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Where you should be: Profile > Edit Profile > Education and Work tab.
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1. Recommended setting for Employer is Friends.
2. Recommended setting for University is Friends.
3. Recommended setting for Secondary school is Friends.
However: if you select Custom you can open this up to others within your network, which you may already be a part of. This allows you to connect with friends and colleagues who are already in the same network as you, as per your university or workplace.
Remember: people may be able to search for you based on your Employer or University fields.