Guest Post: A Better Use of Resources

By Scott Fleming

The Obama Administration has proposed a bold agenda for student financial aid, including calling on Congress to provide nearly $130 billion in additional funding to pay for a massive expansion of the Pell Grant program, the creation of a new grant program for states to support local student completion and retention programs, and a significant retooling of the Perkins Loan program. Despite the Administration’s aggressive proposal, a promising approach to improving college affordability appears to have been overlooked: leveraging the advantages of saving to help the lowest income students.

While the proposed increase in spending on Pell Grants is certainly substantial, it’s unlikely to have much of a long-term effect, as long as tuition costs continue to spiral out of reach. And while Perkins Loans offer more advantageous terms than federal Stafford loans and private loans, the program’s expansion will only contribute to further student indebtedness. The emphasis on “point of sale” aid, where students receive aid as they enter postsecondary education, may be falling victim to the law of diminishing marginal returns. Even in the midst of historic investments in student financial aid, increasing numbers of students still find themselves with considerable unmet need.

There is an alternative, however. For a relatively modest sum, Congress could begin an important policy shift toward helping low-income families plan and save for college by building tax-advantaged college savings plans for low-income children, popularly known as “529” college savings plans. For example, if the $500 million in annual spending set aside for the completion and retention fund were applied to financing college savings plans for low-income children, it could have a substantial impact on college attendance. It may just take a few years to see the full impact.

For the tax year 2006 (filed by April 15, 2007), roughly 1.8 million households filed with modified taxable income of less than $18,000. It is obviously impossible to know how many of these households filed with dependents under the age of five, but even if every household in this category fit that criteria, a $500 million fund could provide almost $300 of seed funding toward that child’s college savings plan. A $300 annual contribution for five consecutive years at an interest rate of only six percent would yield more than $2,200 by the time a five-year-old entered college, none of which counts against the student when calculating federal financial aid eligibility (as other forms of savings do currently). A younger child could accrue even greater resources by the time he or she entered college, particularly if friends or family members contributed as well.

A larger federal investment could reach many more families, as well as expand the initial contribution to get an account started. Over the next 10 years, the federal government could support over 18 million $5,000 college savings plans for low-income families for the same amount of money the Obama Administration is proposing to increase spending on Pell grants.

Setting aside funds for future college students would also help meet the Administration’s goals of improving completion and retention. The Advisory Committee on Student Financial Aid estimated that as many as 1.4 to 2.4 million students fail to achieve a four-year postsecondary degree based only on their lack of financial resources. Having money set aside for college would also provide an important assurance that a reasonably substantial amount of funds would be available for release when the child enters college later on, helping to build confidence and aspirations.

Another significant advantage of a focus on savings is that — despite recent objections to the concept — time and interest begin to work in favor of the future student (as opposed to student loans, which have the opposite effect). Funds in college savings plans grow over time, meaning they can make a much more substantial impact for a large number of low-income future students, something states ought to be interested in supporting.

If we’re serious about improving college access, it’s time we started putting resources to work for the future.

Scott Fleming is a director at the Chartwell Education Group, a lobbying firm that specializes in providing education-related consulting services to state and local governments, foundations, corporations, and other countries. Prior to joining Chartwell, he was the Senior Education Policy Advisor for the United States Senate Committee on Health, Education, Labor and Pensions under the chairmanship of Sen. Michael B. Enzi (R-WY). In that capacity, he became an expert on the federal student financial aid programs and worked extensively on issues related to accreditation, distance education, minority-serving institutions, and international education. His views are his own and do not necessarily reflect those of the New America Foundation.