In last week’s post, using a report from the Federal Reserve Bank of St. Louis, we looked at the importance of a college degree on both income generation and wealth accumulation.  Clearly, those with a college degree enjoy higher incomes and much great wealth over the course of their lives.  We also know from other studies that college graduates tend to live healthier and longer lives, marry more and divorce less and have a higher degree of financial intelligence than non-grads.
In today’s post, we look at the second part of the Fed report, focusing on the interplay between “inherited” and “acquired” factors in income generation and wealth accumulation. Inherited factors are those over which one has no control, such as a race, ethnicity and a parent’s education. Acquired factors are those over which one exerts personal control; in the case of this report, the acquired factor is one’s decision to pursue and complete a college education.
Figure 5 below portrays a slice of the median income data for middle-aged families; Figure 6 shows the same for median net worth.

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As you can see, the analysis covers all middle-aged families with average levels of income and net worth. It then proceeds to break down groups by race and ethnicity, before further dividing those groups by those with and without a college degree.
Importantly, the last column in each figure shows the change in income and wealth ranks associated with own education (i.e. over and above inherited characteristics).  In other words, it shows how the contribution of one’s own education increases or decreases the middle-ranking family’s income and wealth position versus the overall population.
What these figures show is that inherited demographic characteristics are very important determinants of adult outcomes like education, income and wealth. For example, in Figure 5, the typical member of the demographically favored group earned an income of $113,618 (80th percentile), compared to $41,518 (40th percentile) among the least favored group. Similarly, the typical member of most favored group in Figure 6 had 14 times as much wealth as the typical member of the least-favored group, even before one’s own educational attainment is taken into account.
As the report says: “College clearly is important, but contrary to conventional wisdom, your own college education does not completely level the playing field.” This is seen most accurately by looking at rows 2 and 7 in the second-to-last column in both Figure 5 and 6. The income and wealth of a non-graduate with the most advantaged inherited demographics are 9% and 58% higher, respectively than the income and wealth of a college grad with the least advantaged inherited demographics. Or, put more simply, in this comparison inherited demographics-including the college education of the parents’ generation-outweighed the benefits of obtaining a college education.
The Returns on One’s Own College Education
The Fed report highlighted three key results related to the income and wealth implications of completing or not completing college in light of one’s inherited demographic characteristics.

  1. The head-start effect: Certain inherited demographic characteristics are associated with consistently higher median income and median wealth. As both Figure 5 and 6 shows, simply having at least one college-educated parent greatly boosts median income and wealth. For example, in Figure 6, among middle-aged white families headed by someone with a four-year degree, simply having a college-educated parent boosts median wealth to $629,900 (83rd percentile) from $409,110 (76th percentile) among otherwise similar families without a college-educated parent. The difference is even more dramatic for families of other races and ethnicities. We see the boost to median net worth associated with having a college-educated parent is from $100,354 (50th percentile) to $347,586 (74th percentile).
  2. The upward-mobility effect: The second important result is that completion of a four-year college degree pays off proportionately more among groups with less-advantageous inherited demographic characteristics. In looking at the last column to the right, for example, we see that middle-aged white family heads whose parents were highly educated get an 8-percentile rank boost in median net worth above the level predicted purely by inherited characteristics when those family heads earn a college degree. That increase is much less than the 17-percentile rank boost for the group that was similar in all respects except that is parents were not well-educated.
  3. The downward-mobility effect: The third clear result is that failure to complete a four-year college degree is more-costly in terms of falling short of the demographically predicted level of income and wealth when one’s parents included a college degree. For example, the wealth and income shortfall was 15 to 17 percentile ranks for a non-graduate family head who was white and was the child of a well-educated parent. This exceeded the 8 to 9 percentile rank decline of the otherwise similar families whose parents were not well-educated.

As we’ve illustrated over this two-post series, in the absolute, a college education pays off. But it is interesting to look at the relationship between education and wealth from a two-generation context.  To summarize, here is what we learned:

  • Families headed by someone with favorable, inherited demographic characteristics-being white, being over 40 and having parents who were well-educated-on average earn significantly higher incomes and accumulate much more wealth than families without these characteristics.
  • Among college graduate families with the least advantageous demographic characteristics, such as no college-educated parents, completion of a four-year degree typically boosts income and wealth far above the levels predicated solely from inherited demographics.

Families with the most advantageous inherited characteristics whose heads-of-household do not complete a four-year college degree suffer greater proportionate shortfalls of income and wealth than their predicted levels, compared to families whose heads also do not complete four-year degrees but who have less favorable inherited characteristics.
In future posts, we will explore the third variable and that is: does significant educational debt mitigate any of the absolute advantages of securing a college degree?