One of the major benefits of higher education is the “college premium.” That’s the economic boost a graduate receives to their lifetime earnings as a result of getting a postsecondary degree. The common understanding is that the college premium is real, and justifies the costs of spending years in higher ed and accumulating debt thereby.
Recently the Federal Reserve Bank of St. Louis has been researching the financial returns to higher ed, and have just shared some results. Their analysis broke things down by birth decade (people born in the 1930s, 40s, etc.) and two races (black and white populations).
tl;dr version: based on historical data, college has paid off for graduates, but less well than it used to over time. Worse, college has always been good for individual income, but recently seemed to barely generate any wealth at all. My fear: future prospects aren’t good.
Let me offer a gloss.
First, undergraduate education really rewarded folks in older generations, especially white people, in terms of income. However, that reward seems to have declined generally over successive generations:
Notice that 1930s generation’s boom time. Note, too, the drop in the Reagan era: “for white grads born in the ‘80s, their incomes were meaningfully lower than those of previous generations.”
Similarly, graduate education’s income value was positive for everyone. Its value declined for whites over the decades, ultimately quite steeply, but described a more variable arc for blacks:
Then things change when the Fed looked not at income, but wealth. As they put it, “The Wealth Advantage Is Falling.”
Look at what happens to the impact of undergraduate degrees on wealth:
Look at the steady drop for whites, ratcheting down decade by decade. And for blacks?
Disturbingly, given the statistical uncertainty around our estimate for the wealth boost among black grads born in the ‘70s and ‘80s, we can’t say for certain that there even is a wealth advantage to a college degree for the average black family.
How about those with graduate degrees?
“The fortunes of families holding postgraduate degrees are even dimmer”:
Look at those plummeting numbers for people born in the 60s and afterwards.
Among white postgrads, the wealth boost ranged between 403 percent and 276 percent for postgrads born in the ‘30s through ‘60s.
Compare that with those born in the ‘70s and ‘80s, which had 116 percent and 28 percent higher expected wealth than nongrads. The boost estimated for white grads born in the ‘80s is almost negligible after accounting for statistical noise.
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Also bad: “The implication is shocking: Black postgrads born in the 1960s, ‘70 or ‘80s do not have statistically higher wealth than blacks who didn’t graduate from college.”
Negligible. Shocking. “[W]e can’t say for certain that there even is a wealth advantage to a college degree for the average black family.” These words aren’t coming from fly by night opinion piece writers or right-wing anti-intellectuals, but are written by sober economics writing for one of the nation’s major financial institutions.
I have questions:
- Why the income-wealth gap? Is this an expression of widening inequality, with the richest accelerating away from the rest?
- If those downward curves continue, what will the college premium be for people born in the 1990s and 2000s? When will they yield zero returns? When will they turn negative?
- Will people interpret this in terms of generations, rather than decades?
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(I will insert an obligatory and mordant “nobody will mention GenX” note.)
Bryan – One of the problems I have with the premise of this analysis is the idea that it is based on income and wealth, not personal sustainability. While that might not make sense at first glance, consider that one of the reasons why I chose to “cash in” my prior career slaving away in the TV advertising business on NYC for a career in higher education is that, while I earn far less income and have a much lower possibility of “wealth” (whatever that means), I do have stable health insurance, low stress, and other benefits related to tuition breaks for my family.
While this is anecdotal, what I’m suggesting here is that there may be a segment of the population who goes to college to set themselves up in a situation that enables them to just get by. Income and wealth are second and third on the list.
This is another way of saying that the premise of going to college to become wealthy is an old notion that no longer reflects the real challenges of coming of age in an America where the promise of the American Dream simply does not resonate like it used to.
Now, the goal is not necessarily to earn a high income and own a home, but simply to avoid bankruptcy and retain some semblance of relevance in an insecure job market. Sorry if this comes across as a bummer. 🙁 Your mileage may vary.
I don’t doubt that you’re right Steve in that some are seeking something other than wealth when they sign up for college. My sense, however, is that while parents might have aspirations for their kids to be happy and healthy and low stress, the main reason they want their kids to go to college is to increase their earning potential and thus their wealth. Love to see some research on that.
And btw, your last paragraph does come across as a bummer. 😉
I agree, Will. However, perhaps parents (myself included) are naive about the reality of the degree dividend. My cynicism is informed partly by the experience my wife has had where she wants to earn a degree in school-based social work or working with students with special needs. But the pay for those jobs are so low that it isn’t worth going into debt. She’ll never pay it off – literally.
