Assume education is financed with a mix of debt (loans) and savings, and the yearly cost of interest on a student's loans does not exceed deductible amounts. All interest paid will be tax-deductible. The payer is assumed to have a tax liability, and a family's or individual's credit has no influence on loan rates or availability.

In this discussion, we compare individuals' and families' willingness to undertake debt versus relying on equity (savings) in financing investment in an educational training or degree program to a firm's decision to mix financing vehicles as it determines how to approach an upcoming project. We assume, for the purposes of this discussion, that a new tax policy will soon be passed that lowers the limit on deductibility of interest expense on student loans, increasing their effective cost to the borrower. Consider how this will influence educational decisions.

1. While comparing an individual or family investing in education to a firm investing in a project of any type, discuss what cost of capital means by comparing personal cost of capital with corporate cost of capital.
2. Focusing on both tax issues and income issues, discuss how these factors influence whether debt or savings (equity) is a more viable option for the family and the firm.