College Degrees Used to Make Families Wealthier. That’s No Longer True

The high cost of education and soaring student loan debt has choked off the net worth of younger families.

Photo by Andre Hunter / Unsplash

Historically, a bachelor’s degree was perhaps the single most important key to increasing people’s income and their wealth. The conventional wisdom is that a college education all but guarantees access to the middle class and a higher standard of living for each successive generation. Yet new research from the Federal Reserve Bank of Saint Louis calls this equation into question.

The numbers are stark. The college income premium still exists. But the wealth premium—the difference in net worth between college and non-college graduates—has plunged since 1940. Put simply: College graduates today are experiencing a profound struggle to generate wealth. The biggest culprit is likely the surging cost of higher education and an accompanying increase in student loan debt.

The researchers analyzed the Federal Reserve Board’s Survey of Consumer Finances, which encompasses economic data about heads of households through the 20th century. While they still found that an income premium exists—meaning that college graduates still earn more than non-graduates—the wealth premium has essentially disappeared for non-white graduates born in the 1980s. (White college graduates born in the 1980s retain a wealth premium.) This is a “striking divergence between the income and wealth outcomes.”

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The number of heads of household with college degrees has increased steadily for decades, and as of 2016 reached 34 percent compared to just 23 percent in 1989. There’s been a similar trend in the number of households headed by someone with a post-graduate degree, with the number increasing to 13 percent in 2016 from 9 percent in 1989. Throughout that period, the income premium has remained steady at around 100 percent higher for those with four-year degrees, compared to those without, and 175 percent higher for those with graduate degrees.

Wealth accumulation is a different story, however. According to the report, “among white bachelor’s degree families, for example, the 1930s cohort owned 247 percent more wealth and the 1940s cohort owned 195 percent more wealth than nongraduate families of the same age, but the 1980s cohort owned only 42 percent more wealth.” For black families, the decline in wealth premium was even more dramatic. While the wealth premium for black college educated families was 509 percent in the 1930s, it had reached 177 percent by the 1960s, and “was statistically indistinguishable from zero for both the 1970s and 1980s cohort.” Essentially, the data seem to indicate that by the 1970s, black families with college degrees had the same amount of wealth as those without degrees.

There are several possible explanations for why a college degree may still confer higher income without that translating into greater wealth accumulation. Older generations had an easier time accruing wealth when asset prices, particularly stocks, bonds and housing, were low, making subsequent rates of return higher. Loosening financial regulations beginning in the 1980s made it easier for young people to get into trouble with consumer debt than their predecessors. And, perhaps most important, the researchers cite “the rising cost of higher education, which would not reduce college graduates’ incomes but would reduce their wealth, at least early in life.”

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“While the overall level of consumer prices has increased by a factor of four since 1978,” the report says, “the cost of college tuition and fees has increased by a factor of almost 14—more than triple the overall increase in consumer prices.” Indeed, “the 1980s cohort of college graduates, most of whom attended college after 2000, experienced a very sharp decline in wealth outcomes.”

These two trends, the slump in household net worth and the drastic rise in student loan debt, are becoming increasingly acute. Total student loan debt has reached $1.46 trillion, compared to $870 billion for credit card debt and $1.27 trillion for automotive debt. Most of that student loan debt has been added in the last two decades. In 2003, total American student loan debt sat at just $240 billion.

This debt load has already become a political issue, with U.S. presidential candidate Elizabeth Warren calling for large portions of student debt to be cancelled. If family net worth continues to slump in years to come, industries that depend on wealthy families for business—wealth management and real estate, for instance—may increasingly feel the pinch as well.