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ISSUE 12 | AUGUST 2015 Perspectives on Household Balance Sheets Why Didn’t Higher Education Protect Hispanic and Black Wealth? Compared to their less-educated counterparts, typical white and Asian families with four-year college degrees withstood the recent recession much better and have accumulated much more wealth over the longer term. Hispanic and black families headed by someone with a four-year college degree, on the other hand, typically fared significantly worse than Hispanic and black families without college degrees. This was true both during the recent turbulent period (2007-2013) as well as during a two-decade span ending in 2013 (the most recent data available). Why didn’t higher education protect Hispanic and black family wealth from either short-term turbulence or long-term William R. Emmons and Bryan J. Noeth C ollege-educated families usually earn significantly higher incomes and accumulate more wealth than families headed by someone who does not have a four-year college degree. The income- and wealth-boosting effects of education apply within all racial and ethnic groups. Higher education may also help “protect” wealth, buffering families against major economic and financial shocks and mitigating adverse long-term trends. Based on two decades of detailed wealth data, we conclude that education does not, however, protect the wealth of all racial and ethnic groups equally. (continued on Page 2) TABLE 1 Median Family Income in 2013 Four-Year College Graduates Non-College Graduates Median College Income as a Multiple of Median Non-College Income All Families $87,250 $36,523 2.4 White $94,351 $41,474 2.3 Asian $92,931 $32,668 2.8 Hispanic $68,379 $30,436 2.2 Black $52,147 $26,581 2.0 TABLE 2 Median Family Net Worth in 2013 Four-Year College Graduates Non-College Graduates Median College Net Worth as a Multiple of Median Non-College Net Worth $273,586 $43,625 6.3 White $359,928 $80,692 4.5 Asian $250,637 $25,632 9.8 Hispanic $49,606 $12,160 4.1 Black $32,780 $9,006 3.6 All Families SOURCE FOR BOTH TABLES: Survey of Consumer Finances 1 The Center for Household Financial Stability at the Federal Reserve Bank of St. Louis focuses on family balance sheets. The Center’s researchers study the determinants of healthy family balance sheets, their links to the broader economy and new ideas to improve them. The Center’s original research, publications and public events support researchers, practitioners and policy-makers seeking to rebuild and strengthen the balance sheets of all American households, but especially those harmed by recent economic and financial shocks. For more information, see the web site at www.stlouisfed.org/hfs. (continued from Page 1) FIGURE 1 Change in Median RealWorth Net Worth between Change in Median Real Net between 2007 and2007 2013 and 2013 20% competitive pressures? Job-market difficulties specific to Hispanic and black college graduates probably played a role, especially 5.1 0% over the longer term. Financial decision-making appears even more important in explaining large wealth declines among –16.0 –20% Hispanic and black college-educated families during the Great Recession and its aftermath. –32.9 –40% Higher education typically boosts income and wealth. The first –37.3 –41.2 row of Table 1 shows differences in 2013 median income between Four-Year College Grads –60% families with college degrees and families without. The median –59.7 Non-College Grads –65.3 income among all families headed by someone with a degree was –71.9 –80% 2.4 times the median income among families headed by someone White Asian Hispanic Black without such a degree. The ratio was somewhat larger among SOURCE: Survey of Consumer Finances. SOURCE: Survey of Consumer Finances. whites and Asians than among blacks and Hispanics, but all were FEDERAL RESERVE BANK OF ST. LOUIS within the range of two to three times. Table 2 shows that higher education is even more strongly FIGURE 2 associated with wealth accumulation. The typical collegeChange in Median RealIncome Incomebetween between 2007 Change in Median Real Real 2007 and and 20132013 educated family had between three and 10 times more wealth than its racial or ethnic counterpart without a degree. The white 10% and Asian wealth ratios shown in the table are noticeably larger than those of blacks and Hispanics. One reason why the income 0% –1.4 and wealth ratios are highest among white and Asian college –4.3 –5.9 –7.9 –10% graduates is that they are more likely than black or Hispanic –8.6 college graduates to have graduate or professional degrees. –20% Advanced degrees typically provide significantly higher earnings –21.3 –22.0 and are strongly associated with greater wealth accumulation.1 Four-Year College Grads –30% Higher education protects wealth, but only among white and Non-College Grads –33.1 Asian families. Another financial benefit of having more educa–40% tion may be its “protective” effect on wealth. Better-educated White Asian Hispanic Black families often withstand major economic and financial shocks SOURCE: Survey Survey of Consumer Finances. SOURCE: of Consumer Finances. better than those with less education. For example, the median FEDERAL RESERVE BANK OF ST. LOUIS wealth of all families headed by a four-year college graduate declined by 24 percent between 2007 and 2013. The decline among families without a college degree, however, was 48 percent. among whites and Hispanics run counter to their respective (Both figures are adjusted for inflation, as are all figures in the wealth changes. Therefore, the link between changes in income balance of this article.) and changes in wealth is imperfect at best, at least during the The reasons why having a college degree might appear to promost recent economic cycle. tect wealth during turbulent times are complex. They probably Financial choices probably played a bigger role than income include both stronger attachment to and performance in the job fluctuations in determining wealth outcomes in recent years. Figmarket during recessions as well as purely financial factors, inure 3 shows that the median debt-to-income (DTI) ratios among cluding balance-sheet choices and financial behaviors. Education college-educated Hispanic and black families in 2007—on the eve is a strong predictor of the quality of financial decision-making. of the Great Recession—were far higher than those among any Figure 1 compares the changes in median wealth between other group. 