Abstract

Previous literature has established that the role of family income has grown substantially at predicting college entry decisions when comparing the 1979 and 1997 National Longitudinal Surveys of Youth (e.g., Belley and Lochner  (2007)). In this article, I further examine the changing role of family income as a determinant of college quality choice, degree attainment, and post-schooling earnings. I document that the role of family income has remained important and relatively stable at explaining college quality choice, its importance increasing only for the choice of four- over two-year colleges. In contrast, pre-college academic achievement has become much more important at predicting college quality choice, indicating a substantial strengthening of student college sorting. I also document that for a given college type, family income has remained an important predictor of graduation outcomes, its effect staying similar in magnitude. However, its role in explaining the post-schooling earnings of college graduates has dropped substantially. In contrast, the quality of the degree-granting college has become a much stronger determinant of both graduation outcomes and post-graduation earnings. I argue that all of these findings are consistent with the hypothesis of rising returns to college coupled with tighter financial constraints.

Oksana Leukhina is a research officer and economist at the Federal Reserve Bank of St. Louis. The author thanks Amy Smaldone for valuable research assistance and Lutz Hendricks, Juan Sanchez, and Guillaume Vandenbroucke for useful comments.

INTRODUCTION

Whether or not to go to college and what type of college or university to choose are among the most important decisions that people make. These choices are influenced by students' learning ability and family income, among other factors. The term "learning ability" refers collectively to all student characteristics at the time of high school graduation that matter for both their academic success and labor market success (e.g., college preparedness, work ethic, grit, ambition). Better learners tend to better enjoy their academic studies and may also prefer occupations that require a college or postgraduate degree. Also, higher-income families can better navigate the admissions system and are better suited to alleviate the financial burden associated with college, especially with more expensive, selective schools. Family background, such as parents' experience with college, may also matter for how accurately the student perceives the financial returns to different types of college.

Previous studies have examined the changing role of family income and academic achievement (a proxy for learning ability) for college entry. College admissions requirements were highly idiosyncratic in the mid-1800s. However, they slowly became more uniform and meritocratic by the mid-1900s, and general admissions standards continued to rise (Beale (1970)). The SAT debuted in 1926, and by 1960, more than three-fourths of admissions directors considered it "absolutely essential" to their admissions process (Beale (1970))

Hendricks and Schoellman (2014) document that, compared with academic ability, parental socioeconomic status was a stronger determinant of college attendance before WWII, but its role reversed in the postwar period. While academic ability continues to be the most important determinant of college enrollment today, parental income has increased in importance in the past few decades (Belley and Lochner (2007))

Following Belley and Lochner (2007), I employ the 1979 and 1997 National Longitudinal Survey of Youth (Bureau of Labor Statistics (2019a, 2019b)), with my focus extending beyond college entry. I ask whether or not parental income matters for the type of college students choose (among two-year community colleges, leastselective four-year colleges, selective four-year colleges, and highly selective four-year colleges), for whether or not students eventually earn a bachelor's degree, and for how much they earn in labor markets conditional on degree attainment outcomes. Precisely, I document the changing role of family income as a determinant of college quality choice, bachelor's degree attainment, and post-schooling earnings.

In my empirical analysis, I include controls for measures of learning ability at the time of high school graduation. Doing so allows me to exclude the role of income that affects academic achievement through childhood investments. This strategy also allows me to place my analysis in the context of the aforementioned literature that examines the relative roles of income and learning ability as well as work on the consequences of academic ability and college quality for various student outcomes (e.g., Light and Strayer (2000) and Dillon and Smith (2020)). In my analysis of labor market earnings of college graduates, I also include controls for the quality of the degree-granting college alongside controls for learning ability. This allows me to discuss the changing returns to college quality.

Of course, including these controls is an imperfect solution, and one needs a structural model to get at the causal influence of family income and/or college quality on student outcomes. In this article, however, my goal is to simply outline data trends with these imperfect controls in place. My results can then be used as empirical targets for calibrating models of student decision making. In fact, to assist with the calibration of such models is another important goal of this article, and I provide detailed summary statistics for each cohort in Appendix 2.

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