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College Grads Learn to Buy Different Assets

It seems that U.S. college graduates are wealthier partly because they own different types of physical assets and financial investments. And it is these underlying components of net worth—which are quite oblivious to the education level of their owner—which have increased in value, which leads to an increase in net worth. For example, according to the same Survey of Consumer Finances data you previously saw, in the year 2007 more than 31 percent of college graduates owned stocks (directly), and 21 percent held investment funds. In contrast, only 9 percent of those with a high school diploma reported holding any stocks (directly), and only 6 percent had any investment funds.

A similar pattern emerges with nonfinancial assets such as real estate. For example, in the same 2007 survey, 78 percent of college graduates reported owning a primary residence, whereas only 53 percent of individuals without a high school diploma owned a primary residence. For high school graduates the ownership rate was 69 percent. Even more noteworthy is the median value of the houses owned by the various educational groups: The median value of the college graduate's primary residence was $280,000. For the high school graduate it was $150,000, and for those without a high school diploma it was $122,500.

What you can see is that the college graduate's higher net worth is allocated to a portfolio of assets that are quite different from those in the other groups who have less education. In aggregate, college graduates have more financial investments, and they own houses that are more expensive. Now, think about what happened to the value of the stock market, mutual funds, and housing prices during the period 1989 to 2007; they went up quite strongly. The SP500 increased by 659 percent from January 1989 to January 2007, whereas the value of housing—as measured by the S&P/Case-Shiller Home Price (Composite 10) index, which provides data on single-family house prices in the United States—increased by 187 percent over the same 18 years.

So, perhaps the reason college graduates are wealthier than high school graduates is because of what they "learned to buy" while in college, as opposed to their earning power per se. In the words of the author of a recent study on the same topic, "Assets more likely held by college graduates appreciate faster than assets held by high school graduates."10 This insight is also echoed in a Harvard Business School working paper in which the authors examine the impact of financial education on financial market participation and find that cognitive ability, which is arguably improved by attending college, increases the odds of holding financial assets such as stocks and bonds.11 Of course, these same assets can become a double-edged sword because they are more volatile than other kinds of assets, and this volatility is not under their individual owner's control.

What you've seen so far is that households headed by individuals with more education tend to have higher incomes and higher net worth. The higher net worth comes in part because college graduates hold different assets than those owned by households with lower levels of education, and these components of net worth appreciate more quickly. But you also know that the assets held by households with higher education levels fluctuate in value more than those held by other households. Does this mean that college graduates might become worse off, over time, than other households with less education?

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