Problem:

A college friend of yours is considering dropping out. If college graduates, on average, earn $18,000 more per year than people without a college degree, what is the college degree worth, in today's dollars (i.e., what is our economy/society willing to "pay" for a college education)? Assume a 40 year working career and a 4% time value of money. (Note: the 4% is a real rate; inflation is not being considered in this problem since the $18,000 is a current differential which also increases with inflation over time; i.e., the $18,000 "earns" an inflation rate.) 4b. The college graduate will have to pay taxes on that extra $18,000.

Required:

Question: If 35% is paid back as taxes, what is the college degree worth on an after-tax basis?

Note: Please provide reasons to support your answer.