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The Soup to Nuts Approach to Financing College

The presidential campaign trail is littered with ideas for making college more affordable, but none of them address the potential game-changer of a wealth-based approach to financing an education.
(Photo: AN NGUYEN/Shutterstock)

(Photo: AN NGUYEN/Shutterstock)

Public concern over the unabated rise in college costs and student debt has the field of 2016 presidential contenders vying for solutions. Reflecting what our Education Policy colleagues christened the “kitchen sink” approach, a few weeks ago, Democratic frontrunner Hillary Clinton rolled out her New College Compact, a $350 billion package that covers ground from expanding AmeriCorps to student loan re-financing.

This proposal is an aggressive response to an urgent need. In the new labor market, a college degree isn’t a professional enhancement; it’s a prerequisite for employment even in fields that only 10 years ago were staffed by high-school graduates. Now, instead of needing a college degree to be an accountant, you also need one to be his or her file clerk.

It’s also an approach that’s missing from every proposal so far: replacing a debt-driven model with a wealth-driven one.

But even for the students who do earn this credential, student debt—even at modest levels—can undermine its potential economic advantage. Instead of a sprawling assortment of ideas, what we recommend is a “soup to nuts” approach—one that advances a single intervention to improve outcomes from the beginning to the end of the educational pipeline. It’s also an approach that’s missing from every proposal so far: replacing a debt-driven model with a wealth-driven one.

The decisive role that wealth plays in determining who goes to college and their subsequent financial well-being is clear early on. Wealth allows parents to purchase homes in competitive school districts and invest in enrichment activities, both of which lead to improved educational performance and preparation for college. Importantly, wealth also creates the perception in children that going to college is expected and achievable, beliefs that are necessary to summon the effort and persistence to reach that goal.

Predictably, the absence of wealth robs children of that belief. A study of 7th graders eligible for the national free and reduced price school lunch program indicates that perceiving financial circumstances as being a barrier to college can result in decreased aspirations and effort. Overall, the Department of Education found that, among college-qualified low- and moderate-income students, half failed to enroll in a four-year institution due to cost and another quarter failed to enroll anywhere.

Those low- and moderate-income students who do matriculate are dramatically more likely to struggle to pay down their debt and to endure long-term financial consequences that their peers from high-wealth families (with smaller or no college loans) were able to avoid. That gap persists when it comes to saving for retirement or purchasing a home, perpetuating the same inequities for future generations. In 2009, households headed by someone with outstanding debt had less than half the retirement savings of someone who did not ($25,000 vs. $55,000).

In order to transform how students pay for college in a way that democratizes educational access and opportunity without re-entrenching existing economic advantage we also need to democratize access to wealth. The good news here is that public policy already has an extensive government infrastructure in place to help families build wealth, just as it does for helping families pay for college. This analysis from the New America Foundation’s Asset Building Program shows that, in 2015, over half a trillion dollars in federal spending went to support things like owning a home and saving for retirement or college. The bad news is that almost all of this spending was directed at households who already had wealth rather than those that didn’t.

Take federal policies explicitly dedicated to supporting college savings, for example. Each state currently manages a system of college savings accounts, called 529s after the section of the federal tax code that created them, and last year, the federal government alone spent $1.9 billion in the form of tax subsidies to help families build balances in those accounts. There is enormous potential in these accounts: research demonstrates that simply having an account in a child’s own name, regardless of the amount in that account, can increase the likelihood of enrolling in college even after controlling for things like parental income or education.

But offering incentives through the tax code disproportionately serves families with the highest earnings and capacity to save, not those with the greatest need or potential to benefit. In fact, the Government Accountability Office reports that only three percent of families have 529s, and those who do have median financial assets near $415,000. In contrast, Sallie Mae finds that almost 80 percent of parents earning below $35,000 say that they've never even heard of a 529, much less used one, even though they are saving around twice the proportion of their income for college than their middle- and upper-income counterparts.

The status quo is like Bloomingdale’s having a back-to-school sale: it’s only going to bring in people who already shop there and probably would have paid sticker price anyway.

The status quo is like Bloomingdale’s having a back-to-school sale: it’s only going to bring in people who already shop there and probably would have paid sticker price anyway. This approach is fine for a retailer trying to move more Uggs, but it’s a lousy way of allocating taxpayer money in the name of helping more students go to college.

Cities and states around the country are testing a better strategy, Child Savings Accounts, and are producing encouraging results. CSAs build on the 529 structure but extend its reach to benefit children left out of the current system. In 2013, a team led by the Wabash County YMCA launched the Wabash County Promise, which has since become Promise Indiana and spread to three additional communities. By streamlining enrollment in 529s through school registration, providing financial incentives for participating and saving, encouraging families to take concrete steps towards college preparation, and engaging community leaders as champions of children’s aspirations, Promise Indiana increased 529 account ownership from six percent to more than 70 percent for Wabash County youth, including its low-income students.

For this approach to work at scale, CSAs would need to include two key features. First, they should be opened automatically, ideally at birth, because having a college savings account should not just be for financially savvy parents looking for tax shelters. Second, they need to be progressively funded. Seed deposits and matches would get balances growing, but for CSAs to have a meaningful role in helping to pay for college, they need to receive robust public investment. There are many options to do this, including re-directing a portion of funds that would likely be received later to be used deposits, like Pell or the American Opportunity Tax Credit. The ASPIRE Act has also been introduced in multiple previous Congresses as the legislative vehicle to implement this CSA vision.

Changing the way we finance college from a debt-driven model to a wealth-driven one could create better educational opportunities for all students. It could also mean that the chances of them pursing those opportunities will have more to do with their effort and ability than the value of their parent’s bank account. This is the kind of idea worth getting into the mix on the campaign trail.

This post originally appeared in New America’s digital magazine, The Weekly Wonk, a Pacific Standard partner site. Sign up to get The Weekly Wonk delivered to your inbox, and follow @NewAmerica on Twitter.