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Racial Wealth Gap Persists Despite Degree, Study Says

Susan Notes: What the study shows is the importance of family wealth.


By Patricia Cohenaug


Even with tuition shooting up, the payoff from a college degree remains strong, lifting lifelong earnings and protecting many graduates like a Teflon coating against the worst effects of economic downturns.

But a new study has found that for black and Hispanic college graduates, that shield is severely cracked, failing to protect them from both short-term crises and longstanding challenges.

"The long-term trend is shockingly clear," said William R. Emmons, an economist at the Federal Reserve Bank of St. Louis and one of the authors of the report. "White and Asian college grads do much better than their counterparts without college, while college-grad Hispanics and blacks do much worse proportionately."

A college degree has long been recognized as a great equalizer, a path for minorities to help bridge the economic chasm that separates them from whites. But the report, scheduled to be released on Monday, raises troubling questions about the ability of a college education to narrow the racial and ethnic wealth gap.

"Higher education alone cannot level the playing field," the report concludes.

Economists emphasize that college-educated blacks and Hispanics over all earn significantly more and are in a better position to accumulate wealth than blacks and Hispanics who do not get degrees. Graduates' median family income in 2013 was at least twice as high, and their median family wealth (which includes resources like a home, car and retirement account) was 3.5 to 4 times greater than that of nongraduates.

But while these college grads had more assets, they suffered disproportionately during periods of financial trouble.

From 1992 to 2013, the median net worth of blacks who finished college dropped nearly 56 percent (adjusted for inflation). By comparison, the median net worth of whites with college degrees rose about 86 percent over the same period, which included three recessions -- including the severe downturn of 2007 through 2009, with its devastating effect on home prices in many parts of the country. Asian graduates did even better, gaining nearly 90 percent.

Among minorities, a college education has not been a guarantee of financial security in recent decades. In contrast to white and Asian households, the net worth of college-educated black and Hispanic families fell significantly between 1992 and 2013, while their debt hit high levels even before the financial crisis.

See New York Times for chart.

To understand just how disappointing these results are, look at the impact during this period on comparable groups without college degrees. Blacks without degrees, in large part because they had much less to lose, experienced a 3.8 percent drop in wealth. Whites who didn't graduate from college lost nearly 11 percent. The wealth of Asian nongrads fell more than 44 percent.

There is not a simple answer to explain why a college degree has failed to help safeguard the assets of many minority families. Persistent discrimination and the types of training and jobs minorities get have played a role. Another central factor is the heavy debt many blacks and Hispanics accumulate to achieve middle-class status.

The collapse of the housing bubble played havoc with college-educated black and Hispanic families, who on average accumulated a huge amount of debt relative to the size of their paychecks. They borrowed a lot to buy homes, only to see them plunge in value during the mortgage crisis. While the average value of a home owned by a white college graduate declined 25 percent, homes owned by black and Hispanic grads fell by about twice that.

This loss was made more devastating by the fact that blacks and Hispanics tended to have more of their wealth concentrated in their homes than whites and Asians, who, on average, accumulated more assets in the stock and bond markets, primarily through retirement accounts.

The housing boom and bust particularly whipsawed college-educated Hispanics: From 2007 to 2013, their net worth fell a whopping 72 percent.

One lesson, according to economists at the St. Louis Fed, is that borrowing too much to get a piece of the American dream often undermines any hope of sustaining it.

That notion applies equally to excessive college and housing loans, they say. "How you finance an asset is just as important as the asset itself," said Ray Boshara, director of the Center for Household Financial Stability at the St. Louis Fed bank.

Substantially narrowing the racial and ethnic wealth gap, Mr. Boshara and the study's authors suggest, would require policy changes to expand the availability of a quality college education without forcing students into outsize debt.

The issue of onerous student debt is surfacing in 2016 presidential campaigns. Hillary Rodham Clinton, who is seeking the Democratic Party nomination, has proposed government grants to replace loans for students at four-year public colleges and universities. The plan has spurred some of her Republican rivals, including Senator Marco Rubio of Florida and Gov. John R. Kasich of Ohio, to talk about reducing the student loan burden.

While the recession has caused especially steep declines in black and Hispanic wealth, the study contends that the problem is deeply rooted and more persistent. "The recent crisis exacerbated these longer-term trends but did not by itself cause the long-term trends that we see," Mr. Emmons said.

In even the best of economic times, blacks and Hispanics have lagged whites. The black unemployment rate, for example, has consistently been twice as high as the rate for whites, even among college graduates.

Researchers have repeatedly found discrimination in the job market. When two nearly identical résumés are sent out, for example, it has been documented that the candidate with a white-sounding name receives more callbacks than the applicant with a black-sounding name.

Discrimination like this and other factors contribute to the persistent and substantial pay gap between whites and minorities. Blacks, for instance, hold a disproportionate share of government jobs -- a sector that has shrunk in recent years and provides fewer opportunities for big wage gains. Blacks have fewer advanced degrees, and the ones who do are more often in lower-paying fields or graduates of colleges with lesser reputations.

"Blacks and Latinos at all education levels, including college and advanced degrees, earn less than their white counterparts, which means lower lifetime earnings" and less ability to save, said John Schmitt, research director at the Washington Center for Equitable Growth, who reviewed an advance copy of the report.

Blacks and Hispanics are also less likely than whites to inherit money or receive help from their parents to cover a tuition bill or a down payment on a house.

William A. Darity Jr., director of the Duke Consortium on Social Equity at Duke University, points out that a family headed by a black college graduate has less wealth on average than a family headed by a white high school dropout.

The lack of family wealth is pivotal to understanding the racial economic gap, he argues.

While the researchers from the St. Louis Fed, when asked, played down the importance of financial support from family when explaining their results, Mr. Darity said he believed that family aid helped individuals avoid the type of risky big-ticket borrowing that ensnared so many Hispanic and black graduates.

"Prior family wealth is the key," Mr. Darity explained in an email, noting that it "shapes both income-generating opportunities and the capacity to allow wealth to grow more wealth."

— Patricia Cohenaug
New York Times
-08-17
http://www.nytimes.com/2015/08/17/business/racial-wealth-gap-persists-despite-degree-study-says.html?emc=edit_tnt_20150816&nlid=5100421&tntemail0=y


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