Federal Reserve Survey of Consumer Finances, College and Owning a Business

[SeattleCPA]

Thought this was sort of “investment-y”. Last week the Federal Reserve’s Survey of Consumer Finances appeared.

Note: The PDF summary appears here: https://www.federalreserve.gov/publications/files/scf23.pdf

Most of reporting on this newest edition has talked about growing incomes and wealth in US, which is good news for Americans. But one thing that I haven’t seen mentioned is how good an investment the Survey suggests a college degree is and a small business is. Basically a college degree triples someone’s net worth. Owning a business seems to double one’s net worth. Worth reading. (Report is sort of couple dozen pages.)

P.S. Tangential point. We’ve regularly discussed in past income inequality in US versus other countries. I was curious after reading the Survey’s reporting of real growth in US incomes to see if other countries have reported real growth too. Realize the Our World in Data website now lets you do that and compare countries in an attractive chart. Here’s link for example for chart version that compares US and Sweden:

link: https://ourworldindata.org/explorers/incomes-across-distribution-ppp2017?country=USA~SWE&Indicator=Decile+thresholds&Decile=All+deciles&Household+survey+data+type=Show+data+from+both+income+and+consumption+surveys&Period=Day&Show+breaks+between+less+comparable+surveys=false

A chart comparing deciles of average daily income of US and Sweden appears below.

[Must_ache]

This just suggests to me that Sweden's taxes are considerably higher, and a lot of our "wealth" is at the expense of government deficits.

[MustacheAndaHalf]

I believe salaries are public information in Sweden - anyone can look them up.  That could put downward pressure on the highest salaries, which are easier to hide in the U.S.

Sweden 1975 - 2015, median $25.34 grew to $48.05 ... +90% growth
U.S. 1974 - 2014, median $40.95 grew to $51.60 ... +26% growth
(Different starting years from lack of annual data back then)

If we had this discussion back in 2014-2015, we'd be wondering how the U.S. had made such small gains compared to Sweden.  Maybe we'd point to higher quality education, or question the U.S. handling of the 2008 financial crisis.  But if we take the decussion forward 5 years ...

Sweden 2014 - 2019, median $46.90 grew to $50.55 ... +8% growth
U.S. 2014 - 2019, median $51.60 grew to $64.90 ... +26% growth

U.S. income gains over 40 years equal the gains in those 5 years?  Compared to Sweden, the U.S. has both the low (40yr) and high (5yr) extremes.

[ChpBstrd]

This just suggests to me that Sweden's taxes are considerably higher, and a lot of our "wealth" is at the expense of government deficits.

That is the tradeoff our parents accepted. The arbitrage move is now to move to Sweden and avoid liability for the $256k in national debt per person we racked up for the benefit of top earners.

[SeattleCPA]

Honestly think the two big points here are that college and business ownership both gamechangers.

But what I think I see in that chart is this: a Nordic style system reduces variability but mostly by pushing down incomes. All incomes basically?

[roomtempmayo]

Honestly think the two big points here are that college and business ownership both gamechangers.

But what I think I see in that chart is this: a Nordic style system reduces variability but mostly by pushing down incomes. All incomes basically?

That's one way to look at it.

The other way is that Nordic countries reduce variability in income by making major parts of the market public services that do not require income to consume.  For example, healthcare is about 20% of the US economy and a major part of household spending for which people need income. In Sweden, that whole sector is classified as a public service and so there's no need for that income.

I wouldn't think of it so much as a matter of depressing incomes as making income less necessary.

[ChpBstrd]

Honestly think the two big points here are that college and business ownership both gamechangers.

But what I think I see in that chart is this: a Nordic style system reduces variability but mostly by pushing down incomes. All incomes basically?

That's one way to look at it.

The other way is that Nordic countries reduce variability in income by making major parts of the market public services that do not require income to consume.  For example, healthcare is about 20% of the US economy and a major part of household spending for which people need income. In Sweden, that whole sector is classified as a public service and so there's no need for that income.

I wouldn't think of it so much as a matter of depressing incomes as making income less necessary.

Yea those incomes are low because they are essentially after people have paid for things like healthcare, secured retirement funding, and more extensive public transportation. To make this apples to apples we'd have to subtract those expenses from each line of the American income curve, because Americans still have to pay for these things from their individual incomes.

In addition, there is reason to believe Americans pay far more for each of these items than the Scandinavians. The US healthcare system is notoriously inefficient, bureaucratic, and riddled with rent-seekers, Americans have to earn and save very large amounts for retirement to make sure they can outpace any potential sequence of returns risk, and the SUV arms race on American roads is decimating middle class finances while maintenance of those roads is itself destroying public finances.

[roomtempmayo]

Honestly think the two big points here are that college and business ownership both gamechangers.

But what I think I see in that chart is this: a Nordic style system reduces variability but mostly by pushing down incomes. All incomes basically?

That's one way to look at it.

The other way is that Nordic countries reduce variability in income by making major parts of the market public services that do not require income to consume.  For example, healthcare is about 20% of the US economy and a major part of household spending for which people need income. In Sweden, that whole sector is classified as a public service and so there's no need for that income.

I wouldn't think of it so much as a matter of depressing incomes as making income less necessary.

Yea those incomes are low because they are essentially after people have paid for things like healthcare, secured retirement funding, and more extensive public transportation. To make this apples to apples we'd have to subtract those expenses from each line of the American income curve, because Americans still have to pay for these things from their individual incomes.

In addition, there is reason to believe Americans pay far more for each of these items than the Scandinavians. The US healthcare system is notoriously inefficient, bureaucratic, and riddled with rent-seekers, Americans have to earn and save very large amounts for retirement to make sure they can outpace any potential sequence of returns risk, and the SUV arms race on American roads is decimating middle class finances while maintenance of those roads is itself destroying public finances.

Also, the bottom 3/8 of Swedish society basically have the same incomes as their American peers, plus a massive social safety net covering all sorts of goods that require income in the US. 

