There was much to-do last month over the Obama administration's fiscal-2012 budget proposals for higher education. Specifically, many education observers took issue with the administration's suggestion to fiscally shore up the Pell Grant program by ending year-round Pell Grants for students attending summer school, as well as ending the "in-school interest subsidy" that prevents some low-income graduate students' loans from accruing interest until they have left school. The administration defended the proposals, arguing that the programs were redundant, and that fiscal austerity requires sometimes painful cuts.
More troubling to me than an argument over the health of current aid programs, however, is that so much of the debate over financing higher education focuses on students who are either already in college or about to enter. In short, there are not nearly enough proposals to help low-income families save for college long before students are ready to apply to a college or university.
Although many families find it difficult to put aside additional income, there are significant benefits to helping families save that might not accrue from supporting or restructuring financial-aid programs. Obviously, in many instances, saving replaces future debt. In 2008, nearly 87 percent of Pell Grant recipients graduated with student-loan debt, compared with just over 50 percent of nonrecipients. Even more disturbing, this number did not factor in students who failed to receive a postsecondary credential and were still on the hook. Giving more low-income students an opportunity to save early and often could decrease the need to pay off loans upon graduation, and it could help keep in college students who otherwise would drop out for financial reasons.
Research reported last year by the Center for Social Development at Washington University in St. Louis indicates that among students who expect to attend college, those who have a savings account are about seven times more likely to attend college than similar youths who do not have an account. Furthermore, when controlling for variables in demographic and academic achievement, having savings is positively associated with youths' college expectations, and net worth and youths' savings are positively associated with college progress soon after high school. In short, saving early can affect college-going behavior. As for the rate of college completion, a statistic that has stagnated over the past several decades, financial assets (including savings) is a consistent and stable predictor of later college graduation—even more so than the level of a family's annual income.
Helping low-income families save money for college is easier said than done. But it's not impossible. There are several ways that policy makers can help students and their families stretch each hard-saved dollar as far as possible-and in some cases provide an opportunity to attend college to students who otherwise would be left out.
First, families shouldn't be afraid to save. For too long, arcane qualification rules have been in place for both state and federal financial aid, and many low-income families are wary of putting money away for college for fear of losing future aid. Similarly, low-income families face barriers to saving in public-assistance programs such as Temporary Assistance for Needy Families and Medicaid, which limit the assets a person can have and still receive assistance. Unfortunately, this rings true even for so-called 529 college-savings accounts, which are exempted from federal income taxes, although such funds cannot be used for anything other than qualified higher-education expenses without incurring a hefty penalty. Streamlining the Free Application for Federal Student Aid and removing savings disincentives could have a positive effect on the families who most stand to benefit.
Beyond that, there is a need for more aggressive messages indicating that saving for college is a necessary long-term strategy. Families—especially low-income ones—need to see that their saving efforts are rewarded and that significant account balances build up over time. In short, saving for college should be institutionalized as an important priority along the lines of retirement and "rainy day" savings.
The City of San Francisco, for example, has taken the lead by offering college-savings accounts for students entering city public schools. The Kindergarten to College Initiative, launched in 18 schools in October (and expected to be fully rolled out over the next three school years), has leveraged government as well as private and nonprofit support to seed savings accounts and provide savings incentives for students. And for deficit scolds, the city requested only a little over $250,000 to pay for the program this year. Additionally, some states provide matching grants, similar to those in retirement accounts, for low-income families who put money away in a state 529 plan.
On the federal level, we should be providing incentives to families via a tax code that already provides many incentives—to homeowners, retirement savers, and investors. This could be done by expanding the Savers Credit, a middle-class tax credit for retirement savings, to include college expenses as well. Families should also be able to open and contribute to college-savings accounts when they file their income taxes, diverting some of their refund into a 529 plan or other such program.
In addition, it may be worth reforming higher-education tax credits such as the American Opportunity Credit, which, while improved over the former Hope Credit, is still not targeted or timed properly. Often, recipients wait more than a year to receive the credit, and it does little to pave the way toward college for students who otherwise would not attend. Ideally, the credit could be deposited into students' savings accounts as early as eighth grade, giving many students a jump-start on financing a college degree.
There is currently an earnest and important debate about how to most effectively give aid to low-income students, particularly in an age of fiscal austerity. While most of today's federal-aid mechanisms are worthwhile and defensible, they have become insufficient in helping families cope with the rising cost of higher education. Expanding the focus to cost-effective savings incentives long before college enrollment might not only increase affordability, but it also might well change student aspirations along the way.