchase of a stock or bond. Return on investment tells us how well the investment performed. In this case, we use the term "ROI" to think about the cost of 4 years of college in relation to the potential income that could be earned.

Martina knows her expected income from her visit to the BLS site but now she needs to consider the financial costs of attending college? Should she attend a public or a private university?

Between 2009 and 2013, the average cost of attending a 4-year public university including tuition, room and board was $65,238, while the average cost of attending a 4-year private university was $132,853.

Given Martina's projected median income should she only consider public universities? Not necessarily, but she should consider cost.

Of course, a lot depends on whether Martina has scholarships and grants or whether she has to pay the full cost herself, which might require student loans. How should Martina decide which university to attend?

Some of the criteria she should consider are the student to teacher ratio, the qualifications of the professors, the types of organizations and clubs available, job placement services, and the school's location. These factors—and many more—will contribute to Martina's experience and could affect her probability of graduating from college and landing a good job.

Martina thinks Public University, is a better choice for her. It is a good fit with high-quality faculty, lots of organizations and clubs in which she is interested, excellent job placement services, and a convenient location. And, because the cost is lower the return on her investment is likely to be higher.

So now she needs to determine how to pay for her education. Along with scholarships and grants, she can use a combination of these methods: pre-funding, post-funding and funding from current earnings. Pre-funding is saving money ahead of time. Post-funding means taking out student loans that must be repaid after graduation. And funding from current earnings is paying for college with the income from a current job.

Martina is lucky that her parents started saving money when she was younger. They opened a college savings account under her name and contributed money to it annually. However, the amount Martina's parents saved is not enough to cover the full cost of college; so, Martina will need a loan.

She could acquire a federal loan or a private loan. Federal loans are made by the U.S. Treasury and have slightly more flexible repayment plans. Martina found good information about federal student loans at this site: Studentaid.ed.gov. Private loans are made by private banks, and have slightly higher interest rates than federal loans.

Using her college savings with a college loan, Martina can pay for her tuition and room and board. But she'll have additional expenses such as books, gasoline and personal spending money.

She's decided to look for a part-time job that gives her the flexibility to attend classes. By thinking through all of these considerations, Martina can earn the degree she wants at a reasonable cost.

College is an investment and there are risks. Making careful choices about what college to attend and how to pay for it reduces the risk. And, college pays off—those with a college degree have greater lifetime earnings than those with a high school diploma, and they are less likely to be unemployed.

Visit stlouisfed.org for more information on these and other economic topics.

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