Are Savings More Important Than Income For Poor College Students?
March 25, 2013 Leave a comment
Noah Smith has a good piece in the Atlantic about ways low-income families can save more money. Because the article focuses on solutions, Smith mostly pays lip service to the benefits of increased savings, but if you have any doubts, a new paper by Vernon Loke illustrates the crucial role that savings can play in a low-income student’s pursuit of higher education.
While most research on poverty and higher education tends to focus on family income, Loke focused the effects of wealth or asset accumulation. Using data from the government’s NLSY79 longitudinal survey of youth born in 1986, Loked examined families belonging to four different types of asset classes. Families with “High and Stable” assets began with assets significantly higher than zero, but experienced non-significant growth. Families in the “High and Accumulating” class began with significant assets and saw a significant amount of growth over time. The “Low and Stable” class began with assets not significantly different from zero and saw stable but non-significant growth. Finally, the “Low and Accumulating” class began with assets not significantly different from zero but saw stable and significant growth over time.
Loke found was that when it comes to college attendance and college graduation, a family’s rate of asset accumulation appeared to be more important than their initial level of wealth.
The data indicate that having higher asset holdings during childhood by itself is insufficient for the direct effects of assets to be evidenced with regard to college graduation. Rather, it is in the experience of both having higher asset holdings, and experiencing a significant accumulation of assets over time, that the direct effects of assets are seen. In addition, youths from households that initially had asset holdings that were not significantly higher than zero around the time of their birth, but which experienced significant asset accumulation over the course of their childhoods, had statistically similar outcomes compared to youths from higher net worth households.
Loke also found that for low-income families the effects of asset accumulation were mediated by parental expectations, although it’s hard to know the direction of causality. It could be that parents who expect their kids to go to college are more likely to try and save money, but it’s also possible that parents who save money begin to believe it’s increasingly possible for their children to attend college.
In general, the results mesh well psychological research on framing and anchoring effects. Even when a family begins with higher wealth, if they are anchored to that baseline the additional cost of a college education can seem enormous if there is no asset accumulation. Meanwhile, for a family that starts out with zero wealth, significant asset accumulation can make the cost of college seem less daunting because they are much better off relative to where they began.
To get back to Smith’s article, Loke’s study means that encouraging saving becomes more than a way help low-income families gain access to the earning potential of assets such as stocks. Saving more can also significantly increase the chances their children attend and graduate from college, and that can increase the family’s earning potential.
Loke, V. (2013). Parental asset accumulation trajectories and children’s college outcomes Economics of Education Review, 33, 124-133 DOI: 10.1016/j.econedurev.2012.12.002