Study Suggests Going Back to Basics: Saving to Fund Education

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by Jamaal Abdul-Alim

WASHINGTON — In an effort to reduce student debt and the debilitating effect that it can have on graduation rates, a pair of University of Kansas researchers on Monday suggested Children’s Savings Accounts—or CSAs—as a way to transform the way students pay for college.

“As a nation, we can’t significantly increase college completion rates—essential to global competitiveness—by relying disproportionately on borrowing,” said William Elliott III, assistant professor and director of the Assets and Education Initiative within the School of Social Welfare at KU.

“We need a financial aid system equipped to deliver excellent outcomes in the post-modern world,” he said.

Universal participation in CSAs would be a prominent feature of such a system, said Melinda Lewis, policy director at the Assets and Education Initiative.

“Every child should be automatically enrolled in a Children’s Savings Account, preferably at birth,” Lewis said.

The reason, she said, is because research shows better participation and stronger outcomes when you let families opt out of CSAs instead of opting in.

“It doesn’t mean that every family has to have the same experience,” Lewis said. “Universal participation can still accommodate special outreach to and special incentives for lower income families.”

“In order to get there, we need to acknowledge the barriers (low-income) families face to saving and develop program structures that facilitate their success,” Lewis added.

Elliott and Lewis made their remarks Monday at the New America Foundation, a nonpartisan policy and research organization, during a panel discussion titled “Saving Financial Aid: Expanding Educational Opportunity and Reimagining the Way We Pay for College by Promoting Children’s Savings.”

At the event, they also released a new report they co-authored that is titled “Building Expectations, Delivering Results: Asset-Based Financial Aid and The Future of Higher Education.”

Lewis called the report a “policy blueprint” that describes the key features that CSAs need to have in order to “set the United States on the road to greater educational equity and an improved return on financial aid investment.”

In the report and in Monday’s discussion, Elliott and Lewis make it clear that CSAs are not just about money but aspirations and getting students from disadvantaged backgrounds to see themselves as “college bound.”

Students with college savings of less than $500 are three times more likely to enroll in college and four times more likely to graduate, states the new report, which serves as a synthesis of a decade’s worth of research into CSAs.

Elliott noted that research has shown student debt levels that exceed $10,000 can potentially “depress graduation rates and harm post-college financial security.”

In light of the fact that the average student debt now exceeds $26,000, children need to save about $16,000 in order for their savings to work optimally within the framework of the current student loan system, Elliott said.

In practical terms, he said, these figures mean that—assuming a one-to-one match on contributions and 5 percent interest—families would need to save about $23 per month, starting at birth, to achieve $16,000 in savings by the time the child reaches 18.

“When we think about it in these terms, it seems doable, particularly when we think about the possibility of government and third party contributions as well,” Elliott said. “When we consider the potential for improved educational engagement and achievement, it seems imperative.”

Other panelists discussed practical problems that need to be addressed before government can assume a role in CSAs.

Ben Miller, senior policy analyst in the Education Policy Program at the New America Foundation, said it would be hard to carve out a federal role for the assets accumulation side of CSAs because of issues associated with cost and infrastructure.

“If you wanted to do it at scale, you would be looking at a fairly sizable federal investment,” Miller said. “It’s probably hard to find that money at this point in time because the main federal financing program of college right now is the Pell grant program, and that’s slated to run with substantial budget deficits going into the future,” Miller said.

Another problem is that federal dollars come with many restrictions.

States, he said, are better situated to play a role in CSAs because of some of the things states are already doing with various “promise” initiatives, which guarantee tuition coverage for students who do certain things, such as achieve a certain GPA and fill out the FASFA.

Such programs, he said, could be restructured to include CSAs and could include certain benchmarks, such as passing certain algebra courses that are associated with higher rates of college persistence.

Elliott said it’s important to bear in mind that low-income families can save, despite negative perceptions to the contrary.

“Part of the problem is we think they can’t save,” Elliott said. “We need to change that mindset.”

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