In a world where a person’s decision to go to college depends on their ability to pay for college, money is everything.
And in a country where access to money is wildly unequal across racial and ethnic groups, whether a family’s financial resources go beyond a biweekly paycheck and include home equity, retirement savings or hefty gifts from older relatives can make a significant difference in access to higher education, according to a new analysis from the Institute of Higher Education Policy.
The analysis found that family wealth – not just income – affects the likelihood that a student’s parents have saved for college, whether the student will enroll, whether they’ll take out student loans, and even how likely they are to graduate. And it identified a self-perpetuating cycle in which the nation’s pervasive racial wealth gap both contributes to and is exacerbated by disparities in higher education.
And the report argues that something can be done about it. Distributing federal financial aid dollars based on wealth and income, rather than income alone, could make for a fairer system, they wrote. The authors said more research is needed to determine exactly how the recommended process should be designed so that it minimizes the burden on the families it would be trying to help.
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Eleanor Eckerson Peters, director of research and policy at IHEP and one of the report’s authors said that affordability is “one of the key levers that higher education can pull to ensure equitable access” and that including wealth in the financial aid calculation could minimize students’ need to take out loans and allow them greater opportunities to build wealth later in life.
“For decades, policymakers, advocates, researchers have been using income to understand economic inequities within higher education,” Eckerson Peters said. “This research really shows that we should be looking at wealth alongside income.”
Yet college and university financial aid decisions cannot easily take wealth into account, because the FAFSA, or Free Application for Federal Student Aid, does not ask for many of the common elements of wealth.
An estimated 850,000 students per year benefit from assets that are not accounted for by the FAFSA, according to a 2022 report from the Brookings Institute, a nonpartisan research organization.
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Right now, home equity and retirement savings, which are “the most important sources of wealth that most people have, don’t get counted,” said Phillip Levine, an economist who studies college affordability as a professor at Wellesley College and a nonresident senior fellow at the Brookings Institute.
“It just creates this obvious inequity in that the people who have exactly the same income, but not those resources, are in a worse position.”
Phillip Levine, economist at Wellesley College
Levine said that white families are more likely to have these types of assets, and excluding them from financial aid calculations disproportionately benefits white students.
When a student’s financial need is calculated without considering home equity and retirement savings, the Brookings Institute estimates that white students receive roughly $2,200 more per year in financial aid than their Black peers, and $800 more than their Latinx peers.
“It just creates this obvious inequity in that the people who have exactly the same income, but not those resources, are in a worse position,” Levine said.
Related: Why racial graduation gaps exist across the nation
Eckerson Peters said rethinking the way need-based financial aid is distributed could be one way of ensuring that higher education isn’t contributing to the racial wealth gap.
The IHEP analysis found racial disparities between median income and median wealth among families with young adults. For Black families, the median income was $43,800, and the median wealth was $4,000. For Latinx families, the median income was $58,000 and the median wealth was $24,000. And for white families, the median income was $84,500 and the median wealth was $52,000.
In all racial groups, those students with high wealth (not just income) are more likely to enroll in college than those who come from low or middle-range wealth. Among students from high- wealth backgrounds, white students enroll at a rate of 90 percent, compared to 82 percent for Latinx students and 81 percent for Black students.
The IHEP analysis also found that the generational transfer of wealth (a gift of more than $10,000 from living parents or grandparents) plays a role in whether a family is able to save for their children’s education.
About 67 percent of Black families who received financial gifts of that size saved for college, compared to 40 percent of those who didn’t. About 61 percent of Latino families saved for college if they received such gifts, compared to 40 percent of those who didn’t. And for white families, about 60 percent saved for college if they received such gifts, compared to 33 percent of those who didn’t.
Levine said that in a perfect world, the financial aid system should make college equally accessible regardless of what their family’s financial situation is.
“If the financial aid system operated well, that almost shouldn’t matter, because it should undo that by charging more to the people with more wealth,” Levine said. “If the financial system worked perfectly, that’s what would happen. But that isn’t the way it works.”
This story about family wealth was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for our higher education newsletter. Listen to our higher education podcast.