I wonder what part of Swedish society has a higher standard of living (private income + public benefits) than their American counterparts.  2/3?  3/4?

[MustacheAndaHalf]

Honestly think the two big points here are that college and business ownership both gamechangers.

But what I think I see in that chart is this: a Nordic style system reduces variability but mostly by pushing down incomes. All incomes basically?

You need to consider the +61% head start for the U.S., which eroded to +28% by the end.  Given equal starting points, the U.S. would have fallen 20% behind in median income.

[SeattleCPA]

Honestly think the two big points here are that college and business ownership both gamechangers.

But what I think I see in that chart is this: a Nordic style system reduces variability but mostly by pushing down incomes. All incomes basically?

That's one way to look at it.

The other way is that Nordic countries reduce variability in income by making major parts of the market public services that do not require income to consume.  For example, healthcare is about 20% of the US economy and a major part of household spending for which people need income. In Sweden, that whole sector is classified as a public service and so there's no need for that income.

I wouldn't think of it so much as a matter of depressing incomes as making income less necessary.

Good point--and I agree we can look at and think about the variability in different ways. BTW some of the ourworldindata data series include consumption. Not sure though how much that addresses your point.

[SeattleCPA]

I wonder what part of Swedish society has a higher standard of living (private income + public benefits) than their American counterparts.  2/3?  3/4?

Agreed. I think that's really one of the key points. FWIW, I'm reading these charts as showing that often almost everybody ends up with higher income and consumption in an economy like US runs. But also that you experience way more variability in incomes and consumption.

I've made this analogy before but it's similar to the way that adding bonds to your portfolio dampens the variability but also probably decreases the outcomes.

BTW I picked Sweden partly because that's where my people come from and then also because the Nordic economies have been praised as models of equality sometimes. But you can look at other countries and like France, UK, Germany and see other data sets compared.

@MustacheAndaHalf ? Looking at France may be a comparison where roughly people start at the same point...almost.

P.S. I wish now I'd not pointed to the new Our World in Data charts. Because I thought the super-neat and actionable thing for people still in the accumulation phase of their personal financial plan were the Survey's insights about college and business ownership.

[MustacheAndaHalf]

BTW I picked Sweden partly because that's where my people come from and then also because the Nordic economies have been praised as models of equality sometimes. But you can look at other countries and like France, UK, Germany and see other data sets compared.

@MustacheAndaHalf ? Looking at France may be a comparison where roughly people start at the same point...almost.

I think inflation, growth and wages have been important topics recently, which is why these country comparisons of wages draw attention quickly.  Along those lines, the top developed markets are Japan, UK, Canada (per Vanguard's Developed Markets ETF, $VEA).  China is in emerging markets, but its worth tracking.  Japan lacks long term data.

U.S. 1974 - 2017  : $40.95 to $58.30 = +42% growth
Canada 1975 - 2017 : $33.95 to $55.40 = +63% growth
UK 1974 - 2017 : $20.66 to $45.00 = +118% growth
China - urban : 1981 - 2019 : $1.81 to $13.34 = +637% growth
China - rural : 1981 - 2019 : $0.91 to $8.10 = +790% growth

P.S. I wish now I'd not pointed to the new Our World in Data charts. Because I thought the super-neat and actionable thing for people still in the accumulation phase of their personal financial plan were the Survey's insights about college and business ownership.

Lumping all college degrees together mixes those that are very well paid with those that aren't.  For example, compare those who majored in "dance" ($30k/year) to those who majored in "computer science" ($105k/year) in the data from this article.
https://www.cbsnews.com/news/college-major-top-and-lowest-earning-majors-impact-on-income-pay/

There are 3 "engineering" majors in the top 10, and 3 theater related majors (dance, music, theater) in the bottom 10.  Engineering jobs pay better than theater jobs.  So when trying to form advice about reaching higher NW, the type of major needs to be considered.

[Michael in ABQ]

Some interesting statistics from the assets section.

Only 1.1% of households own bonds compared to 21% for stocks (directly held vs. in a retirement account).

14.6% of households had business equity with a median value of $90k.
 
5.9% had non-residential property equity with a median value of $125k.

16.1% had cash value life insurance with a median value of $9,700. Such a waste. That means almost 1 in 6 households have wasted money on this terrible financial product - while enriching numerous insurance agents.

Business Ownership

In 2022, 20 percent of families owned a privately held business, the highest level on record in the modern Survey of Consumer Finances

Among families that owned businesses in 2022, 78 percent employed fewer than five people, and 52 percent owned nonemployer firms, which are primarily either sole proprietorships or self-employed contractors (table A).3 Conditional mean business equity rises with the number of employees from $142,700 for nonemployer firms to nearly $3.9 million for families with businesses with more than five employees. Conditional median business equity exhibits a similar pattern, but the values are much more modest. The median nonemployer business owner reported no net value for their business. Among families that owned businesses with more than five employees, median business equity was $400,000.

Median equity in businesses with 2-5 employees was $141k vs. $400k for those over 5 employees. Median income for businesses without employees was $73.5k but rose to $135k for 2-5 employees and $217k for 5+ employees.


One final encouraging state:

Use credit cards for convenience only (that is, do not carry a balance) - 55.7% in 2022 - however, that's fallen from 63% in 2013.

[SeattleCPA]

Lumping all college degrees together mixes those that are very well paid with those that aren't.

I agree. I also think there are some really excellent vocational tracks that don't necessarily include a college degree. E.g., some of the skilled trades--electrician, plumber, etc--may not have a college degree always but those high-skill occupations can do really well too.

No offense meant to anyone who majored in dance in college. But I'd rather make what an electrician makes.

BTW I like your insights from the other comment.

