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Last week I was in Washington, D.C. attending a meeting of the SEED state policy partners. This is an initiative led by CFED, a national non-profit organization that is a pioneer in the field of asset development, that brings together Oklahoma and other states working on efforts to develop state-level approaches to promote children’s savings accounts (CSAs). CSAs are meant as ways to expand opportunities for children in low- and moderate-income families to save and build assets from an early age towards achieving the pillars of lifelong economic success – attending and completing college, owning a home, starting a business, or saving for retirement.
Our meeting featured a very interesting presentation from Kathie Little of the College Board, which has recently released a report recommending reforms in the system of federal student aid for higher education. For most American families, paying for college is a growing concern. According to the College Board’s annual Trends in College Pricing report, the average cost of a public 2-year college is over $14,000, while for a public in-state 4-year college, the total cost exceeds $18,000. Since 1979, the cost of a 4-year public college, including tuition, fees, and room and board, has almost tripled in inflation-adjusted terms, far exceeding the increase in average incomes. Students from all income groups have become increasingly reliant on financial aid to meet the costs of higher education, with federal student loans making up the largest share of this aid. In 2007-08, federal student loans amounted to $43.8 billion.
The College Board report includes a series of recommendations to simplify and strengthen the system of federal aid. The recommendation presented to us involved the creation of Education Savings Accounts for students from low income backgrounds. The idea would be for the federal government to make annual deposits into children’s accounts proportional to the amount of the federal Pell Grant for which children would be eligible, based on family size and income. These accounts would grow over time through additional deposits and investment earnings, and could then be used for eligible college expenditures at a wide range of post-secondary institutions. The accounts would remain available for adults who defer attending college, but the funds would revert to the government in cases where individuals opt not to pursue post-secondary studies. The cost of the program would depend on the age at which deposits began and the proportion of the Pell award used to calculate deposits. The report calculates that if deposits were pegged at 10 percent of Pell grants (which currently range from $430 to $4,731) starting at age 12, the
program would reach 12.6 million families and cost $2.8 billion per year at current college participation rates.
With adequate funding, Education Savings Accounts would establish a financial basis for students from low income backgrounds to use in paying for college. Almost all students who qualify for a Pell Grant at the time of applying for college – which currently extends to households with incomes up to $45,000 per year – would bring a savings account with them. The savings accounts would go a long way towards bridging the gap between college costs and the amounts currently available to students in grants and scholarships, and reduce reliance on student loans that force many students to abandon their studies and saddle graduates with substantial long-term debts. Just as importantly, Education Savings Accounts, by accruing from an early age, would create a significant change in expectations among students and families who currently simply do not see college as a feasible option on the horizon.
One can certainly point out flaws with the College Board variation on children’s savings accounts. For one thing, by tying eligibility to current Pell Grant standards, the program would exclude children of families in the $45,000 to $80,000 range in particular that already fall in the gap between affordability and assistance. Secondly, at least in its initial design, the program does not provide for private contributions to children’s account, thereby missing an opportunity to encourage savings habits and to help accounts grow.
In Oklahoma, a 2005 task force recommended public contributions to 529 college savings plans for children in low- and moderate-income families; bills to implement the recommendations have been introduced in recent sessions but have failed to gain much momentum. Policymakers have focused resources on funding OHLAP, or Oklahoma’s Promise, as well as providing substantial tax deductions for private 529 plan contributions. This still leaves a gap – OHLAP covers tuition and fees but not room and board, equipment, and supplies, and is not available to everyone – waiting to be filled. The idea of publicly-supported education savings accounts is one you can expect to hear more about.
