Essay No. 2: Education and Wealth

The Demographics of Wealth
How Age, Education and Race Separate Thrivers from Strugglers in Today's Economy
Essay No. 2: Education and Wealth


Hello. This video focuses on the second essay in a series that we call The Demographics of Wealth, how age, education, and race separate thrivers from strugglers in today's economy. The first essay examined the connection between race and wealth. The subject of this one is education.

Our researchers, Bill and Bryan, have poured over data from more than 40,000 interviews. These were conducted with heads of households between 1989 and 2013 by the Federal Reserve for its Survey of Consumer Finances. Bill and Bryan looked at how income and wealth have changed, for the better or worse, over those 24 years for households headed by people with four different levels of educational attainment. First, less than a high school diploma; second, a high school diploma, GED, or vocational or technical certificate; third, a two or four-year college degree; and fourth, a graduate or professional degree.

Some of the results were surprising and some not. As you might expect, the greater the education, the greater the income and wealth, at least when looking at the median of all households in each category. Perhaps a bit surprising is that the best educated group, those with a graduate degree, law degree, or some other professional degree, was the only one to see its income rise when adjusted for inflation over the past quarter century. It went up 4%.

In contrast, those families with only a high school diploma saw their income fall 16%. High school dropouts lost 1%. Even those with a two or four-year college degree saw a loss of 5%.

Those with a two or four-year degree fared better when it comes to wealth, that is, assets minus liabilities. They saw their wealth rise by 3%. The best educated, however, saw their wealth jump 45%. In contrast, the two lower levels of educational attainment saw their wealth plummet by 36% and 44%. We want to stress that while there is a strong correlation between education and financial success, there is no guarantee that more formal education will make you wealthy.

The connections are less straightforward than many people realize. What you learn in school as reflected by your diploma or degree is just one of many determinants of your wealth.

Among the other factors is what is called assortative mating. That just means that people marry someone like themselves.

So if you are highly educated, you marry another highly educated person. In doing so, you may double your family's income. You also bring another savvy person to the table to help you make better investments and other financial decisions.

The opposite is likely to happen if you are not well educated and marry another person who is also not well educated. Another important factor is native ability, which encompasses the brain's attitudes and skills that you inherited from your parents, as well as the environment in which you were raised.

Speaking of inheritances, the money that your parents leave you when they die is yet another factor. Better educated people tend to inherit more. Additional factors are listed in the essay.

Our research found not only striking differences in the income levels among the four education groups, but also, significant differences in the health of the group's balance sheets and in the wisdom of their financial decisions. Combined, these three measures have a huge influence on wealth. Those who have high incomes, strong balance sheets, and good options for their financial decisions and choose wisely among those decisions are going to be much wealthier than those who don't do well in these areas. The resulting wealth gaps among our four groups are even wider than the income gaps.

There are many ways to gauge the strength of a household balance sheet. Among them are measures of liquidity, asset diversification, and leverage. In all three of these areas, better educated families outperformed less educated families.

More liquidity, in other words, more cash on hand or cash that can be quickly obtained, can buffer a family against financial shocks.

If you invest in stocks or own at least part of a business, you are likely to get higher returns than if your assets consist just of your house, cars, and other low-return investments.

As for leverage, a higher ratio of debts-to-assets can lead to less wealth for two reasons. More debt means more borrowing, and as we all know, borrowing can be expensive. Second, more debt means more risk of losing it all when a family experiences some kind of economic shock.

We also developed a financial health scorecard to help gauge whether people are making good or bad everyday financial decisions. Again, the better educated group scored higher on the scorecard than did the lower educated groups.

There are several other trends in education that our research brought to the surface. In general, Americans level of educational attainment has been increasing. The percentage of families headed by someone with a graduate degree has risen from 10% to 13% over the past quarter century. Those who have a two or four-year degree have jumped from 16% to 25% of the population. The share of families headed by high school graduates has increased from 44% to 50%. And the ranks of those without a high school diploma has dropped from 31% to 12%, another good sign.

If you read our essay, you will also find some interesting information on gender, generational, and racial differences in educational attainment. As we hope you realize by now, there are many factors involved in wealth accumulation. A graduate degree is no guarantee that you will become a millionaire, but in today's economy, the less education you have, the less likely you will become financially successful. The next installment in this series will focus on the connection between wealth and age.

The essay and companion video will be available on the website of the St Louis Fed Center for Household Financial Stability. There, you will find other information on our research into the finances of American households. Thank you.

Executive Summary

New research by the Center for Household Financial Stability shows that there's a strong correlation between education and money. More of the former often leads to more of the latter. However, correlation is not causation—there is no guarantee that more education will lead to more wealth. Many other factors might be in play, such as natural ability, family environment, inheritances and even health. It's entirely possible that what's learned in the classroom has much less influence on lifetime earnings and wealth accumulation than most people believe. In fact, your ability, family background, inheritances or health might be responsible for some—perhaps a large part—of your success even if you hadn't received the education that you did.

These and other connections that may exist between education and wealth are examined in this second essay in our “Demographics of Wealth” series. (Read the first essay, which looked at the link between race and wealth.) All of the essays are the result of an analysis of data collected between 1989 and 2013 through the Federal Reserve’s Survey of Consumer Finances.  More than 40,000 families were interviewed over those years.

For this essay, only those heads of families  at least 40 years of age were studied – because by age 40, the vast majority of adults have completed their formal education. These family heads were broken down into four groups: those without a high school diploma; those with only such a diploma, a GED or a vocational/technical certificate; those with exactly a two- or four-year college degree; and those with a bachelor's degree plus a graduate or professional degree.

Our key findings:

  • The median income for those without a high school diploma in 2013 was $22,320, down 1 percent from 1989; for those with such a diploma, etc., $41,190, down 16 percent; for those with a two- or four-year degree, $76,293, down 5 percent; and for those with an advanced degree, $116,265, up 4 percent. (All dollar amounts are adjusted for inflation.)
  • When looking at wealth (net worth, or assets minus liabilities), the median in 2013 for those without a high school diploma was $37,766, down 44 percent; for those with such a diploma, etc., $95,072, down 36 percent; for those with a two- or four-year degree, $273,488, up 3 percent; and for those with an advanced degree, $689,100, up 45 percent. (The median wealth levels of the top three groups generally increased until the mid-2000s, after which they declined due to the bursting of the housing bubble and to the Great Recession.)
  • Those with more education had stronger balance sheets—more liquidity, a better mix of investments and lower leverage.
  • In most categories, women are outpacing men in educational attainment.
  • When it comes to race or ethnicity, Asian-Americans have the highest graduation rates at every level of schooling, followed by whites, blacks and Hispanics.
  • As for the contributions of successive generations to rising educational attainment, members of Generation X and Generation Y have lifted college-degree levels less than did the Baby Boomers before them.

Read all the essays and watch all the videos in this series »

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