Beyond Financial Aid

I am fortunate to have commentary in the Chronicle of Higher Education this week, arguing for savings and asset building to be included in the debate over how best to finance higher education, particularly for low-income students. From the piece:

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.

You can read the whole piece here. And always, check out all the recommendations and research of the College Savings Initiative by visiting our website.