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Future Discounting: Future discounting is a method used for adjusting values from different years that allows us to compare them on the same scale. Using a discount rate that dictates how much additional value is needed each passing year to maintain the amount from the previous year, we can adjust our costs and earnings in the future, and express them in present day dollars. Values from years closer to the present are adjusted less, while values from further in the future are adjusted more.
Discount Rate: The discount rate is used in future discounting to compare values from different years. It represents how much more value you would need to be okay with delaying a value one year. For example, with a discount rate of 2%, you would view getting $1000 today, and $1020 one year from today approximately the same. The more likely you are to save, the lower your discount rate would typically be, because you’d have less want to spend immediately. On the flip side, the less likely you are to save, the higher your discount rate would be.
College Earnings Premium: The College Earnings Premium at a given age is how much more earnings you would have made that year if you had gone to college, versus if you had only graduated high school. This is calculated using PSID data, taking the average earnings of all college graduates of a given age, and subtracting from it the average earnings of high school graduates of a given age.
College Earnings Advantage: The College Earnings Advantage is the sum of all the adjusted College Earnings Premium values up to some age. Each year is adjusted with Future Discounting to Age-19 dollars, and the adjusted premiums are added up to get the College Earnings Advantage. This is expressed in terms of Age-19 (present day) dollars.
Total Cost of College: The Total Cost of College is the sum of tuition paid for college, and the income you could have earned during the four years of college if you were working. These two are the components that make up the cost of attending college. The value are adjusted by future discounting, and expressed in terms of Age-19 (present day) dollars.
Net Return on College: The Net Return on College is the College Earnings Advantage minus the Total Cost of College. This represents the financial value of college at a given year, and is expressed in terms of Age-19 (present day) dollars.