The College Wealth Premium Has Collapsed Younger folks have come of age during an era of consumer debt. Annie Lowrey January 8, 2020 Younger folks have come of age during an era of consumer debt. Is college worth it? As the cost of American higher education soars, inequality widens, and wages stagnate, millions of Millennials and Gen Zers have asked themselves that question. The answer, at least from economists, has remained a resounding yes. One study found that college graduates earn nearly twice as much as their peers without a college degree. But what if those earnings are no longer translating into financial security and long-term prosperity? A new study by researchers at the Federal Reserve Bank of St. Louis suggests that might be the case. College still boosts graduates’ earnings, but it does little for their wealth. The paper, by William R. Emmons, Ana H. Kent, and Lowell R. Ricketts, is an exercise in pulling apart averages. As a general point, college graduates earn more and are worth more than people without college degrees. And, as a general point, the college earnings and wealth premiums—meaning how much more a person with a college diploma makes and owns than an otherwise similar person—are large. But upon close examination, terrifying generational and demographic trends emerge. The college earnings premium has proved durable and considerable overall. White people born in the middle of the century got more of an earnings boost for attending college than white people born in the 1980s—but the boost for both groups was big. (“People” is close-enough shorthand here; the authors use a more technical household comparison.) And black people born in the ’80s got a similar income bump, compared to black people born in the ’40s and ’50s. But the wealth premium has collapsed precipitously over the past 50 years. White graduates born in the ’30s were worth 247 percent more than their non-college-educated peers; white people born in the ’80s were worth just 42 percent more. Among black families, the wealth premium sat at more than 500 percent for those born in the ’30s and fell to zero—yes, zero—for those born in the ’70s and ’80s. Notably, the study corrects for the fact that households tend to accumulate wealth as they age; the issue is not that members of the Greatest Generation and Boomers have had more time to let their homes appreciate and their money sit in the stock market. They were always on a different wealth trajectory than their kids and grandkids. The authors cite a few reasons why this might be the case. The first has to do with asset prices. Older generations were able to buy houses and stocks when prices were low, then saw the value of those assets rise. Recent generations have faced high housing prices, and have found themselves unable to buy their way into the stock market. Therefore, they have not been able to take advantage of the recent run-up in asset values. “The three oldest cohorts we studied generally have experienced fortuitous asset price fluctuations,” the authors write. The second potential factor involves Wall Street’s financial engineering. Younger folks have come of age during an era of consumer debt, with banks more than happy to load customers up with credit cards, car loans, and so on. Those debts then get subtracted from the value of families’ assets when determining their net worth, helping to explain the Millennials’ crummy wealth accumulation. “The leveraging of college-graduate balance sheets over time is entirely consistent with the progressive weakening of their overall financial positions that we identified—even while the college and postgraduate income premiums remained intact,” the authors write. Finally—most obvious, and perhaps most important—is the cost of college and graduate school itself. The price of consumer goods has increased by a factor of four since the late 1970s. College costs have increased by a factor of 14, the study notes. More and more students have taken out heavy debt burdens to be able to go to school, burdens that then eat away at their earnings, month after month, for years on end. That has forced millions of Millennials to delay life milestones, including getting married, having children, and owning a home, for years, if not for decades, if not forever. Even if going to college is still important for young people’s earnings and employment, it is less of a clear economic boon than it was 30 years ago. In a way, the paper makes a powerful argument for making college a public good, low-cost or even free for everyone. The spiraling cost of higher education is choking Millennial families, and more young people would be able to go to college—and get the full financial benefit of getting a degree—if they were able to do it for the same price as their parents paid. TLDR College is good for earning potential but it’s impact on wealth has diminished significantly and is basically zero for black people. This is because everything costs more than it did for previous generations especially college. Because of their debt and the higher cost of things millennials are delaying life events like buying homes and investing which has caused them to miss out on the recent run up in values.