Public discussion of college affordability tends to focus more on student-loan debt than on savings. But to protect access to college, improve outcomes, and move away from a debt-driven model, savings must be promoted across income levels, says a new report proposing a federal program of children’s savings accounts.
What’s needed is a comprehensive system that’s easy to navigate, friendly to lower-income families, and able to give people faith that dollars saved now will pay off in the long run, according to the report, “Building Expectations, Delivering Results: Asset-Based Financial Aid and the Future of Higher Education,” which was released on Monday by the Assets and Education Initiative at the University of Kansas.
An effective system, the report says, would:
- Automatically enroll every child at birth.
- Publicly finance initial deposits in children’s savings accounts, “at least for low- and moderate-income families.”
- Provide public matching contributions.
- Allow participants to withdraw from the accounts for pre- and postcollege expenses.
Beyond proposing a new federal program, the report also outlines an alternative: to modify existing 529 plans—the tax-advantaged savings plans sponsored by states and educational institutions—to allow for “national administration, low initial deposit requirements, and automatic enrollment” to increase participation.
To date, the use of college-savings accounts has lagged, in part because families don’t plan ahead, don’t have money to put away, or think doing so might limit students’ financial aid when it’s time to enroll. While participation in 529 plans increased after the expansion of federal tax advantages in 2001, only about 7 percent of families who anticipate major educational expenses in the next five to 10 years set money aside in 529 plans or Coverdell Education Savings Accounts, according to a study last year by the Government Accountability Office.
Those families that did use the savings plans had median incomes about three times as high as and median assets about 25 times as high as those that did not.
No More Debt Dependency
The idea of broadening participation in college-savings plans, including through matching programs, is not new. Last year the U.S. Department of Education announced that it would spend $8.7-million to test a college-savings and financial-counseling program for 10,000 low-income middle- and high-school students in its GEAR UP program. And legislation supporting the creation of savings accounts for low-income children has been introduced in Congress. Several reports on how to improve the federal financial-aid system have also included similar proposals.
But with no program yet in place, Monday’s report seeks to bolster the case for one. The incentive to save can “increase the financial health of low-income families, help them plan for the future, and improve the school outcomes of their children,” the report says. “These are all features missing from our current just-in-time, debt-dependent financial-aid system.”
Existing efforts to encourage saving for college aren’t getting the job done, the report says. “As a nation, we can’t significantly increase college-completion rates by primarily relying on borrowing.”
A national program of children’s savings accounts wouldn’t just set students up to be able to afford college, the report argues. It cites research showing that having a college-savings account can increase a student’s belief that higher education is a realistic goal.
Among low- and moderate-income students, even those who have less than $500 in savings are three times as likely to enroll and four times as likely to graduate as those without any savings, according to the report. College-savings accounts, it says, can also help students develop healthy financial habits for life.
In another proposed policy change, the report recommends redirecting the Pell Grant system, the government’s main support for needy students, toward children’s savings accounts, rather than awards upon enrollment. One concern with that model is that, over time, some families’ financial situations may improve, said William Elliott III, an author of the report who is director of Kansas’ Assets and Education Initiative and a senior fellow at the New America Foundation. He planned to explore that issue in additional research.
On Monday a panel of experts from the Assets and Education Initiative, the New America Foundation, the College Board, and the Citi Foundation are scheduled to discuss the full report and how to better promote savings at an event in Washington.
Promise in San Francisco
Tying financial incentives to academic performance as students prepare for college has shown positive results, said Mark Kantrowitz, senior vice president and publisher of Edvisors Network. To really work, a system of college-savings plans needs to be as streamlined as possible, he said.
Several cities are already adopting models to encourage early savings. In San Francisco, for instance, the Kindergarten to College Program—which began a few years ago and now includes every kindergartner in the city’s public schools—puts $50 in each college-savings account through a partnership with Citibank. Children in the National School Lunch Program receive an additional $50. Along with the initial deposits, the program offers a financial-literacy curriculum and the potential for matching contributions.
Participation rates there are already higher than in 529 plans nationally, said José Cisneros, treasurer for the city and county of San Francisco. Of 8,000 accounts, most for children in low-income families, he said, about 12 percent have funds beyond the initial deposit.
With the new report and others to come, Mr. Elliott hopes to shift the conversation about financial aid to student engagement before college and its long-term effects, including success in college and beyond.
“We can’t think about the American dream in the same way that we used to think about it,” he said. College-savings accounts “are a way of providing all children with access to all institutions that helps level the playing field.”