Human Capital Investment as a Major Financial Decision

The Richmond Fed’s approach to financial education is guided by the principle that financial decisions should depend on the preferences and constraints of the consumer, not on the beliefs of an outside observer. While prescriptive approaches to financial education may be unproductive, consumers can benefit from accurate information regarding major financial decisions, which are infrequent and complex decisions that have large and long-lasting consequences. Many efforts are aimed at helping students decide how to finance college. But these efforts beg an important question: Is college the right investment for every student? On average, the payoff to college is large, but only students who graduate realize high returns on their investment. Currently, the dropout rate is about 50 percent, perhaps because many students do not have an accurate assessment of their own readiness for college. The flipside of the dropout problem is the failure of relatively high-achieving students to apply to college, perhaps because they overestimate the costs of college or underestimate the future payoffs. This suggests that students would benefit from accurate information about the returns to schooling, the level of preparedness that is required to succeed in college and options such as community college, vocational training and apprenticeship programs. In addition, research shows that poor and minority children are much less likely to have access to high-quality early education, which lays the foundation for future academic and labor market success. Greater investments in early interventions could help ensure that children’s future choices about human capital investment aren’t limited by their backgrounds.