Education and Wealth's Catch-22

When I was about 12 years old, I asked my dad where he got all his money. He unhelpfully remarked, “Son, it takes money to make money.”

“Great,” I said in response, “but then how do I get some money in the first place?”

“Hard work, inheritance or college” was his answer.

Well, at least I had some options. But then I was thrown out of our family's restaurant business at 14 for irreparable lack of interest and skill, meaning that inheriting the family business wasn’t going to be my route to wealth. (But it was, thankfully, for my brother.)

So I tried working hard at my high school jobs pumping gas, selling shoes and detailing cars. That wasn’t getting me far either, leaving me with my final option: college. I enrolled at Ohio State University (becoming the first one in my family to go to college) and was fortunate that it was paid for by my parents.

Now that I work at the St. Louis Fed, where we study these issues, I better realize that going to and completing college was possible, in no small part, because of my family's wealth and that my college degree has enabled me to build my own wealth.

So, wealth predicts education, and education predicts wealth. But, recalling my dad’s “it takes money to make money” maxim: If you need wealth for college, but then need college to build wealth, how does one get wealth or a college degree in the first place?

Research on College and Wealth

Education Predicting Wealth

There are good data from our Center and others behind this conundrum. First, how does education predict wealth? For a variety of reasons, we can’t say that educated people are wealthier because of education; or, in the words of Darrick Hamilton and Sandy Darity, “Umbrellas don't make it rain.” To quote them: “Observing an association between higher levels of educational attainment and higher levels of net wealth and concluding that education produces wealth is tantamount to observing an association between the presence of umbrellas during rainfalls and concluding that umbrellas cause the rain.” Hamilton, Darrick; Darity Jr., William; Price, Anne E.; Sridharan, Vishnu; and Tippett, Rebecca. “Umbrellas Don’t Make It Rain: Why Studying and Working Hard Isn’t Enough for Black Americans,” Insight: Center for Community Economic Development, April 2015. My colleagues William Emmons, Ana Hernández Kent and Lowell Ricketts found that compared to a similar family without a college degree, the income of the average family with a four-year college degree was a sweet 69 percent higher, and wealth was a staggering 201 percent higher. Emmons, William; Kent, Ana Hernández; and Ricketts, Lowell. “The College Boost: Grads Still Do Better Than Nongrads Financially,” St. Louis Fed On the Economy, July 16, 2018.

To be sure, while income returns have been pretty steady across birth cohorts (what decade you were born in), wealth returns have varied by both race and birth cohort. The rising cost of college and the high prices of assets (such as a home) are likely dampening those returns, especially for younger generations, but college remains worth the investment on average. Emmons, William; Kent, Ana Hernández; and Ricketts, Lowell. “Is College Still Worth It? It's Complicated,” St. Louis Fed On the Economy, Feb. 7, 2019.

Wealth Predicting Education

Now, how does wealth predict education? Again, some caution is in order: Since wealth itself is not randomly assigned (due to inheritances, family background, etc.), there may be other factors that lead to wealthier families having better educated children. Fox example, see Cesarini, David; Lindqvist, Erik; Ostling, Robert; and Wallace, Bjorn. “Wealth, Health, and Child Development: Evidence from Administrative Data on Swedish Lottery Players,” Quarterly Journal of Economics, May 2016, Vol. 131, Issue 2, pp. 687-738. Fabian Pfeffer of the University of Michigan revealed some interesting research when comparing the wealth of parents of young adults born in the 1970s and 1980s.

For those individuals whose parents were in the bottom 40 percent in terms of wealth, college attendance increased, but college completion—which is necessary for the big economic payoffs—actually flatlined at over 11 percent. Pfeffer, Fabian. “Wealth Gaps in Education,” Presentation at Is College Still Worth It: Looking Back and Looking Ahead, St. Louis Fed's Center for Household Financial Stability, May 24, 2018 Young adults with parents in the middle 40 percent of the wealth distribution saw both attendance and completion rise, with about one-third of the 1980s birth cohort earning degrees. For young adults with parents in the highest wealth quintile, or top 20 percent, attendance oddly declined somewhat (but was still above 80 percent), while completion soared from 46 to 60 percent.Pfeffer, Fabian. “Growing Wealth Gaps in Education,” Demography, June 2018, Vol. 55, Issue 3, pp. 1033-68. That's a powerful progression up the wealth ladder!

Obtaining Wealth and Education

So, education and wealth each strongly predict the other, yet we still must answer the question: How does one have either a college degree or wealth in the first place?

There are many things we can do to independently increase both wealth and college success. One option would be radically improving early childhood environments, especially early education opportunities, which have meaningful economic impacts later in life, according to many studies.

I'm also big fan of “baby bonds,” also called “child development accounts” and “college savings accounts.” They automatically give children a deposit (typically $100 to $500) at birth or when they enter kindergarten. The deposit is then restricted for post-secondary education.

In some programs and policies now operating in the U.S., every kid gets something, but kids from lower-income and lower-wealth families get more, a structure sometimes called “progressive” or “targeted” universalism.

Americans do not believe in equality of outcomes but we do believe in equality of opportunity. The problem is that inequality of outcomes in one generation becomes inequality of opportunity in the next.

Baby bonds can serve as the inheritance that breaks that vicious cycle and addresses that conundrum—it's the start-up money that, in the spirit of my father, actually makes both education and more money possible.

Notes and References

¹ For a variety of reasons, we can’t say that educated people are wealthier because of education; or, in the words of Darrick Hamilton and Sandy Darity, “Umbrellas don't make it rain.” To quote them: “Observing an association between higher levels of educational attainment and higher levels of net wealth and concluding that education produces wealth is tantamount to observing an association between the presence of umbrellas during rainfalls and concluding that umbrellas cause the rain.” Hamilton, Darrick; Darity Jr., William; Price, Anne E.; Sridharan, Vishnu; and Tippett, Rebecca. “Umbrellas Don’t Make It Rain: Why Studying and Working Hard Isn’t Enough for Black Americans,” Insight: Center for Community Economic Development, April 2015.

² Emmons, William; Kent, Ana Hernández; and Ricketts, Lowell. “The College Boost: Grads Still Do Better Than Nongrads Financially,” St. Louis Fed On the Economy, July 16, 2018.

³ Emmons, William; Kent, Ana Hernández; and Ricketts, Lowell. “Is College Still Worth It? It's Complicated,” St. Louis Fed On the Economy, Feb. 7, 2019.

⁴ Again, some caution is in order: Since wealth itself is not randomly assigned (due to inheritances, family background, etc.), there may be other factors that lead to wealthier families having better educated children. Fox example, see Cesarini, David; Lindqvist, Erik; Ostling, Robert; and Wallace, Bjorn. “Wealth, Health, and Child Development: Evidence from Administrative Data on Swedish Lottery Players,” Quarterly Journal of Economics, May 2016, Vol. 131, Issue 2, pp. 687-738.

⁵ Pfeffer, Fabian. “Wealth Gaps in Education,” Presentation at Is College Still Worth It: Looking Back and Looking Ahead, St. Louis Fed's Center for Household Financial Stability, May 24, 2018.

⁶ Pfeffer, Fabian. “Growing Wealth Gaps in Education,” Demography, June 2018, Vol. 55, Issue 3, pp. 1033-68. 

Additional Resources

• Center for Household Financial Stability: Is College Still Worth It?
• On the Economy: The College Boost: Grads Still Do Better Than Nongrads Financially
• On the Economy: Is College Still Worth It? It's Complicated