Understanding Racial Wealth Gap: Parents Resources and Parental Financial Assistance to Higher Education

Background and Purpose: Racial wealth disparity has been a serious socioeconomic problem throughout the history in the United States. However, factors that perpetuate this disparity in wealth are not well understood. This study examines whether and how parental socioeconomic resources and parental financial assistance for higher education can explain the gap (White-Black) in children’s wealth.

Methods: This study uses three sets of data from the Panel Study of Income Dynamics (PSID): (1) 1982 to 1984 family data for parents’ information, (2) 2013 family data and individual data for adult children’s information, and (3) 2013 Family Rosters and Transfers data for parental financial assistance. The sample consists of individuals who were between ages 6 and 17 in 1984 (868 white children and 484 African-American children). This study employs decomposition methods. The methods are commonly used to measure differences between groups by decomposing the difference into explained (difference that is explained by observable characteristics) and unexplained component (difference that is not explained by observable characteristics).

Results: Our analyses show a large racial gap in children’s chances of receiving financial assistance for their higher education from their parents (34% vs. 14%). We also observed a large wealth gap in children. The mean net worth for African-American children was $36,732 and the mean net worth for White children was $114,463 - approximately three times larger than for African-American children. Decomposition analyses show that all the racial gap in parental assistance is explained by differences in parental socioeconomic resources. African-American children whose parents have the same educational attainment, income, and wealth as White children, receive similar levels of parental financial assistance as White children. Our results indicate that the racial disparity in net worth is mainly explained by racial disparity in parents’ socioeconomic resources. We also show that parental socioeconomic resources play an important role in children’s wealth, partially through parental financial assistance. The difference in parental assistance explains a significant proportion of racial wealth gap (8%) and it affects through children’s educational attainment and income.

Conclusions and Implications: Our findings corroborate the importance of providing equal opportunity in higher education. Findings suggest that reducing the effects of parents’ resources on parental assistance to college may decrease racial wealth gaps. Our results suggest than affordable college education may decrease the racial wealth gap by providing educational opportunity for children from families with low socioeconomic resources. They also suggest that universal and progressive Child Development Accounts may be an effective policy in expanding access to college education and decreasing racial wealth disparity.