Can someone layout what the benefits are of adding metadata to a folder? In our case we have employee and student folders. What benefits would adding metadata to their folders give us?
The main benefit is that you can apply the folder-level metadata to documents in the folder, which allows you to keep stuff organized without having to do costly lookups to third-party databases for every new document. It can also be used to find which folder new documents should go into. For example, in your case, if employees and students have ID numbers, you can have those on the folder level. Then when a new document arrives, have Workflow do a field search to find the employee/student folder. This gives you more flexibility with folder naming conventions.
Can you automatically have a document take on the metdata from the folder level or do you use some kind of a workflow activity to get it to do that?
You can use the %(Parent) token in the document's fields to automatically retrieve the value from the corresponding field in the parent folder, but this will only retrieve the value the first time the token is used. Basically, the token is useful for automatically inheriting a value at the time of document creation, but isn't useful for any kind of live updating. (You can find out more in the Token Types page of the User Guide, under Field Data Inheritance.)
For example, if the parent folder had "Department" field with a value of "Sales," and you created a new document with the %(Parent) token in that field, the document's "Department" field would be created with the value "Sales." But if the person moved to the "Accounting" department and you changed the value on the parent folder, it wouldn't be automatically updated for all documents in that folder.
To keep the value dynamically updated based on the parent folder's field values, you could use a workflow (or some other automatic lookup method).
I've also seen this used in situations where the contents of a folder were somewhat freeform, and the users didn't want to apply metadata to the documents inside. When they did a search for something (like a case number) they only wanted a single result instead of the folder and it's contents.