I'd actually blogged about this earlier in the week here: https://evergreensmallbusiness.com/wealth-building-insights-from-latest-survey-of-consumer-finances/ Shared some similar comments. :-)

[roomtempmayo]

Lumping all college degrees together mixes those that are very well paid with those that aren't.  For example, compare those who majored in "dance" ($30k/year) to those who majored in "computer science" ($105k/year) in the data from this article.
https://www.cbsnews.com/news/college-major-top-and-lowest-earning-majors-impact-on-income-pay/

There are 3 "engineering" majors in the top 10, and 3 theater related majors (dance, music, theater) in the bottom 10.  Engineering jobs pay better than theater jobs.  So when trying to form advice about reaching higher NW, the type of major needs to be considered.

I think the actionable information is primarily going to college.  Kids who show up on campus often or even usually have a very poor grasp of their interests and aptitudes, as the legions of former pre-med students can attest.  Due to a combo of preparation and natural aptitude, many students are never, ever going to enter a math-heavy field.

I do appreciate that there are applications of every given aptitude and skillset that are compensated at higher and lower levels, and it helps to know that when making choices.  The further you get from a certified or licensed profession though, the less students are actually making a choice about a job when they make a choice about a major.

My reservation about the trades isn't about annual income, it's about durability/endurance.  A kid who is in high school now is likely going to be in the workforce until they're 70+.  50 years is a long time to work with your hands.  There are offramps for sure, but the math doesn't work for 50% of plumbers to be running the business from an office.

[MustacheAndaHalf]

Lumping all college degrees together mixes those that are very well paid with those that aren't.  For example, compare those who majored in "dance" ($30k/year) to those who majored in "computer science" ($105k/year) in the data from this article.
https://www.cbsnews.com/news/college-major-top-and-lowest-earning-majors-impact-on-income-pay/

There are 3 "engineering" majors in the top 10, and 3 theater related majors (dance, music, theater) in the bottom 10.  Engineering jobs pay better than theater jobs.  So when trying to form advice about reaching higher NW, the type of major needs to be considered.

I think the actionable information is primarily going to college.  Kids who show up on campus often or even usually have a very poor grasp of their interests and aptitudes, as the legions of former pre-med students can attest.  Due to a combo of preparation and natural aptitude, many students are never, ever going to enter a math-heavy field.

I do appreciate that there are applications of every given aptitude and skillset that are compensated at higher and lower levels, and it helps to know that when making choices.  The further you get from a certified or licensed profession though, the less students are actually making a choice about a job when they make a choice about a major.

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college.  The article I posted only covers 4 year colleges, although the report by the Fed does include graduate degrees as a category.  A few of those top paying jobs (like veterinary medicine) are probably very correlated with pursuing a medical degree.

Common knowledge is that college costs too much, but most people ignore "after inflation" costs - they just compare to when they went to college.  The cost of college is rising faster than inflation... but only by (real) 2%/year.  For private universities, I get 1.7%/year (20 years => 40%), and for public 2.3%/year (20 years => 58%).  Maybe college is cheaper than I expect, in real terms.
https://www.usnews.com/education/best-colleges/paying-for-college/articles/see-20-years-of-tuition-growth-at-national-universities

One overall problem is ignored in both the Fed article, the article I cited, and the assumption that everyone should go to college: dropout rates.  About 1/3rd of students pursuing a bachelor's degree drop out.
https://educationdata.org/college-dropout-rates
https://www.bestcolleges.com/research/college-dropout-rate/

When you see "some college" in the report by the Fed, think college drop out.  I also think "mean" (average) isn't a good measurement - it lumps in highly paid CEOs.  "median" salary for 2022 is more useful :

high school diploma: 53 k/year
some college (drop outs): 60 k/year
college graudates : 118 k/year
https://www.federalreserve.gov/publications/files/scf23.pdf#page=12

Based on everything above, I think the best advice starts with a question:  "How many digits in your SAT score?"

3 digits?  Don't pay for college then drop out... avoid it.
4 digits?  It's a good investment in future income.
https://satsuite.collegeboard.org/media/pdf/understanding-sat-scores.pdf#page=7

[roomtempmayo]

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college. 

Teaching, nursing, accounting, actuarial work, licensed engineers, and law enforcement are all common examples of undergraduate programs that lead to a professional license.

[MustacheAndaHalf]

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college. 

Teaching, nursing, accounting, actuarial work, licensed engineers, and law enforcement are all common examples of undergraduate programs that lead to a professional license.

Is that the only thing you read?

[seattlecyclone]

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college. 

Teaching, nursing, accounting, actuarial work, licensed engineers, and law enforcement are all common examples of undergraduate programs that lead to a professional license.

Is that the only thing you read?

Depends on the career of course. To become a Professional Engineer the only formal education required is a bachelor's degree in engineering. There's a work experience requirement and a couple of exams before you get the full license. For nursing an associate's degree in nursing is often sufficient education for licensure, though some states require a bachelor's degree and many employers prefer those as well.

[EvenSteven]

Lumping all college degrees together mixes those that are very well paid with those that aren't.  For example, compare those who majored in "dance" ($30k/year) to those who majored in "computer science" ($105k/year) in the data from this article.
https://www.cbsnews.com/news/college-major-top-and-lowest-earning-majors-impact-on-income-pay/

There are 3 "engineering" majors in the top 10, and 3 theater related majors (dance, music, theater) in the bottom 10.  Engineering jobs pay better than theater jobs.  So when trying to form advice about reaching higher NW, the type of major needs to be considered.

I think the actionable information is primarily going to college.  Kids who show up on campus often or even usually have a very poor grasp of their interests and aptitudes, as the legions of former pre-med students can attest.  Due to a combo of preparation and natural aptitude, many students are never, ever going to enter a math-heavy field.

I do appreciate that there are applications of every given aptitude and skillset that are compensated at higher and lower levels, and it helps to know that when making choices.  The further you get from a certified or licensed profession though, the less students are actually making a choice about a job when they make a choice about a major.

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college.  The article I posted only covers 4 year colleges, although the report by the Fed does include graduate degrees as a category.  A few of those top paying jobs (like veterinary medicine) are probably very correlated with pursuing a medical degree.

