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Is There a Link Between College Choice and Wealth Accumulation?

Adam Rust's picture

Posted March 5, 2015

What explains the differences in returns to education for African-Americans compared to other groups? 

In February, the St. Louis Federal Reserve published new data on the divisions of wealth across a variety of demographic groups. "The Demographics of Wealth: How Age, Education, and Race Separate Thrivers from Strugglers in Today's Economy" benefits from the Fed's unparalleled data access. Through their work with the Survey of Consumer Finances, Fed researchers can examine a topic on the level of the individual household. With that, the Fed can run crosstabs. That led their staff to pull out some conclusions that add detail to our understanding of the wealth gap. 

Some of the principal conclusions made by the Fed researchers: 

  1. The wealth gap is greater than the income gap.
  2. Median levels of wealth among white households are fairly static, but the dynamics are brighter for Asians. 
  3. Asset allocation is part of the problem. 

The authors compared outcomes along race as well. The Fed staffers noted that incomes of African-Americans are about 60 percent of that of whites, but their asset holdings are only one-eighth of that of white households. While the income discrepancy is problematic, the wealth gap may be worse. Wealth creates a cushion against emergencies, it aids with leverage, and it sets up opportunities for investment in human capital. Wealth is also the thing that too many people lack as they go into retirement. 

But hold on - there are some caveats. For one, the researchers noted that there were population biases in terms of age. Minority households are, on average, younger than ones headed by a white person. There is also a significant difference in educational attainment.  If we know that being older or having an advanced degree leads to greater financial health, then maybe those differences explain the gap.

But it turns out that middle-aged black household with advanced degrees were still likely to lag their white peers. Even more intriguing was the nature of how that gap has changed. During the 2000s, there wasn't much difference in financial health among any of similarly-aged and educated racial groups.  Age explains a lot about why Hispanics struggle more than white or Asians, but that is not nearly as telling about the state of wealth in Black America. 

Then there are the differences in household balance sheets. The typical Asian or white family keeps a higher share of their assets in liquid instruments. They can allocate more to checking, savings, CDs, and savings bonds. Moreover, since they already have 10 times more in overall assets, the fact that their allocation share is twice as high means there is a substantial absolute balance. The Fed says that the average African-American household has only $257 in liquid assets at their disposal, compared to about $5,000 among those headed by a white or Asian person. 

The relationship between age and wealth is easy to understand and consistent across all groups. But why could it be that case that a college education fails to produce the same returns for everyone?  After all, having a college degree is a specific requirement for many jobs. It is an assumption that a college degree is a gateway to the middle class. But the results from the Fed's research would seem to counter those perceptions.

Maybe there is a population bias to the colleges that people attend. We know that minorities are more likely to attend either an HBCU or a for-profit college. We also know that their students are likely to earn less and be unemployed more often after they leave.  Back in 2012, the Economic Policy Institute reported that families of students at for-profit colleges had a median income of about $23,000.  The poverty threshold for a family of four is only slight more than that figure. So many of the students at for-profits are starting from a different place.

Where people start out is only part of the story. It is also the case that students at HBCUs and for-profits are more likely to borrow. TICAS says that 90 percent of for-profit grads had student loans. To make it worse, they tend to leave with higher levels of debt, too. As if to affirm the problems with lower incomes and higher debt loads, it is the case that students graduating from those institutions generally have a harder time repaying their student loans.  

It is not the case that students at for-profits are choosing to enroll in low-earning majors. Students at not-for-profits and public universities are 19 times more likely to graduate with a liberal arts degree. 

I can see evidence of that difference in my own life. The students that my wife teaches at Duke University generally come from great privilege. The students that I met while doing research on for-profit colleges were living on the margins of our economy. Those at our local HBCU seem to fall somewhere in the middle, although if I had to guess I would suspect that they are probably situated in balance sheets that more closely resemble the ones at the students of for-profits.  

So, is the real takeaway to be made from the Fed's new research that we need to re-examine higher education if we want to address the wealth gap?