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The college wealth premium is shrinking for younger Americans

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A college degree, the thinking goes, is worth the cost, given a lifetime of higher earnings. But a recent phenomenon may add a more pessimistic nuance to those assumptions, with economists finding the college wealth premium — or the assets owned by college grads compared with high school grads — is vanishing for younger Americans. 

White college graduates who were born in the 1930s and 1940s, for example, enjoyed wealth that was about triple that of non-college grads — but for successive generations, that wealth advantage has been shrinking. For White college grads born in the 1980s, or members of the millennial generation, the wealth premium has decreased to 42%, according to the analysis by the Federal Reserve Bank of St. Louis.

It's even worse for people of color, with Black college grads born in the 1980s experiencing no wealth premium at all compared with their counterparts without college degrees, the research found. 

To be sure, the income premium — or the difference in earnings between college grads and those without bachelors degrees — remains, although that is showing signs of stagnation. But the mechanism that traditionally helped college grads translate those higher incomes into a greater share of wealth has grown increasingly shaky for younger generations. And that has implications for the financial resilience of younger households, as well as the decisions that current high school students are now making about whether to enroll in college.

"We've been focusing on wealth because we always say it does something different from income: It provides a buffer," said William Emmons, an economist with the Federal Reserve Bank of St. Louis and a co-author of the research. "It's buffering yourself against shocks, and we are getting this huge shock right now" with the economic crisis caused by the coronavirus pandemic.

In effect, many millennials with college degrees entered the pandemic with fewer monetary resources to weather the pandemic's economic shock than older generations had at the same age. That could explain why a larger share of millennials are racking up credit card debt in the pandemic when compared with Gen X or Baby Boomers, while more than half of millennials say their savings have declined since the start of the pandemic. 

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"I often say this — I think it scares people — people really need to understand this is really a high-stakes decision," Emmons said of enrolling in college. "Unfortunately it's even more of a high-stakes decision for a first-generation student, for someone whose family doesn't have a lot of money."

To be be sure, adults with only high school degrees are faring worse than those with college diplomas, a trend that started before the pandemic but has been exacerbated by the current K-shaped recovery that's benefitting white-collar, educated workers while less educated workers suffer higher rates of joblessness. Workers over 25 with high school degrees had a jobless rate of 7.9% in January — almost double the jobless rate for people with a college education, according to Labor Department data.

Before the pandemic, wage growth for college graduates had been lackluster, growing at about 15% between 1979 and 2019 for the typical college grad, a 2020 study from the Congressional Research Service found. But those with only a high school degree were worse off, with the median income falling 11% over the same period.

"Luck of when you are born"

There are several factors that could be to blame for the shrinking college wealth premium, Emmons said. But at the heart of the issue is what Emmons calls "the luck of when you are born." 

People born in the 1950s and earlier came of age when assets like houses were relatively cheap compared with today's standards. College was also relatively affordable for the Silent and Boomer generations, Eammons pointed out.

But younger generations who attend college are saddled with debt before they even enter the workforce — eating into their ability to build wealth.

"You could work a part-time job and pay your way through college," Emmons said of people born in the 1940s and 1950s. "How realistic is that today? It's not."

It's not only private colleges like Harvard that are more expensive. State colleges have also cut funding, pushing more of the cost onto students and their families. 

Before the pandemic, state funding for higher education remained below its pre-Great Recession levels, according to a new study from the Center on Budget and Policy Priorities. Between 2008 to 2019, per-student spending at public four-year colleges decreased by more than $1,000, or almost 12%, while tuition jumped 35%, the study found.

"I would argue in an intergenerational sense it doesn't look as fair," Emmons said. Much of that is driven by voter preferences, with older generations who benefited from government support of public colleges now effectively saying, "I'm not going to pay for it for younger people," he added.

College choice?

Adding to the stress of the high-stakes decision of whether to enroll in college is the ongoing pandemic. Applications for the 2021-2022 academic year rose 10% through January 18, according to the Common Application. But that's due to a surge of applications to selective colleges, which dropped their SAT and ACT score requirements this year — opening the door to students who might not otherwise have applied. 

It's a different situation at less selective schools. "There is a sharp decline in community college enrollment — an over 18% decline for first-time, first-year students for community college," noted Victoria Jackson, a senior policy analyst at the CBPP and the co-author of the study on state college costs. "I think it speaks to who is being hit by the pandemic, and who is more likely to not being able to attend for a financial shock."

The expense of college combined with a faltering economic recovery is playing into the decisions of some students, especially those from lower-income households, about whether to apply, said Charlie Javice, the CEO of Frank, a service that helps students with financial aid forms.  

"There is a huge amount of uncertainty," she said. "People are weighing the opportunity costs of not working — they are picking not getting paid for four years" by enrolling in college. 

Student loan relief

Student loan relief could significantly boost the ability of younger college grads to build wealth, said Emmons of the St. Louis Fed. But President Biden on February 17 signaled that he's unlikely to support some Democrats' plan to cancel $50,000 in per-person student debt, saying that he's instead prepared to support a less ambitious plan to erase $10,000 in debt. 

Wiping away student debt could come with a host of problems, experts say. First, people who saved for college and worked to pay off their loans would likely be resistant to supporting such a plan. And given that the majority of Americans don't have college degrees, the plan would mean those taxpayers are supporting the minority of adults who built up debt to attend college.

But there's another issue that doesn't get as much attention: the fact that fewer than half of college students earn a degree within four years. That should raise questions about the effectiveness of some colleges, as well as signal that some students aren't perceiving the value of college when they're enrolled, Javice added. That could be due to everything from the quality of instruction to the cost and concerns about debt, among other issues.

"Forty percent of student debt is currently for those who have dropped out," Javice said. "Therefore, if they dropped out, it likely means they weren't seeing value or they couldn't afford to stay in."

The shrinking college wealth premium could impact the nation's economy for years to come, impacting household wealth as well as generational mobility. With less wealth than older generations, young college grads may be less likely to start a business or to be able to help their own kids afford college, Emmons added. 

"Wealth has very very significant intergenerational links," he said, "so one generation not being able to accumulate wealth likely has implications for the next generation."

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