As a parent, I still believe the college experience is a great thing. But I would never suggest to my kids that they will also get some kind of financial benefit from it other than being more employable. Again: sustainability, not wealth.
First of all, I’m glad to see you two connect, Steve and Will, if you don’t already know each other.
Second, that’s a fascinating proposal, Steve. I wonder what proportion of the student body has that approach. How many will seek public service? How many come from wealthy families?
Agreed with Will – and I feel that increasing anxiety over debt will heighten that impulse.
My guess is this is more about housing as a wealth multiplier than education. People in earlier cohorts were able to turn early income gains into purchasing power for houses, which in turn ramped up wealth as they rode up the 1990 – 2006 housing market.
Anyone getting into the housing market from 2003 on would see most of those gains erased. That includes later GenXers and all millenials. Additionally, because the cost of real estate became so high in productive U.S. urban centers the cost of buying in was too high, and the recession downturn lowered prices but did so at the cost of making entry into the market more expensive in terms of risk.
While the particular post 2006 vicissitudes of the housing market probably play the primary role, student loan payments probably play a secondary role. Compared to return on earnings, student loan repayment is a fairly good deal, but the structure of student loan payments is that you pay the same rate when you enter the job market in your twenties as when you are at peak earnings. That means that income gains averaged over the life of the student are high, but income gains in the first years of work are low, and maybe even initially negative. This fact, which almost all reporting on this misses, can explain the paradox of high average income returns but low investment in houses an 401k funds in people’s 20s — where it can have the most impact on wealth.
Student debt should be reduced dramatically. I like the idea of free college. But you actually don’t have to reduce student debt to change this. A graduated payment system that slowly increases the amount due on education loans so that a 24 year old entry level employee is not paying the same on a loan as a 34 year old mid-careerist would dramatically help. Soaking 20 year olds at the same rate as their future higher-earning selves is decreasing 401k and housing purchase, and without there is no wealth multiplier. Reduce, yes, but also restructure loans to allow for early 20s investment when it can have an outsized impact due to compounding.
On the additional issues with the black wealth gap, it’s racism pure and simple, and based on the combination of redlining, predatory lending, and risk shifting during the housing collapse, and the failure of majority black neighborhoods to see the gains in you see in white neighborhoods (see https://www.washingtonpost.com/graphics/business/wonk/housing/atlanta/). You want to fix that you have to fix the housing market and take the white supremacy out of it and create a system that allows black families to make money off of houses too.
I think the modern (post-crash) housing bubble can play a role, Mike. But notice that the wealth returns start dropping for people born in the 1950s.
Perhaps the prior generation enjoyed the great post-WWII boom, complete with the lowest economic inequality ever seen in the US (established in part by the massive New Deal redistribution expansion) and the explosion of suburbia. That was the low-hanging fruit.
I really like your idea of progressive student loan repayment.
Beginning in the 80s and accelerating in the 90s, a new channel for wealth developed – investing. Now wealth was often not tied to SALARY. It’s SALARY that commands an education premium. Investment income doesnt depend at ALL on Education, and in fact it might be anti-correlated. The Internet made this trend available to everyone. And it breaks the education-wealth correlation.
Bryan, is any of this tied to increasing overhang of student loans? The additional income from higher ed goes increasingly to pay off loans, and therefore has the opportunity cost of less investing for wealth?
Is there any relation to the state of the economy when the students graduate and enter the job market? Maybe a decade is too coarse to measure this. I’ve read that starting out in a recession produces a hit on income which is rarely made up for later in life. True? Relevant?
And, of course, this data is disaggregated by race, but not by income of parents or other (often related) measures. So the analysis is tantalizing, but easier to focus on what is shown, and harder to ask about what is not shown.
This may have very little to do with the effect of college itself. I suspect two other causes.
First, it’s likely that the decline in income boost is related to the decline in middle-class incomes in general.
Second, I suspect that the growth of the college-going population has a strong influence on this outcome. In a recent article in the Chronicle (https://www.chronicle.com/article/Yes-College-Is-Worth/243450), two economists explained their research showing that while college is beneficial for everyone, it’s more beneficial for people who start out wealthy. It’s reasonable to suppose that, since most of the increase in college-going after 1960 occurred among the non-wealthy, the *average* wealth increase has fallen substantially. Moreover, this would also explain why there is little wealth increase for African Americans since 1960, as the distribution of college-going African Americans has shifted most rapidly toward lower-income Americans.
I am glad that the various Federal Reserve banks are addressing some of these economics-of-college questions, but their reports tend to push in an alarmist direction because they don’t always account for contextual issues like these.