Earlier this year, the Obama Administration released a
bold new plan for improving the state of higher education in the United States.
Its fiscal year 2010 budget proposal included several items aimed at increasing
postsecondary education enrollment and completion rates, and decreasing the
financial burden that college represents to many lower and middle class
families.
[1]
These proposals include reforming the federal student loan program, expanding
Pell Grants for low-income students, and creating a new College Access and
Completion Fund (CACF).
The CACF is a five-year, $2.5 billion fund to support
state initiatives that would help more low- and moderate-income (LMI) students
both enroll in and complete postsecondary education. The overall goal of the
fund is to identify the most effective strategies for increasing completion rates
for LMI students. In September, the House of Representatives passed the Student
Aid and Fiscal Responsibility Act of 2009 (H.R. 3221), which very closely
mirrors the Obama Administration’s higher education proposals.[2]
The bill includes the CACF with slightly more funding (a total of $3 billion
over five years) and some guidelines on how the funding should be distributed. The Senate is expected to
take up this issue later this fall or in early 2010.
Beyond
general guidelines, much of the CACF proposal is currently undefined, which
allows for a great deal of flexibility and creativity in addressing issues of college
completion. This brief highlights several promising and innovative strategies
involving college savings that could be incorporated into the CACF proposal. Increasing
college savings for LMI students can help make them more likely to attend and
graduate because it makes college more affordable. An emerging body of research
is also beginning to discover important educational and behavioral benefits of
saving for college. The college savings strategies discussed here revolve
around enrolling more disadvantaged students into 529 College Savings Plans and
encouraging and facilitating contributions from a wide range of sources –
including family, friends, and private and public institutions.
529 College Savings Plans were
created by states over two decades ago to help their residents keep pace with
the rising costs of higher education. They were added to the Internal Revenue
Code (Section 529) in 1996, and were given federal tax-advantaged treatment in
2001. Virtually every state offers or runs their own plan, with a variety of
investment options. Many states offer additional tax benefits as well. Today,
over 11 million accounts have been opened nationwide.
However, despite this
growth, there is less-than-ideal participation by LMI families, who stand to
benefit the most from saving for college. They receive few or no tax benefits
from contributing to college savings plans, since they typically have no or low
tax liabilities, reducing their incentive to participate. Several states,
however, have begun to test innovations for helping more LMI families save for
college using 529s. Current innovations by
states to encourage more LMI families to save in 529s include matching contributions,
opening accounts at birth, enrolling participants in the workplace, and
creating partnerships with public and nonprofit organizations to educate
families about 529s and the importance of saving for college.[3] Due to limited resources though, not all
states are able to test innovations and when they can, their scope is often
limited. Funding from the CACF could help states surmount this financial
barrier and provide a unique opportunity to test the potential of some of these
strategies to impact college completion among LMI students.
College Completion and Savings
Extensive research has
demonstrated that college graduates have significantly higher incomes over
their lifetimes, and receive other important non-economic benefits, compared
with those who do not complete college. For poor students, a college degree is
one of the best paths for climbing the economic ladder. College enrollment has
steadily increased over the last several decades among all income groups, but
college completion rates are problematic. Despite the strong benefits of a
college degree, nearly half of students who enroll in college do not finish.
And the lower the family income of the student, the less likely they are to
enroll or complete their degree.[4]
One of the major reasons for
these low levels of degree completion, particularly for low- and
moderate-income families, is college affordability. Over the past few decades,
college prices have increased dramatically and need-based financial aid has not
kept pace. In 1987-88 for example, the maximum Federal Pell Grant covered 50%
of public higher education costs. Currently, it covers only 32%.[5] The result has been ever-increasing levels of
loan debt for students from LMI families who do enroll. In 2007-2008, nearly
90% of LMI students who applied for federal aid graduated with student loan
debt that averaged almost $25,000.[6]
Increasing need-based financial aid is one essential step in addressing the college
affordability issue, but that alone is not enough. Additional steps also have
to be taken, including making savings a larger component in helping students to
pay for postsecondary education.