Common knowledge is that college costs too much, but most people ignore "after inflation" costs - they just compare to when they went to college.  The cost of college is rising faster than inflation... but only by (real) 2%/year.  For private universities, I get 1.7%/year (20 years => 40%), and for public 2.3%/year (20 years => 58%).  Maybe college is cheaper than I expect, in real terms.
https://www.usnews.com/education/best-colleges/paying-for-college/articles/see-20-years-of-tuition-growth-at-national-universities

One overall problem is ignored in both the Fed article, the article I cited, and the assumption that everyone should go to college: dropout rates.  About 1/3rd of students pursuing a bachelor's degree drop out.
https://educationdata.org/college-dropout-rates
https://www.bestcolleges.com/research/college-dropout-rate/

When you see "some college" in the report by the Fed, think college drop out.  I also think "mean" (average) isn't a good measurement - it lumps in highly paid CEOs.  "median" salary for 2022 is more useful :

high school diploma: 53 k/year
some college (drop outs): 60 k/year
college graudates : 118 k/year
https://www.federalreserve.gov/publications/files/scf23.pdf#page=12

Based on everything above, I think the best advice starts with a question:  "How many digits in your SAT score?"

3 digits?  Don't pay for college then drop out... avoid it.
4 digits?  It's a good investment in future income.
https://satsuite.collegeboard.org/media/pdf/understanding-sat-scores.pdf#page=7

Those numbers seemed high to me, and looking at it it seems like that is family or household income. What does "reference person" mean when referring to education? Is it like at least one person has that level of education?

[SeattleCPA]

What does "reference person" mean when referring to education? Is it like at least one person has that level of education?

Reference person basically means breadwinner. (Appendix in SCF defines this I recall.)

BTW pretty sure college degree includes AA. (The survey's questions are available in the Code Book here: https://www.federalreserve.gov/econres/files/codebk2022.txt.)

[Radagast]

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college. 

Teaching, nursing, accounting, actuarial work, licensed engineers, and law enforcement are all common examples of undergraduate programs that lead to a professional license.

Is that the only thing you read?

Depends on the career of course. To become a Professional Engineer the only formal education required is a bachelor's degree in engineering. There's a work experience requirement and a couple of exams before you get the full license. For nursing an associate's degree in nursing is often sufficient education for licensure, though some states require a bachelor's degree and many employers prefer those as well.

Curiously, in the state of Washington no college degree of any type is required to get a license to do engineerin'.
:D

https://brpels.wa.gov/engineers/get-your-engineer-license/get-your-professional-engineer-license-exam-or-comity

[SeattleCPA]

I think the actionable information is primarily going to college.

I don't know that you're necessarily rejecting the "actionability" of small business ownership. But can I just point out that small business ownership provides some significant benefits to people including:

1. Self-employed people may make more money (source: https://www.bls.gov/opub/mlr/2005/02/art6full.pdf )
2. Business ownership provides some unique tax savings opportunities such as Section 199A (which means someone doesn't pay income taxes on last 20% of their income), Subchapter S elections (which can annually save a person thousands in payroll taxes), pass-through entity taxes (which can save thousands)... all of which can combine and add significant sums to someone's net worth. It's not implausible for these savings to add up to six even seven figures by time someone retires.
3. A small business may provide opportunities to invest in higher-risk ventures (so not small cap but micro cap basically) and invest on a pre-tax basis into illiquid alternative assets (commercial real estate, e.g.,) which may do good things to someone's investment performance.

Common knowledge is that college costs too much,

Agreed. And spending a big number on college should get someone a big return on that investment. Yet often doesn't...

But low-cost vocational and occupational degree options exist. In accounting, for example, someone with a bit of college can probably use Western Governors University to get a B.S. in accounting and cost (for the year or so of study) may run $8K to $10K?

I think our firm (a very small business) has paid for 3-4 WGU accounting degrees. Which I guess points to another affordability route: Getting an employer to pick up tab.)

One overall problem is ignored in both the Fed article, the article I cited, and the assumption that everyone should go to college: dropout rates.  About 1/3rd of students pursuing a bachelor's degree drop out.

The drop out rate thing, yeah, totally agree, is really important. (Just like the failure rate on business startups and a bunch of other stuff in life.)

But I think the Federal Reserve's SCF does to me highlight the hit someone takes from dropping out. They explicitly say, "Cross-sectional differences in net worth across groups generally mirror those for income, but the gaps are larger. For example, families in which the reference person had a college degree had twice the median income of those with some college but over three times the median net worth."

Thus, I agree ability to finish a degree program needs to be considered. But I assume there are people who can finish but don't. Or who might choose college or pick a different degree if they knew the payoff. And then that missed opportunity probably often damages both income and wealth?

[MustacheAndaHalf]

One overall problem is ignored in both the Fed article, the article I cited, and the assumption that everyone should go to college: dropout rates.  About 1/3rd of students pursuing a bachelor's degree drop out.

The drop out rate thing, yeah, totally agree, is really important. (Just like the failure rate on business startups and a bunch of other stuff in life.)

But I think the Federal Reserve's SCF does to me highlight the hit someone takes from dropping out. They explicitly say, "Cross-sectional differences in net worth across groups generally mirror those for income, but the gaps are larger. For example, families in which the reference person had a college degree had twice the median income of those with some college but over three times the median net worth."

Thus, I agree ability to finish a degree program needs to be considered. But I assume there are people who can finish but don't. Or who might choose college or pick a different degree if they knew the payoff. And then that missed opportunity probably often damages both income and wealth?

"SAT scores are predictive of student retention to their second year—students with higher SAT scores are more likely to return for their sophomore year."
https://satsuite.collegeboard.org/higher-ed-professionals/test-validity/national-validity-study

Here's the extreme combinations of high school GPA and SAT score :
A+ grades with 1400 - 1600 SAT have a 23% dropout rate
C+ or lower grades with 400 - 790 SAT have 92% dropout rate
https://allaccess.collegeboard.org/updated-look-sat-score-relationships-college-degree-completion

Grades of B- or lower in high school predict very high dropout rates - in addition to SAT scores under 1000.  About 3/4ths of this group will drop out, and in college these are the bottom 22% of students.  Should they really be paying tuition with failure rates that high?

