Child Savings Accounts Could Be Our Way Out of the Student Debt Crisis
Posted By Derek Johnson on July 17, 2015 at 2:50 pm
By now, the idea that college has become unaffordable for the vast majority of students is a truism that borders on cliché. And virtually everyone inside the higher education policy world, regardless of where they fall on the political spectrum, agrees that the current financing model is broken. The price of college is going up, state investment in public education is going down, and students are relying more and more on loans to earn their degrees. Where the consensus begins to break down, however, is how to solve the problem – and whether the current system of borrowing to pay for college can be saved through reform, or if it needs to be dismantled and replaced with something else.
Two authors make the latter case in their new book, “The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream.” William Elliot III, senior research fellow at the New America Foundation, and University of Kansas professor Melinda Lewis argue that the current system is a Frankenstein-esque mishmash of policies that has left us with a fundamentally broken and incoherent system.
Though the days of working a summer job to pay for a year of college tuition are long gone, the federal student lending process is still largely built on this now obsolete assumption. Instead, students today are borrowing tens and even hundreds of thousands to pay for tuition and other expenses, and then spending the next 10-15 years paying back loans instead of saving.
“If student debt is making us delay contributing to our 401K and delay buying a house, that’s extremely problematic,” said Elliott during a panel discussion on his book in Washington D.C. on Wednesday.
Assets and investment
What Elliott and Lewis propose is changing the system from a debt-based model to what they call an “assets and investment” model. Instead of giving thousands of dollars to students after they finish high school, the two argue that states and the federal government should establish savings accounts for students during their early childhood. They cite research in their book that indicates this tends to produce dramatically different behavior and saving strategies for families.
“Can we put that scholarship money into an account early on and let that person leverage it? One of the things you see [. . .] is the infusion of assets at different points in people’s lives really makes a difference,” Elliott said.
The authors pointed to a number of state and local governments as potential models for a national policy. Maine utilizes a quasi-public/private foundation that automatically sets aside $500 for children born in the state to use towards their future education. Nevada and Rhode Island provide smaller contributions ($50 and $100 per child, respectively) but invest the money so its value appreciates over time, similar to an IRA or 401K. Other states, like Virginia, offer college savings plans (known as 529s) which do not set aside state money but allow tax-free investment up to a certain amount on the part of parents.
“There’s a growing sense that we need financing mechanisms for higher education consistent with the responsibility we’ve invested in the education system, which is to be a viable ladder [to success],” said Lewis.
This is crucial, because experts argue that while college has slowly become less affordable over the last 30 years, it has increasingly replaced a high school degree as the minimum level of acceptable education for employers. As a result, most middle and low-income students have no choice but to take on massive debt, differentiating them from other kinds of borrowers.
“Fundamentally, a student borrowing money for college is not the same as someone borrowing to buy a car,” said Kevin Carey, director of the education policy program at New America. “The idea that a person doing the only thing they can do just to get to a starting point and treating them the way we treat other kind of debtors is intensely problematic and a bigger problem for a lot of people.”
Differing views in Congress
While most policymakers agree the current system needs to be changed, there are different views about what its replacement should look like. Sen. Lamar Alexander (R-TN), Chairman of the Senate Committee on Health, Education, Labor and Pensions, is overseeing the reauthorization of the Higher Education Act, which governs the student loans process. Alexander favors risk-sharing – making colleges financially responsible for a portion of the unpaid loans accrued by their students who don’t graduate – as a way to reduce tuition costs. In a speech to the American Enterprise Institute Thursday, Alexander indicated that while reforms are needed to keep tuition costs in check, he believes there are currently an abundance of public and private resources to make college affordable, such as Pell grants, scholarships, and low-cost community college.
“I’ve always said it’s never easy to pay for college, it’s just easier than most people think,” Alexander said.
Senators Marco Rubio (R-FL) and Tom Petri (R-WI) have put forth legislation promoting income-share agreements (ISA), whereby private investors would pay for a student’s college costs in exchange for a percentage of their future earnings over a fixed time period. Andrew P. Kelly, director of the Center for Higher Education Reform at The American Enterprise Institute and Miguel Palacios, assistant professor at Vanderbilt University, argued in a recent op-ed for the Wall Street Journal that ISAs would dramatically reduce the financial risk that comes with the traditional debt-based approach to paying for college:
“ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less – or nothing – if their earnings do not materialize.”
Regardless, many continue to argue that the status quo will become unsustainable as states continue to divest in public universities, family incomes decline and colleges raise tuition.
“This conversation is really about the restoration of something we did have for a good 30 years, where there really were affordable options,” said Carey. “For people of my generation, the phrase ‘work your way through college’ really meant something. That’s not a phrase that has meaning anymore.”