A Federal Budget that Puts Higher Education within Reach: the ASPIRE Act and Inclusive 529s

Going to college and getting an education has long been regarded as a reliable path out of poverty. And for good reason. Research by the Pew Economic Mobility Project shows that children in the bottom income quintile have a forty-five percent chance of remaining in the bottom quintile if they only have a high school education; those who get a college degree only have a sixteen percent chance. Likewise, the average college graduate makes $29,000 more per year than someone with only a high school diploma.

Yet when a college education isn’t even an option because of its excessive cost—as is increasingly the case for many U.S. families—this narrative falls apart. Today, the average American household must devote a significant portion of their annual income to tuition in order to make attending college a reality. Although in the long run the educational system needs greater structural changes, two policy reforms that would facilitate saving for college from a young age—the ASPIRE Act and improved 529 accounts—would allow a greater number of low-income students to access higher education.

Throughout the past decade, both public and private institutions have raised tuition substantially, rendering higher education increasingly inaccessible. As demonstrated by NAF’s new infographic, as of 2008, the average cost of attending a four year college would require over half the income of a household in the lowest income quintile; this represents a proportional increase of 16% since 2000. Meanwhile, most federal money distributed to support college savings is in the form of tax subsidies to higher income households. As a result of the widening gap between costs and wages and in the absence of resources to bridge that gap, the odds of attending college for a low-income student are 54%; the odds for their high-income classmates are 84%.

The excessive cost of college tuition creates a barrier both to access and expectations. Studies have shown that students in families that have some savings set aside for college, even if it is a very modest amount, are more likely to attend college because they view higher education as a more realistic and attainable goal. However, as discussed in the Assets Report 2012, the FY 2013 federal budget’s support for college savings accrues primarily to higher-income families. The American Opportunity Tax Credit, which accounts for around $21 billion of the government’s $67 billion expenditures on post-secondary education, provides a credit of up to $2500 for educational costs, but is only partially refundable. Consequently, families that earn too little money to have tax liability receive a smaller proportion of the tax benefit than higher income families.

Furthermore, although significant funding in the FY 2013 budget is allocated to Pell grants that help low-income students pay for college, the availability of these grants is not as effective as existing savings in encouraging students to pursue higher education. Savings designated specifically for college confer confidence about the future that the mere potential for a scholarship, tax credit or financial aid does not. As explained by one economist in NAF’s recent college savings paper:

“Imagine a car dealer who told customers about a rebate incentive only after they had agreed to purchase a car. What would happen? Customers who were willing to buy at the prerebate price would be pleasantly surprised and drive out of the dealership with their wallets a little fuller than they had anticipated. Customers scared off by the sticker price would never even learn about the rebate and would walk out not knowing that the car they wanted was affordable.”

The Asset Building Program has recommended two policy reforms that would narrow the gap in access to higher education between high and low-income students by facilitating the development of college savings accounts. First, the ASPIRE Act provides one possibility for increasing college access through early intervention. The ASPIRE Act would give every child a savings account at birth, with a balance of $500 and incentives to encourage additional deposits, scaled to income. The account funds could be used only for designated purposes: postsecondary education, homeownership (after age 25) or retirement (after age 59 ½). These accounts would promote savings behavior from a young age and enable the accumulation of assets that could serve as a foundation for the child’s future.

Second, making 529 plans better savings vehicles for low-income households would allow a greater number of families to save, despite a limited cash flow. Policy options that could make 529s more inclusive include linking 529s with Pell grants, so that students are aware that the grant money is available for their education from a younger age; exempting 529s from eligibility for both state and federal financial aid; and delivering scholarships through 529s years before enrollment. Excluding 529s from the asset limits for public assistance programs would also encourage more families to open accounts. For a more comprehensive exploration of these and other policy options for improving 529s, see NAF’s paper The Potential of Inclusive 529s.

Excessive tuition costs will continue to necessitate sacrifices on behalf of low-income families that want to send their children to college. Still, the budget could more effectively promote college access by making support for college savings more equitable. Efforts like the ASPIRE Act and inclusive 529s can broaden access to college for students for whom higher education may otherwise be out of reach.