When your business paid the costs for accounting degrees, were the student's grades and SAT scores on the upper end or lower end?  I would imagine someone with a low SAT math score is unlikely to do well in accounting.  That's an aspect where I don't have data - the combination of SAT score and major.

[roomtempmayo]

When you mention "a certified or licensed profession", that sounds like education beyond a 4 year college. 

Teaching, nursing, accounting, actuarial work, licensed engineers, and law enforcement are all common examples of undergraduate programs that lead to a professional license.

Is that the only thing you read?

Most of these licenses are state-based, so it varies.  In general, though, it's some sort of practical experience after graduation, and/or a crash course in the field (e.g. police boot camp, or student teaching), and/or a written exam.  But all require the cornerstones of a specific course of study to do the final capstones to enter the field.

I don't know that you're necessarily rejecting the "actionability" of small business ownership.

Not at all.  I think the real challenge with entrepreneurship today is that models that tend to be durable (i.e. won't be overrun by a megacorp within a year or two) tend to be hard to scale (e.g. giving music lessons), or are gatekept in some major way (e.g. financing for homebuilders), or are just plain unpleasant work (e.g. renting portapotties for events).  If it's scalable, doesn't require big time capital or education or rare skill, and can be done from a desk, it's probably not going to be an opportunity for long.

Thus, I agree ability to finish a degree program needs to be considered.

It's pretty tough for an incoming college student to know whether they'll be successful in a degree program, especially if the adults in their lives are pushing them toward it.  Getting an A in physics or chemistry at a random public high school provides a student with an incorrect signal that they're good at science, and they have a tendency to then internalize that and act on it.

The vast majority of students across fields don't end up working in the field where they majored.  About 10 years ago, Washington Post reported that only 27% of graduates work in their major field (paywalled): https://www.washingtonpost.com/news/wonk/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/  I've seen various numbers thrown around more recently, most are less than 50%, and there's some variability by major.  The general point is that the odds are against a student picking a major (for whatever reasons), following through (only about 62% of students graduate within six years), and ultimately getting a job in that field, much less building a career in it.

It's not a mustachian take, but I think it points to the value of a brand name degree for most students.  Maybe a kid discovers they want to do creative writing in college.  As long as they're at a place like Brown or Middlebury they'll be fine.  Maybe they want to be an actor.  If they're at Yale or Wesleyan, they're probably going to land on their feet.  None of that holds if they're at a place where the major matters more than the institution.

[MustacheAndaHalf]

@roomtempmayo - I meant "is that the only thing you read in my post?", because you triggered off that one line and ignored everything else.  The entire content of that post wasn't contained in the first sentence.

[SeattleCPA]

When your business paid the costs for accounting degrees, were the student's grades and SAT scores on the upper end or lower end?  I would imagine someone with a low SAT math score is unlikely to do well in accounting.  That's an aspect where I don't have data - the combination of SAT score and major.

I wouldn't have known people's SAT scores. But one person has law degree from top law school. Another was national merit scholar. So I'd guess pretty high SAT scores.

BTW I agree with your point that someone needs to think about investing (?) a bunch of money in college if it's likely they can't finish.

Seems like that isn't necessarily same thing as saying someone shouldn't try for an AA or some more doable vocational training?

Also understanding the odds, it seems like some less expensive degree might make sense to at least try given potentially giant payoff?

[SeattleCPA]

It's not a mustachian take, but I think it points to the value of a brand name degree for most students.  Maybe a kid discovers they want to do creative writing in college.  As long as they're at a place like Brown or Middlebury they'll be fine.  Maybe they want to be an actor.  If they're at Yale or Wesleyan, they're probably going to land on their feet.  None of that holds if they're at a place where the major matters more than the institution.

I think you're referring here to recent research suggesting a degree from a top tier university pays a higher ROI. I haven't looked at that research. But it's believable.

HOWEVER, this point: I understand quite a bit about the business of writing... 200 titles which have sold 5M+ copies in English and have been translated into another dozen languages. Front list titles for big publishers. In old days, writing columns for two big magazines (Inc and Lotus/PC/World). And it would be very hard for me to believe a creative writing degree from any school delivers a good ROI if someone becomes a writer.

Writing success is really a very random thing.

P.S. My bestselling books were "For Dummies" titles about computer software. Quicken for Dummies for example sold a million copies. Worst books sold a few thousand copies. Which is what most books sell.

[roomtempmayo]

HOWEVER, this point: I understand quite a bit about the business of writing...

That's an impressive record as a writer, no doubt about it.

My point earlier was coming from a different angle, though: a creative writing degree from Brown or a drama degree from Yale are valuable independent of any specific skills they teach.  The value is in the general training, acculturation, and strong signal that you're smart and know how to learn.  I don't mean you'll be so excellently trained as a writer or actor that you'll be successful in those fields.  I mean that you can still get hired at any number of Fortune 500 companies based on your pedigree, not your specific skills.

Harvard's history program is a more specific example.  It's one of the most common undergrad majors because once you're a Harvard undergrad your major isn't a particularly strong signal.  Why not just study history then?  If you decide to go to med school, you can do the pre-recs on the side.

The Philosophy, Politics, and Economics degree at Oxford is a British parallel. It's a mile wide and an inch deep.  It makes nobody an expert at anything.  And yet, it's the shared background of the English ruling class.

For a kid who doesn't really know what they want to do - that's the vast majority - I think going somewhere where the institutional name is essentially an employment safety net is worth it.

[roomtempmayo]

@roomtempmayo - I meant "is that the only thing you read in my post?", because you triggered off that one line and ignored everything else.  The entire content of that post wasn't contained in the first sentence.

