Rebuilding Family Balance Sheets, Rebuilding the Economy: The Asset Effect and the Importance of a ''College-Bound Identity''

May 22, 2013

Ray Boshara discusses five researching finds that explain why balance sheets matter so much for families. First, net worth drives opportunity from one generation to the next. Second, financial capital is one of the three strongest predictors of economic mobility in the U.S. Third, 55 percent of the lowest-income adults with high initial savings left the bottom quartile within 20 years, compared to 34 percent with low initial savings. Fourth, even small amounts of wealth at the right moments can have a "transformative" effect on one's life course. Having a savings account set up for a child for college, no matter the amount, develops a "college-bound identity" that can dramatically change a child's lifetime trajectory.

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Ray Boshara: What researchers have been doing over the last 20 years is trying to figure out why the balance sheets—like savings, assets, debt, net worth—matter in ways that are distinct from your income, your education, your family background. You can isolate what's called the asset effect. And that's what we're going to show here. So some of the studies I'm going to show you summarize some of those findings. And there's, you know, a lot of research findings. I'm just going to give you maybe 3 percent of what we know so far about why balance sheets matter for families.

So the first is what I call economic mobility outcomes, how do balance sheets matter in determining who moves up in America. And it turns out that, four findings here, net worth, what Bill talked about, the difference between what you own and owe, is really what drives opportunity from one generation to the next.

If you control for everything—your family background, your education—it's really net worth that drives opportunity from one generation to the next. Financial capital turns out to be one of the key drivers of mobility in America. If you have financial capital, that, more than any other thing, determines who moves up in America.

Third, we have a finding showing that, if you look at families who are low-income, the ones with high savings, 55 percent of them moved up, you know, from the bottom quartile within 20 years, compared to only 34 percent of those who had low savings. And a finding that I find very interesting, a scholar by the name of Tom Shapiro of Brandeis University found that—doing surveys and interviews with families—that very small amounts of wealth at the right moment in life—about to get married, buying a home—can have a transformative effect on the life course. It doesn't necessarily take a lot of wealth to propel you forward in this country.

Let me talk about some post-secondary education outcomes. And some scholars here at Wash U found out that liquid and non-liquid assets are positively associated with later college completion while unsecured debt is negatively associated. So, you know, debt means—if you have debt, you're less likely to complete college. If you have savings and assets, you're more likely to complete it.

Secondly—this is actually pretty fascinating—households with a four-year college graduate and outstanding student loans have $186,000 less net worth than a similar household with no outstanding student loans. So you have two households. Both have a college graduate in them. But that one that has student loans has $186,000 less net worth.

And what we think is happening is that student loans are displacing income, and they're displacing the ability to accumulate other kinds of wealth. You can't buy a home. You can't save for retirement. You can't start a small business because of the money that you're expending to maintain that student loan. Your credit score goes down. Your ability to finance any kind of a productive asset goes down. It turns out that that shows up in the data as a $186,000 difference in net worth among college graduates, simply by having that debt.

One recent finding which greatly illustrates this point, the Fed recently found that Americans who borrow to pay for school are now less likely to have a mortgage at age 30 than those who never had student debt, which is a reversal of prior trends. It used to be that if you had college debt, you were more likely to own a home because you had a greater productive capacity. You had more income. But now college debt is turning out to be a burden on your ability to accumulate other assets, as I just mentioned.

This here is a great example of how small amounts of wealth at the right moment can have a big effect. Willie Elliott at the University of Kansas was trying to figure out, among youth who say they want to go to college, it turns out that—you know, he's looking at two different groups here. The first is, you know, the percentage who graduate from college among all children, and the second the percentage who graduate from college low-income children.

If you have no savings account, the rates are 14 percent for all kids and 5 percent for lower-income kids. If they have a basic savings account that is not designated for college, it's 26 percent and 9. If they have a college savings account—it says this is a college savings account, but it's only—you know, with no money in it—it just says, "This is a college savings account,"—they are 30 percent likely to graduate from college among all kids, 13 percent among lower-income kids. If they have school savings between $1 and $500, 31 percent to 25. And if they have more than $500 in savings, college completion is 49 percent for all kids and 33 percent.

You can see this is a straight line up. This is fascinating. And what researchers think is going on here is that having a savings account forms what's called a college-bound identity. That savings account represents a hope, an expectation that you are going to go to college. Whoever invests in that account says you are going to go to college.

The kid and the parent know that you are going to go to college, and that changes their behavior in the short term. They're more likely to take more challenging courses. They're more likely to take—you know, to engage in tutoring or to forego consumption. You know, we don't know for sure, but that's what the researchers suspect, that that one simple account, even with a little bit of money in it, can change your trajectory.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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