We're All Right...Aren't We?
Americans must be fundamentally optimistic. How else can we reconcile the findings that "70% of Americans report either living comfortably or doing okay financially" with "44% of Americans report that they would have difficulty paying an unexpected $400 expense"?
The above figures come from the recently released Federal Reserve's Annual Report on the Economic Well-Being of US Households in 2016. The report shows that, while we remain optimistic as a nation, levels of economic optimism appear to be diverging along the typical fault line of education.
The Importance of Higher Education
In each of the past four years of the Fed Survey, more Americans reported living comfortably or doing okay financially. However, with respect to reporting economic comfort, the percentage of respondents with a high school degree or less took a small step backward in 2016 while the percentage of those with higher education increased.
Economic recovery does not appear to be resulting in higher wages that would increase economic comfort. For employed workers (excluding the self-employed), 62% of those with high school diplomas or less did not receive a raise or promotion in 2016, compared to 51%-52% of those with higher education levels.
Less-educated workers may require a second job to make ends meet. Income from a second job was more significant to those with lower education, by a 40% to 26% margin over those with at least a bachelor's degree – but the Fed survey found that only 6% of workers with a high school degree or less work at more than one job, half the number of those with at least a bachelor's degree. This may reflect improved job opportunities among the higher educated – further driving home the importance of education beyond high school.
A bachelor's degree or above also correlates to lower income volatility, and improves the chances of handling income volatility in general. When faced with an unexpected $400 expense, 79% of respondents with a bachelor's degree or above said they could still pay all of their monthly bills, compared to 61% of those with some college or an associate degree and 52% of those with a high school degree or less.
Race Vs. Education
White workers generally fare better than other ethnic groups, but education makes a clear difference regardless of race. For non-white ethnic groups, having a bachelor's degree or above increased the feeling of economic comfort by 15-19 percentage points above those with a high school degree or less. For non-Hispanic whites, the same educational difference results in a 23-percentage-point climb.
Still, greater advances appear to be made in racial economic equality than educational economic equality. When asked if they were better off, worse off, or the same financially compared to 12 months ago, more respondents claimed to better off than worse off across all educational categories. However, the difference was only 2.9 percentage points in those with high school degrees or less, compared to 11.5 percentage points with some college or an associate's degree and 15.5 percentage points with a bachelor's degree and above.
Within racial subgroups, non-whites with at least some college education showed percentage point improvements from 24.3-26.9, suggesting that higher education is paying off among these groups.
As an interesting side note, only one racial subgroup reported being overall worse off than better off – non-Hispanic whites with high school degrees or less. This is precisely the type of disaffected voter targeted by, and energized by, now-President Trump during the campaign.
Choose your School Wisely
Respondents saddled with crippling student loan debt may be questioning the premise of an educational payoff. The average reported student loan debt was $32,731, with a median of $17,000 – meaning that a few individuals have whopping student loan debts that are distorting the average. That debt may not be distributed proportionately to the ability to repay. Find out quickly at what rate you can refinance your student loan.
Consider that more respondents who attended private for-profit schools report being behind on their educational payments (21.7% as compared to 8.5% for private non-profits and 6.4% for public institutions). That doesn't necessarily mean that for-profits are a bad choice, but they must be given even greater scrutiny as a return on investment. How far do you have to go in debt to graduate from that school, and how likely is it that your post-graduation salary will be sufficient to pay the debt?
Don't underestimate the value of completing a bachelor's degree program. While 11% of borrowers with a bachelor's degree were behind on their payments, almost one-third of those with only some college, a certificate, or technical degree were behind.
Higher education generally pays off over the course of a lifetime, and the Fed report clearly reflects educational importance – but it also reflects the importance of which higher educational path that you choose.
While Americans may not all share the same range of educational opportunities, it's important that you make the most of the opportunities that you do encounter. Have some career path in mind. Research the job placement rate in your field for graduates of your preferred school within your reach, paying special attention to trade schools and private non-profits.
Regardless of your education level and income, you can improve your likelihood of living comfortably or doing okay financially – as well as absorbing an unexpected $400 expense – with simple, sound principles. Spend in proportion to your income (and use a budget to help you do so), take steps to minimize debt, and make sure that you receive value for all your purchases. An expensive purchase – such as a college degree – may well be worth the debt load if it provides the long-term value that you need.
If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.