I don't really have anything to say about dropout rates or costs, which was the rest of the post. 

Edit:

Except, I suppose, that I would never encourage a 17 or 18 year old I cared about to go somewhere that didn't have a very high four year graduation rate.  Spending six years getting a four year degree is usually a financial dumpster fire, and quitting without a degree is even worse.

Finishing in a timely manner is heavily cultural, and highly predictable by institution.

[MustacheAndaHalf]

When your business paid the costs for accounting degrees, were the student's grades and SAT scores on the upper end or lower end?  I would imagine someone with a low SAT math score is unlikely to do well in accounting.  That's an aspect where I don't have data - the combination of SAT score and major.

I wouldn't have known people's SAT scores. But one person has law degree from top law school. Another was national merit scholar. So I'd guess pretty high SAT scores.

BTW I agree with your point that someone needs to think about investing (?) a bunch of money in college if it's likely they can't finish.

Seems like that isn't necessarily same thing as saying someone shouldn't try for an AA or some more doable vocational training?

Also understanding the odds, it seems like some less expensive degree might make sense to at least try given potentially giant payoff?

A national merit scholar almost certainly had A/A+ grades and near perfect SAT scores.

Perhaps an amusing story to provide another perspective:

"A fake lawyer, Brian Mwenda, who has won 26 cases while representing himself as an advocate of the High Court of Kenya, has been taken into custody by Kenyan police."
https://www.ndtv.com/world-news/kenya-officials-arrest-fake-lawyer-who-won-26-court-cases-4482839

"Local media reported that a "fake lawyer" had won dozens of lawsuits despite not being trained."
"He has been praised by Kenya's Central Organisation of Trade Unions (COTU) as a "brilliant young mind" who has succeeded "without traditional qualifications".
https://www.bbc.com/news/world-africa-67115879

A fake lawyer winning 26 cases before getting caught suggests maybe he had talent without education.  If high incomes and NW are a mix of talent and education, then more education may not be enough.

Is your idea that someone goes to community college, and the AA degree there might substantially increase their lifetime earnings?  Or is it a pathway to a 4-year college where some credits are transferred?  I don't have data on community college and high earnings.

[SeattleCPA]

Is your idea that someone goes to community college, and the AA degree there might substantially increase their lifetime earnings?  Or is it a pathway to a 4-year college where some credits are transferred?  I don't have data on community college and high earnings.

I think an AA will substantially bump your income. E.g., https://www.google.com/amp/s/edsource.org/2013/associates-degrees-pay-big-for-state-students-study-says/40591%3famp=1

And another https://ccrc.tc.columbia.edu/press-releases/new-report-finds-associate-degrees-significantly-boost-earnings-certificates-riskier-investment.html

[seattlecyclone]

A national merit scholar almost certainly had A/A+ grades and near perfect SAT scores.

Eh...maybe.

Having been through this process myself back in the day, I can tell you the only thing required to become a National Merit Semifinalist is to score highly on the PSAT. Over 90% of the Semifinalists then move on to Finalist status. Just one out of 16 doesn't. That certainly includes a few kids who are great at standardized tests but have terrible grades, and it also includes some who don't bother to complete all the paperwork (including an essay and a reference letter from a school administrator). If their standard was a GPA in the 3.9+ range that would weed out a lot more than 1 out of 16. Finalist status was considered the big "win" really. About half of the finalists actually receive a scholarship, tilted heavily toward those who go to one of the schools that commits to supporting the National Merit Finalists who attend.

[MustacheAndaHalf]

A national merit scholar almost certainly had A/A+ grades and near perfect SAT scores.

Eh...maybe.

Having been through this process myself back in the day, I can tell you the only thing required to become a National Merit Semifinalist is to score highly on the PSAT. Over 90% of the Semifinalists then move on to Finalist status. Just one out of 16 doesn't. That certainly includes a few kids who are great at standardized tests but have terrible grades, and it also includes some who don't bother to complete all the paperwork (including an essay and a reference letter from a school administrator). If their standard was a GPA in the 3.9+ range that would weed out a lot more than 1 out of 16. Finalist status was considered the big "win" really. About half of the finalists actually receive a scholarship, tilted heavily toward those who go to one of the schools that commits to supporting the National Merit Finalists who attend.

Isn't it more significant that "Semifinalist" weeds out over 99% of PSAT test takers?

https://www.nationalmerit.org/s/1758/interior.aspx?sid=1758&gid=2&pgid=1881
"More than 16,000 of the high scorers, representing less than 1% of the nation’s high school graduating seniors, will qualify as Semifinalists."

I don't have this data for PSAT, so let me fall back on SAT for a moment.  The top 10% get a 1400+ SAT score or higher.  If SAT and PSAT matched 1:1, 90% of this group wouldn't qualify as national merit scholars.
https://blog.prepscholar.com/sat-percentiles-and-score-rankings

Another document I posted earlier in this thread shows the overlap between 1400+ SAT scores and grades.  Of those with 1400+ SAT scores, 93% had an A- or better.  Looking at just A/A+ grades, that's 75% of the 1400+ SAT scorers.  And we're talking about the top 1/10th of SAT scores, while the PSAT is taking only some of the top 1/100th.
https://allaccess.collegeboard.org/updated-look-sat-score-relationships-college-degree-completion

I didn't realize there were 50,000 national merit scholars each year, so I'd like to weaken "almost certain" to "extremely likely".  I think it is extremely likely a national merit scholar had A/A+ grades in high school.

[MustacheAndaHalf]

Is your idea that someone goes to community college, and the AA degree there might substantially increase their lifetime earnings?  Or is it a pathway to a 4-year college where some credits are transferred?  I don't have data on community college and high earnings.

