The impact of education on farmers' choice of activities and household welfare are modelled and estimated using farm household data for rural Ethiopia. We find that education has significant effects on household welfare. Schooling increases the adoption of new technologies and facilitates entry into highly profitable farm and non-farm activities, all of which may increase welfare and help farm households escape out of income poverty. An additional year of schooling in a household increases the welfare by 8.5 percent. These findings provide a rationale to governments and donor organisations to include the expansion of rural schooling (through encouragement of parents to send their children to school) in their policy reform as a means of reducing material deprivation.