Parental Income, Assets, and Borrowing Constraints and Children's Post-Secondary Education

Background and Purpose: Parental economic resources in a child's adolescent years are strongly associated with her educational attainment (Haveman & Wolfe, 1995). A positive income-education connection (especially for college entry) has been consistently documented in multiple studies (Blossfeld & Shavit, 1993). However, the underlying mechanism of this connection remains unclear. Two competing theories developed to explain this connection focus on short-term borrowing constraints vs. long-term family background, but no clear-cut conclusion can be drawn. To provide additional evidence in this ongoing inquiry, the current study tests family borrowing constraints by including both parental income and assets in children's early childhood and late adolescence. The use of structural equation models allows us to examine both theories (short-term borrowing constraints vs. long-run family background) simultaneously.

Methods: A series of structural equation models are tested using the data from a sample of 156 children in the Child Development Supplement of the Panel Study of Income Dynamics. The dependent variable of this study, child's college entry is a dichotomous measure in 2005. The independent variables include parental income and assets (net worth and liquid assets) during early childhood and late adolescence, household head's education, and child's academic ability. Mplus is used to test the above models. The estimator used in the study is Robust Weighted Least Squares.

Results: Results show that both income and assets have consistent long-term effects on children's college entry, but parental income and assets in early years of children play a more important role in children's education attainment than parental income and assets in children's late adolescence. In addition, compared with family income, parental assets are a better measure of economic resources than income in reflecting these long-term effects. Controlling for parental assets in children's late adolescent years, the effects of early assets are still significant. An imputed sample (N=1,090) and bootstrap nonparametric statistical inference are used to test the robustness of findings. The addition of early liquid assets significantly weakens the direct and total effect of early income on children's educational achievement.

Conclusions and Implications. Given the importance of family economic resources in the early years of childhood, particularly early parental assets, it may be important for parents to save for their children's education using various asset accumulation programs, such as 529 College Savings Plans, and Child Development Accounts. Depending on the specific interpretation of how parental assets affect children's educational attainment, the policy objective may be different. This model suggests that as equally important as asset accumulation per se is how and when to invest economic resources in children. The family stress model, however, suggests that asset holdings may lead to positive psychological effects on parents and children. The current study cannot say which of these two theories of asset building and child educational attainment may be operative – perhaps both are to some extent. This unanswered question and the overall findings in this study suggest that assets should be included in future studies of family economic resources and children's educational attainment.