I think an AA will substantially bump your income. E.g., https://www.google.com/amp/s/edsource.org/2013/associates-degrees-pay-big-for-state-students-study-says/40591%3famp=1

And another https://ccrc.tc.columbia.edu/press-releases/new-report-finds-associate-degrees-significantly-boost-earnings-certificates-riskier-investment.html

Wow, that first article finds significantly higher lifetime earnings for attending community college - and community colleges consider those earnings too low.  They exclude people who get credits at a community college and then attend a 4 year college - admittedly it's difficult to proportion credit in that scenario.

Someone spending $1100 to attend 1 year and get a certificate will see their income increase by twice that much - per year!  And an AA degree is even better.  Even if drop out rates exceeed 50%, the low cost makes it worth a try.  I'd agree with you in encouraging people to try picking up ceritifiates, AA degrees or even a start on a 4-year degree by attending community college.

[SeattleCPA]

Is your idea that someone goes to community college, and the AA degree there might substantially increase their lifetime earnings?  Or is it a pathway to a 4-year college where some credits are transferred?  I don't have data on community college and high earnings.

I think an AA will substantially bump your income. E.g., https://www.google.com/amp/s/edsource.org/2013/associates-degrees-pay-big-for-state-students-study-says/40591%3famp=1

And another https://ccrc.tc.columbia.edu/press-releases/new-report-finds-associate-degrees-significantly-boost-earnings-certificates-riskier-investment.html

Wow, that first article finds significantly higher lifetime earnings for attending community college - and community colleges consider those earnings too low.  They exclude people who get credits at a community college and then attend a 4 year college - admittedly it's difficult to proportion credit in that scenario.

Someone spending $1100 to attend 1 year and get a certificate will see their income increase by twice that much - per year!  And an AA degree is even better.  Even if drop out rates exceeed 50%, the low cost makes it worth a try.  I'd agree with you in encouraging people to try picking up ceritifiates, AA degrees or even a start on a 4-year degree by attending community college.

My big picture perspective on all this is the human capital we, our kids, any grandkids accumulate matters a bunch.

However, as you very wisely pointed out/reminded us, one needs to be careful about making these investments.

[seattlecyclone]

A national merit scholar almost certainly had A/A+ grades and near perfect SAT scores.

Eh...maybe.

Having been through this process myself back in the day, I can tell you the only thing required to become a National Merit Semifinalist is to score highly on the PSAT. Over 90% of the Semifinalists then move on to Finalist status. Just one out of 16 doesn't. That certainly includes a few kids who are great at standardized tests but have terrible grades, and it also includes some who don't bother to complete all the paperwork (including an essay and a reference letter from a school administrator). If their standard was a GPA in the 3.9+ range that would weed out a lot more than 1 out of 16. Finalist status was considered the big "win" really. About half of the finalists actually receive a scholarship, tilted heavily toward those who go to one of the schools that commits to supporting the National Merit Finalists who attend.

Isn't it more significant that "Semifinalist" weeds out over 99% of PSAT test takers?

https://www.nationalmerit.org/s/1758/interior.aspx?sid=1758&gid=2&pgid=1881
"More than 16,000 of the high scorers, representing less than 1% of the nation’s high school graduating seniors, will qualify as Semifinalists."

I don't have this data for PSAT, so let me fall back on SAT for a moment.  The top 10% get a 1400+ SAT score or higher.  If SAT and PSAT matched 1:1, 90% of this group wouldn't qualify as national merit scholars.
https://blog.prepscholar.com/sat-percentiles-and-score-rankings

Another document I posted earlier in this thread shows the overlap between 1400+ SAT scores and grades.  Of those with 1400+ SAT scores, 93% had an A- or better.  Looking at just A/A+ grades, that's 75% of the 1400+ SAT scorers.  And we're talking about the top 1/10th of SAT scores, while the PSAT is taking only some of the top 1/100th.
https://allaccess.collegeboard.org/updated-look-sat-score-relationships-college-degree-completion

I didn't realize there were 50,000 national merit scholars each year, so I'd like to weaken "almost certain" to "extremely likely".  I think it is extremely likely a national merit scholar had A/A+ grades in high school.

Yes, my point was that the National Merit process is essentially all about the very top test scores. While there is of course a great deal of correlation between these scores and school grades, the National Merit designation doesn't directly tell you anything about a student's in-school performance. I personally had something like the 50th-highest GPA in my high school class but nevertheless got the National Merit money because I was awesome at filling in standardized bubble sheets with a #2 pencil.

[MustacheAndaHalf]

A national merit scholar almost certainly had A/A+ grades and near perfect SAT scores.

Eh...maybe.

Having been through this process myself back in the day, I can tell you the only thing required to become a National Merit Semifinalist is to score highly on the PSAT. Over 90% of the Semifinalists then move on to Finalist status. Just one out of 16 doesn't. That certainly includes a few kids who are great at standardized tests but have terrible grades, and it also includes some who don't bother to complete all the paperwork (including an essay and a reference letter from a school administrator). If their standard was a GPA in the 3.9+ range that would weed out a lot more than 1 out of 16. Finalist status was considered the big "win" really. About half of the finalists actually receive a scholarship, tilted heavily toward those who go to one of the schools that commits to supporting the National Merit Finalists who attend.

Isn't it more significant that "Semifinalist" weeds out over 99% of PSAT test takers?

https://www.nationalmerit.org/s/1758/interior.aspx?sid=1758&gid=2&pgid=1881
"More than 16,000 of the high scorers, representing less than 1% of the nation’s high school graduating seniors, will qualify as Semifinalists."

I don't have this data for PSAT, so let me fall back on SAT for a moment.  The top 10% get a 1400+ SAT score or higher.  If SAT and PSAT matched 1:1, 90% of this group wouldn't qualify as national merit scholars.
https://blog.prepscholar.com/sat-percentiles-and-score-rankings

Another document I posted earlier in this thread shows the overlap between 1400+ SAT scores and grades.  Of those with 1400+ SAT scores, 93% had an A- or better.  Looking at just A/A+ grades, that's 75% of the 1400+ SAT scorers.  And we're talking about the top 1/10th of SAT scores, while the PSAT is taking only some of the top 1/100th.
https://allaccess.collegeboard.org/updated-look-sat-score-relationships-college-degree-completion

I didn't realize there were 50,000 national merit scholars each year, so I'd like to weaken "almost certain" to "extremely likely".  I think it is extremely likely a national merit scholar had A/A+ grades in high school.

