Method: We utilize the National Longitudinal Survey of Youth 1997 (NLSY97), which is the only national dataset that provides detailed reliable information on family wealth, SAT score, and college attendance. The study sample drawn from the NLSY97 consists of children who reported that they had taken the SAT between 1996 and 2003 (N=3,216). We construct wealth variables measuring illiquid assets, liquid assets, and debt. For statistical analysis, we use structural equation modeling (SEM) with SAT scores (verbal and math) serving as indicators of scholastic ability. SEM enables us to simultaneously estimate both direct and indirect effects on college attendance. Results: The SEM results support the ability hypothesis rather than the borrowing constraints hypothesis. Although, as expected, the liquid and illiquid assets have a positive effect, the direct effects are not significant. On the other hand, a family wealth measure, liquid assets shows a meaningful, indirect effect on college attendance through SAT (Odds ratio: 1.014, p<.05). Finally, although it is not of primary interest, family income, a traditional way to measure economic resources, is found to have a direct effect on college attendance (Odds ratio: 1.074, p<.05).
Conclusions and implications: This study suggests that family wealth, especially liquid assets which are easily convertible, is important for children's cognitive development, which is a strong predictor of post-secondary education. This finding suggests that it is important to enhance programs designed to encourage poor families to accumulate assets to promote educational achievement of their children. It should also be noted that given the observed direct effect of family income on college attendance, this study does not contradict current policy which helps youth from lower income families finance post-secondary education through borrowing.