CHAMPAIGN, Ill. - Families that have high amounts of unsecured debt, such as outstanding credit card balances and payday loans, diminish their children's prospects of attending or graduating from college, according to a new study by social work professors Min Zhan at the University of Illinois and Michael Sherraden, the founder of the Center for Social Development at Washington University in St. Louis.
And differences in the types of household assets and debt that white, black and Hispanic families have may explain, at least in part, the racial disparities in college attendance and graduation rates, the researchers say.
Zhan and Sherraden explored links between household assets, debt and college achievement for 1,162 children whose biological parents participated in the National Longitudinal Survey of Youth 1979 conducted by the U.S. Department of Labor's Bureau of Labor Statistics. The ongoing survey, which studies the life experiences of adults born from 1957-1964, is a nationally representative sample, but includes a supplemental oversample of minority and economically disadvantaged families.
Zhan and Sherraden also drew data about female participants' children from a related ongoing survey, begun in 1986, which collects statistics about household composition, schooling and work experiences, among other information.
Studies of families' finances and their relationship to college attendance and graduation typically lump assets and liabilities together to estimate families' net worth. However, Zhan and Sherraden wanted to isolate assets and liabilities to determine whether asset types (including financial assets, such as savings, and nonfinancial assets, such as vehicles, properties and businesses) and types of debt (secured debt, such as mortgages, and non-secured debt, such as consumer loans) had differing effects on college achievement for white and minority children.
The authors found large gaps in educational achievement among children in the study sample, with Hispanic and black children dropping out of high school at higher rates, 23 percent and 17 percent respectively, versus white children (7 percent).
White children were more likely to enroll in and graduate from college than black or Hispanic children, with more than half of the white children, 53 percent, attaining at least some postsecondary education compared with 31 percent of Hispanics and 37 percent of blacks. About 23 percent of white students graduated, versus 12 percent of black students and 9 percent of Hispanic students.
Among families in the sample, the researchers found wide disparities in income and asset accumulation by race/ethnicity as well. White families had nearly five times the amount of financial assets ($17,871) of Hispanic families ($3,653) and black families ($3,726). About 95 percent of white families had nonfinancial assets versus 84 percent of Hispanics and 63 percent of blacks.
Ownership of financial assets was linked to parents' college expectations for their children, and, along with family income, had stronger associations with college attendance and graduation for white children than minority children. On the other hand, nonfinancial assets had greater significance for black and Hispanic children - but no impact on white children.
Nonfinancial assets, especially home and real estate ownership, could be more critical for minority children partly because they compose a larger portion of the families' assets, facilitating college success, the authors suggested.
The type of debt that families carried affected educational achievement as well. Children from families with larger amounts of secured debt were more likely to graduate from college - but when household assets were included in the analyses, the positive effect disappeared.
The authors suggested that the positive influence of secured debt on college attendance/graduation depended on families' levels of household assets - that is, whether families had the economic ability to service the debt and if the value of the assets exceeded the associated debt.
Greater amounts of unsecured debt in the household decreased the probability that children, especially black and Hispanic children, would attend or graduate from college.
The ratio of unsecured debt to financial assets also was much greater for black families (36 percent) and Hispanic families (22 percent) than for white families (14 percent), indicating that minority families were less able to repay their debt, the authors suggested.
The presence of unsecured debt, especially heavy debt, might be indicative of financial difficulties that could limit long-term educational opportunity as well as families' ability to obtain future loans, perhaps explaining some of the racial gaps in college achievement.
"(U)nsecured debt may suggest a lower level of financial functioning, while the presence of secured debt suggests a higher level of financial functioning, and both of these apparently matter for college completion," Zhan and Sherraden wrote.
Much of the unsecured debt carried by low-income families often is in the form of loans with non-mainstream financial institutions, such as high-interest payday lenders, check-cashing outlets and credit cards, Zhan said."
Stricter regulation of predatory lending practices and policy changes that facilitated access to credit through mainstream financial institutions could help low-income families reduce debt and accumulate assets, enhancing children's opportunities for college success. Providing incentives, such as matching families' contributions to college savings programs, might encourage asset accumulation, the researchers wrote.
Oftentimes, financial constraints preclude low-income families from taking advantage of the savings and tax incentives associated with state college savings programs, Zhan said.
Financial resources aside, however, structured savings programs have attitudinal implications, raising educational expectations and motivation to achieve.
"It goes beyond economic impact," Zhan said. "If kids have some savings, especially in their own names, for funding college, they have this cognitive recognition that the money is for their education so they need to work hard."
Parental expectations have an even stronger bearing on college graduation rates than children's own expectations for themselves, the researchers found in a related study using the same data set. Among other factors in the analyses, mothers' level of education "was overwhelmingly important" to families' educational aspirations for their children.
Clearly, then, savings and assets alone aren't all that matter, according to the researchers.
"However, because saving and asset building has straightforward and doable policy implications, this is a public policy strategy that should not be ignored," Zhan and Sherraden wrote.
The studies appeared in the June and November 2011 issues of the journal Children and Youth Services Review.