2007 and 2013 among families headed by four-year college In particular, the typical DTI ratio of a college-educated Hisgraduates versus those with less education. White and Asian panic family was 100 percentage points higher than the typicollege-headed families generally fared much better than their cal DTI ratio of a non-college-educated Hispanic family, while less-educated counterparts. The typical Hispanic and black the gap was 140 percentage points among blacks. Compounding college-headed family, on the other hand, lost much more wealth this potentially severe squeeze on cash flow were balance sheets than its less-educated counterpart. Median wealth declined by heavily concentrated in residential real estate, which subsequently about 72 percent among Hispanic college-grad families versus a plunged in value. Declines in the average value of ownerdecline of only 41 percent among Hispanic families without a col- occupied homes among college-educated Hispanic and black lege degree. Among blacks, the declines were 60 percent versus families between 2007 and 2013 were 45 percent and 51 per37 percent. cent, respectively. The average value of owner-occupied homes Figure 2 suggests that relative changes in family income may declined 25 percent among college-educated white families and have contributed to the better wealth experience of collegeincreased 6 percent among college-educated Asian families.2 educated Asian families and the worse experience of collegeeducated black families. However, changes in median incomes (continued on Page 3) 2 (continued from Page 2) FIGURE 3 Median Debt-to-Income Ratio Median Debt-to-Income Ratio in 2007in 2007 180% Income trends are important in the longer term. College gradu164.7 Four-Year College Grads ates typically accumulate much more wealth over long periods 160% Non-College Grads 134.3 than do those without a college degree. The median wealth 140% among all college graduates increased by 52 percent between 120% 102.2 1992 and 2013, while the median wealth among all non-college 100% 86.5 grads declined by 26 percent. As Figure 4 shows, higher educa80% tion was strongly associated with greater wealth accumulation 56.9 60% 47.4 among whites and Asians, while a college degree was associated 40% 33.6 with a much worse wealth trend by a typical Hispanic or black 24.9 20% family. 0% Figure 5 suggests that adverse long-term income trends among White Asian Hispanic Black Hispanic and black college grads may be an important factor. SOURCE: Survey of Consumer Finances. SOURCE: Survey of Consumer Finances. The median income of college-grad white families grew by FEDERAL RESERVE BANK OF ST. LOUIS 13 percentage points more than their non-college counterparts. The median income of college-grad Asian families grew 31 perFIGURE 4 cent, while the median income of their non-college counterparts Change in Median RealWorth Net Worth between Change in Median Real Net between 1992 and1992 2013 and 2013 fell 9 percent over the same period. 100% 89.6 Conversely, median Hispanic and black college-grad incomes 86.4 Four-Year College Grads 80% fell 10 percent and 12 percent, respectively, while the median Non-College Grads incomes of their non-college counterparts rose 16 percent and 60% 17 percent, respectively. 40% 30.8 Higher education alone cannot level the playing field. Evidence 20% presented here suggests that college degrees alone do not provide 0% short-term wealth protection, nor do they guarantee long-term –3.8 –10.9 wealth accumulation. The underlying factors causing racial and –20% –27.4 ethnic wealth disparities undoubtedly are complex and deeply –40% 3 rooted. Further research is needed. –44.7 –60% William R. Emmons is senior economic adviser at the Center for Household Financial Stability at Federal Reserve Bank of St. Louis. Bryan J. Noeth is a lead policy analyst at the Center. White SOURCE: Survey Survey of Consumer Finances. SOURCE: of Consumer Asian Hispanic –55.6 Black Finances. FEDERAL RESERVE BANK OF ST. LOUIS FIGURE 5 Change in Median Real Income between Change in Median Real Income between 1992 and1992 2013 and 2013 40% Four-Year College Grads 30.9 30% Non-College Grads 20% 10% ENDNOTES 18.0 17.3 15.6 4.6 0% 1 Emmons, William R.; and Noeth, Bryan J. “Education and Wealth,” The Demographics of Wealth, Federal Reserve Bank of St. Louis, April 2015, No. 2. See www.stlouisfed.org/household-financial-stability/ the-demographics-of-wealth/essay-2-the-role-of-education. Also, all references to four-year college graduates in this article include people who have advanced degrees. 2 These figures refer to the percent change in the average value of owner-occupied housing owned by all members of a particular group in 2007 and 2013, whether they are homeowners or not. This statistic therefore captures both the decline in value of homes retained by their 2007 owners through 2013 as well as the loss of a house through foreclosure or other distressed sale. 3 For more information, see Emmons, William R.; and Noeth, Bryan J. “Race, Ethnicity and Wealth,” The Demographics of Wealth, Federal Reserve Bank of St. Louis, February 2015. Available at: www. stlouisfed.org/household-financial-stability/the-demographics-ofwealth/essay-1-race-ethnicity-and-wealth. –10% –20% –9.2 White SOURCE: Survey of Consumer SOURCE: Survey of Finances. Consumer FEDERAL RESERVE BANK OF ST. LOUIS 3 Asian Finances. –10.0 Hispanic –12.1 Black