5. Why Damage to Balance Sheets Matters for Families

To illustrate how balance sheets matter for families, let us look at some postsecondary education, economic mobility and family stability outcomes.

College outcomes. The economics literature is rich with data about the role that parental education and income levels, neighborhoods, high schools, race, test scores and other factors play in predicting college success, yet only recently have scholars closely examined how various balance-sheet components drive college access and completion.

William Elliott III, a leading researcher in this area, found that among youth who intend to go to college, those with savings accounts in their own name, regardless of the amount, were nearly seven times more likely to attend college than youth lacking accounts. Elliott also found other powerful correlations between savings and postsecondary education outcomes—namely, that higher levels of savings are associated with higher rates of college graduation, even for lower-income children (Table 1).

No doubt these modest amounts of savings would not be enough to finance a college education, but the research suggests that dedicated college savings forge what is called a "college-bound identity," which appears to extend a child's planning horizon and spur behavior changes associated with college success, such as selecting more challenging classes and prompting parental engagement.

Levels of debt appear to play a role, too, in college success. Scholars Michael Sherraden and Min Zhan found that liquid and nonliquid assets are positively associated with later college completion, while unsecured debt is negatively associated with college completion. And researchers Elliott and Ilsung Nam found that student loans may reduce net worth later in life: Households with a four-year college graduate and outstanding student loans have $185,996 less net worth than households with a four-year college graduate but no outstanding student loans. The authors speculate that student loans may push down credit scores, reduce access to credit, and consume disposable income and savings—thus suppressing the acquisition of other productive assets and investments (for example, homes, businesses, retirement accounts) that typically lead to the building of net worth.2

Economic mobility outcomes. As with education, research on economic mobility has largely focused on the role of parents, earnings, education and other factors in predicting whether individuals and their children move up (or down) the economic ladder. The role of savings, assets and net worth has been, until recently, relatively unexamined.

Research thus far suggests that balance- sheet factors generate upward mobility. Heritage Foundation scholars found that financial capital, family structure and educational attainment are the three best predictors of economic mobility in America—with financial capital (savings and assets) the strongest predictor. Similarly, sociologist Dalton Conley reports, "While race, income, job status and net worth all tend to vary hand-in-hand, careful statistical parsing shows that it is really net worth that drives opportunity for the next generation." Further, a study published by Pew's Economic Mobility Project looked at the role of savings in economic mobility; the study found that among adults in the bottom income quartile from 1984 to 1989, 34 percent of those with low initial savings left the bottom within the period between 2003 and 2005, but 55 percent of those with high initial savings left the bottom during that period.

Thomas Shapiro, an expert on the racial dimensions of wealth, interviewed nearly 200 families throughout the U.S. and examined national survey data with 10,000 families. He found that families with private wealth are able to move up from generation to generation, relocating to safer communities with better schools and passing along the accompanying advantages to their children. At the same time, those families without wealth remain trapped in communities that do not allow them to move up, no matter how hard they work. Shapiro also reported that the presence of even small amounts of wealth at key moments in life—at the brink of launching a small business, starting college, purchasing a home, or the onset of unemployment or bankruptcy—can have a "transformative" effect on the life course.

Financial stability outcomes. Finally, a growing body of research shows that healthy balance sheets, and not just income, matter for basic household financial stability. Urban Institute researchers found that households that are "liquid-asset poor" are two to three times more likely than those with liquid assets to experience "material hardship"—being unable to pay a bill or skipping necessary spending on food or health care—after a job loss, health emergency, death in the family or other adverse event.

Experiments also show that households with savings may have fewer day-to-day financial worries, allowing them to be better planners and more future-oriented in their economic and social decision-making. Conversely, the lack of savings and assets can hurt future consumption and security: Seventy percent of workers report withdrawing money from college and retirement accounts in order to make ends meet, and these withdrawals will likely lead to losses of wealth in future years.

Finally, researchers Tammy Leonard and Wenhua Di report that lower- and moderate-income families that invest in productive assets and reduce their debts were more likely to achieve and maintain financial stability (defined by them as a family having enough savings and assets on which to survive for three months). Leonard and Di define "productive" assets as businesses, nonhousing real estate, stocks or bonds—which underscores a key insight from our own research: Economically vulnerable families that diversify their assets beyond housing achieve greater financial stability.

Table 1

The Link between Saving and Graduating from College

Savings Level No Savings Account Only Basic Savings School Savings <$1 School Savings $1-$499 School Savings >$500
% Who Graduated from College—All Children 14% 26% 30% 31% 49%
% Who Graduated from College—Lower-Income Children 5% 9% 13% 25% 33%

SOURCE: Elliott, Nam and Song.


mobility: Movement up or down in a family’s or individual’s level or ranking on an economic or financial measure. Absolute mobility refers to a change in an individual’s level of income, for example, regardless of any changes in other individuals’ incomes. Relative mobility refers to changes in an individual’s ranking among other individuals on some measure. [back to text]

liquid assets: Financial assets that can be sold or traded relatively easily and at little cost. These include bank deposits, stocks, bonds and mutual funds. [back to text]

nonliquid assets: Financial assets that cannot be sold or traded easily and at little cost, such as pension assets, as well as durable goods, business assets and real estate. [back to text]

unsecured debt: A loan that does not require the borrower to pledge collateral, such as a house or an automobile, to the lender. Examples include credit-card loans and student loans. [back to text]

household financial stability: A concept meant to express the degree to which a family’s financial situation is stable, sustainable and resilient to temporary shocks and setbacks. There is no precise measure of household financial stability, but it is likely to be positively related to a family’s net worth, its stock of liquid assets, and its anticipation of cash flows from paid employment, trust funds, pensions, gifts or other sources [back to text]


2. Researchers at the Federal Reserve Bank of New York found that young people with student debt saw bigger declines in homeownership and vehicle purchases since 2008 than young people without student debt. See Brown and Caldwell. [back to text]