Yes, my point was that the National Merit process is essentially all about the very top test scores. While there is of course a great deal of correlation between these scores and school grades, the National Merit designation doesn't directly tell you anything about a student's in-school performance. I personally had something like the 50th-highest GPA in my high school class but nevertheless got the National Merit money because I was awesome at filling in standardized bubble sheets with a #2 pencil.

I don't see how you went from "a great deal of correlation" to "doesn't directly tell you anything" in the same sentence.  Are you claiming "in-school performance" is not the same as "school grades"?

My claim is:
(1) It is reasonable to assume SAT and PSAT are highly correlated
(2) SAT scores 1400+ had A/A+ grades 75% of the time
(3) Being 10x more selective with PSAT scores will give you far more than 75% A/A+ grades

[seattlecyclone]

Claim 1 seems logical, Claim 2 is backed up by linked data, Claim 3 seems a bit more dubious to me. 1400 is already a very high test score, indicating that sheer intellect is not what's stopping the other 25% in the 1400+ SAT group from achieving top GPAs. Maybe that 25% number goes down a bit at higher test scores, maybe it doesn't. Either way, upon meeting a random National Merit Scholar what you know about them is they have a high test score. You don't know anything about their grades, you're merely inferring that they probably are high due to the known correlation between grades and test scores.

[MustacheAndaHalf]

You agree SAT and grades are correlated, but you disagree that PSAT and grades are correlated.  Is that fair?

What I see on the SAT is increasing scores matched with increasing grades (*).  Among C+ or lower students, the lower 800-990 SAT range is 100x more common than 1400+ scores.  Move up to A-, and it is still 3x as common.  At A+, it inverts and low scores are 0.2x as common.  If you take the top 75% ... then the top 50% ... then the top 25%, you get increasingly higher GPAs and SAT scores.  Wouldn't that also be true of PSAT?

I guess the part I believe, but am not saying, is something I confirmed in a textbook of "Intelligence and Cognitive Neuroscience".  The quote appears in Google search results, but not when I click the link, so here's the search I used (quotes " " as is):

is psat "g loaded"

g-loaded tests include IQ tests (Wechsler Scales), college aptitude tests (SAT, ACT, PSAT), military selection tests (Armed Services Aptitude Battery), and other cognitive tests (e.g., ECTs).

The correlations between GPA, PSAT and SAT are "coming from inside the house" to switch to a horror film cliche.



(*)
https://allaccess.collegeboard.org/updated-look-sat-score-relationships-college-degree-completion

I count 54,032 students with "B-" GPA, with SAT score ranges:
43.4% scoring 800 - 990
0.5% scoring 1400+

For the 195,200 "A-" students:
14.2% scoring 800 - 990
5.5% scoring 1400+

And the top scoring A+ students (77,762 of them)
4.0% scoring 800 - 990
24.9% scoring 1400+

[seattlecyclone]

You agree SAT and grades are correlated, but you disagree that PSAT and grades are correlated.  Is that fair?

Not at all. I trust there's a similar correlation between PSAT/grades as has already been established between SAT/grades.

What I'm saying is it's not a 100% correlation, and an A average is definitely not required for National Merit status. You said a National Merit Scholar almost certainly has high test scores and an A/A+ average. No. They very certainly have high test scores because that's the main criterion for National Merit status, and they likely have high grades because a majority of kids with high test scores also have high grades. A 25% chance of having less than an A average is far from "almost certainly" in my opinion.

[MustacheAndaHalf]

You agree SAT and grades are correlated, but you disagree that PSAT and grades are correlated.  Is that fair?

Not at all. I trust there's a similar correlation between PSAT/grades as has already been established between SAT/grades.

What I'm saying is it's not a 100% correlation, and an A average is definitely not required for National Merit status. You said a National Merit Scholar almost certainly has high test scores and an A/A+ average. No. They very certainly have high test scores because that's the main criterion for National Merit status, and they likely have high grades because a majority of kids with high test scores also have high grades. A 25% chance of having less than an A average is far from "almost certainly" in my opinion.

I switched from "almost certain" to "extremely likely" earlier in this thread (*).

The best SAT test takers had grades of A-/A/A+ 93% of the time.  The PSAT picks the best of the best - an even more elite group.  If it is extremely likely the best students got an A- or better, the best of the best are extremely likely to get an A or better.

Semifinalists are the top 1/200th of PSAT scores.  The winners are the top 1/6th of the top 1/200th.  Quotes and data below...

...
"Semifinalists represent the top 0.5 percent of the state's senior students"
https://en.wikipedia.org/wiki/National_Merit_Scholarship_Program

"NMSC is excited to announce the names of more than 16,000 Semifinalists in the 2024 National Merit® Scholarship Program."
"The 2,500 National Merit $2500 Scholarship winners were chosen from a talent pool of more than 15,000 outstanding Finalists in the 2022 National Merit Scholarship Program"
https://tinyurl.com/4khrvwcn (to www.nationalmerit.org)

This data is from "a sample of nearly 870,000 students":

1400+ got A+ : 19,369 , about 1/3
1400+ got A  : 28,818 , about 1/2
1400+ got A- : 10,694 , about 1/6
1400+ got B+ : 3,091 , about 1/20
1400+ got B : 1,260 , about 1/50
1400+ got B- : 274 , about 1/230
1400+ C+ or less : 119 , about 1/530
https://allaccess.collegeboard.org/updated-look-sat-score-relationships-college-degree-completion

(*)

....
I didn't realize there were 50,000 national merit scholars each year, so I'd like to weaken "almost certain" to "extremely likely".  I think it is extremely likely a national merit scholar had A/A+ grades in high school.