College financing: From debt to assets

As previous posts in this series have shown, the crisis in student borrowing is not extraordinary debt loads; those are relatively rare and sometimes not even that harmful. The real college debt crisis is in how student borrowing may be compromising higher education’s potency as an engine of equal opportunity. There is a world of difference between a disadvantaged child who has to borrow for college and one who is able to finance the same degree from family resources. That inequity undermines education as a path to the American Dream.

We need to move from a debt-based to an asset-based approach to financial aid. Assets, particularly in the form of Children’s Savings Accounts (CSAs), are a good place to start. Unlike student loans, which are only designed to bridge affordability at enrollment, CSAs begin early in a child’s life and can work on multiple dimensions—preparation, affordability, completion, and later financial well-being—to improve outcomes and close gaps.

A randomized control trial finds that CSAs can improve children’s social-emotional skills and preserve mothers’ educational expectations. Educational assets may help to build ‘college-saver identities’, potentially shaping engagement and increasing achievement, even with balances as little as $500.

In the arena of financial health (the motivation for most college-goers), assets particularly distinguish themselves from debt. While evidence suggests that borrowers’ net worth, retirement savings, and home equity may lag behind their peers’, young adults with savings accounts have a foundation that can be leveraged for upward mobility.

Saving for college—a national, not individual, goal

If education is to remain the key to upward mobility, we need to ask more of financial aid than just allowing students to mortgage their tomorrows to pay today’s tuition. We need financing that undergirds robust, equitable opportunities, improves outcomes along the pipeline, and aligns with our values.

Children’s Savings Accounts may be the vehicle for such a transformation in college financing. With CSAs, even small savings may make a big difference by initiating savings as early as birth and by repurposing existing financial aid—Pell Grants, philanthropic scholarships—as the next large wealth transfer, the first since the G.I. Bill.

How? One promising approach towards a national CSA system can be seen in the American Savings for Personal Investment, Retirement, and Education (ASPIRE) Act. Accounts would be seeded with $500; a further $500 would be available each year to match disadvantaged families’ savings. When accountholders turned 18, they would be permitted to make tax-free withdrawals for postsecondary education, as well as for other transformative investments. The ASPIRE Act—providing dedicated accounts for all children at birth—could be funded for only $3.25 billion in the first year. Accounts could then receive extra funds for children from the age of 11, when we can fairly accurately predict Pell eligibility, with annual deposits of 5 to 10 percent of the projected Pell award.

Public discontent with student debt is occurring alongside strengthening evidence for the value of asset-based financial aid. The time is ripe for a revolution in college financing.