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College degrees Make the Rich, Poor and the Poor, Rich

06/27/2012 by John 9 Comments

A college degree is so powerful, that children growing up in rich families risk poverty without one. At the same time, children coming from poor families want to go to college and obtain a degree in accounting or even healthcare management so that they have a better chance of earning a better salary. A college degree may be risky, but it is also a critical element to income mobility.

I’ve been writing about college finances so much lately, I’m starting to think I made a mistake in naming this blog. My goal has been to provide sobering information about college to help families and young adults make wiser education decisions and thereby save tens of thousands of dollars plus unbearable disappointment. That’s why I’ve talked about the odds of succeeding after college and how high tuition costs could risk putting college graduates at a disadvantage to high school students. Today, it’s all about class and income mobility.

The Fed put together some probability data showing the odds of earning different income quintiles based on level of education and the income range of parents. In non-boring-econ-speak, that translates into what are the odds of a rich kid staying rich and a poor kid staying poor after getting a college degree?

You’ll find a money-nerd graph throughout the topics below. I’ve highlighted the important sections in each.

A High School Diploma is the Road to Poverty for Rich Kids

There is a shibboleth in modern social thought that once your family is rich, it’s rich for all eternity. This perception is not true. In fact, data shows that having less education is the path that many rich children find their way into poverty.

Based on the Fed’s findings, a rich kid with a high school diploma has a greater chance of ending up the lowest wage earner than a poor kid with a college degree.

 

 

A College Degree Almost Guarantees Rich Kids Stay Rich

Out off all the interesting characteristics on the graph, there was one demographic worth betting on. If a child, born into a rich family goes to college, they are almost guaranteed to remain wealthy. Children in this category have over a 50% chance of making it to the top quintile.

My guess on the differences in odds for rich children is that parents use a college degree as a rite of passage for passing on wealth. Despite popular perceptions, most of the rich parents I know want their children to earn wealth, not just inherit it.

 

Poor Kids with a Degree have Similar Odds of Wealth as Rich Kids without a Degree

The class you are born into does have a strong influence on your chances of getting ahead in life. However, a college degree will improve your chances of income success.

When comparing the look of each distribution. You’ll notice that distribution showing the income probabilities of rich kids without a degree is very similar to the probabilities of a poor kid with a college degree.

A college degree is almost a perfect equalizer.

 

Middle Class has 40% Chance of Earning Riches with College Degree

Of course, most of us fall into the middle class. I’ve pointed out in the past that a college degree can boost your odds of success. It can even play a large role in earning the highest income.

Without a college degree, a child born in a middle class family has slightly better than 10% chance of earning a top salary. However, a child in the middle class with a college degree has better than a 40% chance of netting a high paying salary. A degree, nearly quadruples your chances.

Getting a college degree is risky. You are far better off being unemployed with no college debt, than unemployed with $30,000 in student loans. However, if you want to improve your chances of income success, then you should work towards a degree. Just be sure that you understand that there is no guarantee with a degree, unless you were born into a rich family.

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Filed Under: College Information for Families, Family Spending

Comments

  1. Eric J. Nisall - DollarVersity says

    06/27/2012 at 4:13 pm

    I laugh at all of the time, money, and effort the government as well as private companies put into all of this research. If you ask me, they can give me all of the odds of every single event ever know to man, and I wouldn’t blink at it. When it comes to people, I always say all bets are off. There are so many variables that it is virtually impossible to accurately peg people like this.

    Besides, I’d much rather the government use its resources for something useful, like helping to ensure more kids get a decent education (even before college), or families have enough food to eat so the kids aren’t malnourished, or anything that is truly useful to the country.

    *steps down from the soapbox and thanks you all for your time*

    Reply
    • John says

      06/28/2012 at 6:23 am

      I think that if I were running a government agency or a private company, I’d want some basis for decision making. Do you feel similar to marketing research? If not, why?

      Reply
      • Eric J. Nisall - DollarVersity says

        06/29/2012 at 7:48 pm

        I’m not a big fan of “market research” simply because people’s attitudes and ideals change all the time. Also a lot of these “studies” try to project their findings within such small sample sized upon the nation as a whole.

        If you saw the same data from 10 years ago, the results would be drastically different. Since the housing crash, people that were preciously “rich” can now be in the “poor” section. Also in that vein, when the economy is doing well, regardless of economic level, people tend to be more driven because there are so many more opportunities.

        Anything that incorporates such unstable qualifiers as income and psychological make-up into data, it’s always going to be a highly time sensitive result.

        Plus, I’m more likely to say that it is the individual who decides what the outcome is, not where they come from or the path they take. So many rags-to-riches stories are being lived without the benefit of a college degree. There are also just as many boom-to-bust stories based on the individuals’ decision making, not education.

        Reply
  2. John @ Married (with Debt) says

    06/28/2012 at 12:08 pm

    I won’t always recommend college to young people if they have an alternate plan that is well thought out, and some efforts to back it up. It’s interesting how the debate is shifting in recent years.

    Reply
  3. Marie at FamilyMoneyValues says

    06/28/2012 at 4:10 pm

    I’ve come to believe that learning a skill, whether in secondary or post secondary levels, is more important than a college diploma, even though I have one.

    I’m with Eric on laugh he has at the time and money spent on research. I know stats can be maneuvered to support the theory you want.

    Reply
    • John says

      06/29/2012 at 1:52 pm

      I agree with that. The important thing is making yourself valuable. So long as you do that, your degree won’t matter.

      Reply
    • Christine Axsmith says

      09/05/2016 at 5:28 pm

      I agree. Skill always wins out in the end with most employers. The hard part is getting started in your professional career without that piece of paper.

      Reply
  4. Squirrelers says

    07/01/2012 at 6:16 pm

    I’m in the camp of people that sees a college degree as a basic necessity for young people starting out. I don’t buy arguments that purport that a high school degree is good enough, college is overrated, etc. I’ve probably made my views clear in some of my posts 🙂

    However, while I think an undergraduate degree should be the minimum target for most, I also believe that many of them are horribly overpriced. The wrong decision of where to go to college, coupled with excess loans, can possibly make somebody worse off than if they had no degree! Best to plan very carefully, and evaluate ROI.

    Reply
  5. Debt Free Teen says

    07/14/2012 at 11:53 pm

    I disagree…I think much of this data is out dated. I am in a middle class family and it appears that there is a shift back towards those with skills and ideas. I recently read the book Getting Smart and A whole New Mind. These are cutting edge books that explain where education is headed and where the job markets will be. I think looking at these resources and considering what they sat would be a better indicator of future success.
    Chase

    Reply

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