The disappearing college wealth premium

It’s well known that college graduates make on average. quite a bit more money than high school graduates. (I’ve pointed out that in recent decades the growth in this wage premium has been almost wholly a product of declining wages for high school graduates, as wages for college graduates have been almost completely stagnant on average).

Things get quite a bit more complicated, however, when you look at the wealth premium rather than merely wages. The wealth premium is the measure of how much more wealth college graduates can expect to accumulate than those with no more than a high school degree:

Then the researchers looked at the wealth premium, and a different picture emerged. Older white college graduates, those born before 1980, were, as you might expect, a lot wealthier than their white peers who had only a high school degree. On average, they had accumulated two or three times as much wealth as high school grads of the same race and generation. But younger white college graduates — those born in the 1980s — had only a bit more wealth than white high school graduates born in the same decade, and that small advantage was projected to remain small throughout their lives.

The data for Black families showed the same pattern, but with an even more pronounced downturn. As with the white graduates, older Black college grads were enjoying sizable wealth advantages over their less-educated peers, with generally two or three times the assets of comparable Black high school grads. But Black college graduates born after 1980 were experiencing almost no wealth premium at all. In fact, the researchers found that the wealth premium for Black grads disappeared even earlier than it did for the white graduates. Black college graduates born in the 1970s weren’t receiving any substantial wealth benefit, either, only those born in the 1960s and earlier. Latino families followed a similar pattern. If they were headed by someone born after 1980, they had accumulated no significant additional resources beyond those of a comparable family headed by a high school graduate.

When the researchers looked at young Americans who had gone on to get a postgraduate degree, the situation was even more dire. “Among families whose head is of any race or ethnicity born in the 1980s and holding a postgraduate degree, the wealth premium is … indistinguishable from zero,” the authors concluded. “Our results suggest that college and postgraduate education may be failing some recent graduates as a financial investment.”

These are startling data, and they present a kind of paradox. Millennials with college degrees are earning a good bit more than those without, but they aren’t accumulating any more wealth. How can that be?

It turns out the explanation for this paradox isn’t as unsolvable as whether the Beatles are better than the Rolling Stones or the square root of a million:

Lowell Ricketts told me he had a pretty good idea of the cause, even though the group’s data couldn’t be conclusive on this point. The likely culprit, he said, was cost: the rising expense of college and the student debt that often goes along with it. Carrying debt obviously diminishes your net worth through simple subtraction, but it can also prevent you from taking important wealth-generating steps as a young adult, like buying a house or starting a small business. And even if you (or your parents) were able to pay your tuition without loans, the savings you used are gone when you graduate, and thus are no longer available to serve as a down payment on a starter home or the beginning of a nest egg for retirement.

A few decades ago, tuition costs were manageable for many Americans. But since 1992, the sticker price has almost doubled for four-year private colleges and more than doubled for four-year public colleges, even after adjusting for inflation. Today the average total cost of attending a private college, including living expenses, is about $58,000 a year. After financial aid, the average net price for private-college students is about $33,000 a year; at public institutions, it is about $19,000. Those averages conceal a great deal of variation, however; at the University of Michigan (a public university), tuition, fees and expenses for out-of-state juniors and seniors total more than $80,000 a year.

Over the last decade and a half, more and more young Americans have turned to loans to cover those rising costs. In 2007, total student debt stood at $500 billion. Today it is $1.6 trillion, and for many borrowers, their debt is becoming a serious burden. Among student borrowers who opened their loans between 2010 and 2019, more than half now owe more than what they originally borrowed.

There’s a lot to chew on here, but some basic points ought to be clear:

*If you jack up the cost of college at the same time that the average earnings of college graduates remain stagnant for decades, the economic situation of the average college graduate is going to get worse, both in absolute terms, and, if the increasing cost of college is greater than the decline in wages among high school graduates, relative to people without college degrees. That’s what seems to be happening among people under the age of 45 or so.

*The explosion in people getting postgraduate degrees of all kinds is not producing any net economic benefit for these people as a group.

*The fact that people getting STEM degrees are doing better on average than people getting degrees in the humanities and social sciences would only be an argument for more people getting STEM degrees if there were any evidence that we. have significant structural unemployment in STEM-related fields, meaning that STEM jobs are going unfilled because of a lack of qualified candidates. This doesn’t seem to be the case, so the Obama-era policy of advocating that everybody get an electrical engineering degree from Cal Tech is probably not the answer to this problem.

*Turning higher education into a revenue-maximizing enterprise for the people running these institutions is a social disaster.

*It’s nice to see a piece in the NYT about higher ed that’s about something other than how to get your child into Princeton, and/or those crazy Oberlin kids complaining about the cultural appropriation in the cafeteria.