Research has found evidence that
household savings is related to important educational outcomes such as high
school graduation and college enrollment.[7]
Current research is also exploring the potential association between savings
and college completion and there have been some promising findings.[8]
Savings provide families with resources to help pay for the cost of college,
but the benefits appear to be more than just financial. There is evidence that
even small amounts of savings can have positive impacts on the behaviors and
expectations of both students and their parents. In terms of education, this
might lead LMI families to see college as a more realistic goal and motivate
students to improve their academic performance.[9]
State 529 Plan Innovations and the CACF
529 College Savings Plan
innovations are ideally suited for implementation under the CACF for multiple
reasons, such as their structure. Plans operate under a set of general federal
guidelines, but are coordinated by centralized state government agencies –
often the State Treasurer’s Office. As a result, states have considerable
flexibility to innovate with their savings plans. Additionally, 529 plans lend
themselves to data collection, which facilitates evaluation of 529 plan
innovations. The CACF requires evaluation of all strategies that it funds, in order
to determine which ones are the most effective at helping LMI students achieve
college access and success. Best practices identified through this process can then
be adopted by additional states and be used to inform federal policy.
There is also already
precedent for federal matching grants being used to fund state 529 plan innovations.
Through federal GEAR UP (Gaining Early Awareness and Readiness for Undergraduate
Programs) Programs, a handful of states have used federal matching grants to
help fund 529 savings innovations for LMI students on a limited scale.[10]
Below is a list of a few of the
innovative and promising 529 plan initiatives that states could test under the
CACF to increase college completion and expand opportunity for LMI students. This
list includes both existing strategies that could be expanded to more families
or states as well as new innovations that could be tried for the first time. It
is, however, far from exhaustive and rather represents only a strong starting
point for completion-enhancing savings innovations by the states.
Progressive Matching
States can encourage LMI families
to open and contribute to 529 plans by matching account contributions. Research
has demonstrated that matching savings at tax time can be effective at
incentivizing LMI families to save for long-term goals.[11]
Eleven states currently provide matching incentives for 529 contributions,
though they vary in terms of funding, eligibility, and match structure. Some matching programs are small in scale,
and could be expanded to reach additional families with the help of the CACF. CACF
funds could also be spent to allow other states to start matching programs and
make this promising incentive more widely available.
Opening and Seeding 529 Accounts for
Low- and Moderate-Income Children
Opening and seeding accounts
at birth or kindergarten would allow LMI families to begin saving early and
provide them with a small initial deposit to help get them started. Currently, the
state of Maine,
through the Harold Alfond Challenge, provides an initial $500 contribution to a
college savings plan for every child born in the state, provided families sign
up within one year of birth.[12] The
CACF could fund pilot programs that open accounts for certain populations of
LMI families. In some cases, they could also be used to open an account for
every LMI child in a state.
Using Conditional Cash Transfers (CCTs)
to Fund 529 Accounts
States could open and
contribute to 529 accounts for LMI families using conditional cash transfers (CCTs).
Several US
cities have begun CCT programs for low-income students, providing cash
incentives for attendance, academic performance, and other benchmarks. These
programs could be used in conjunction with state college savings plans,
providing a combination of cash incentives and contributions to the college
savings plans of students to potentially incentivize both improved academic
performance and saving for college.
Other Strategies to Increase
Enrollment and Participation in 529s by LMI Families
While incentives play an
important role in increasing savings and participation in 529 plans, targeted
outreach and new enrollment strategies could also impact college access and
success. Strategies could include: using public institutions such as libraries
and schools to educate LMI families about 529s and the importance of college
savings; collaborating with employers to open and contribute to employee 529
plans; partnerships with community and alumni organizations to enroll students
in plans; and allowing 529 plans to be opened and funded on state tax forms.
Evaluation
of 529 Savings Innovations Under the CACF
In addition to providing
funding to states to test savings innovations like the ones described above,
the CACF would also provide some funding to evaluate the effectiveness of these
innovations. This provides an excellent opportunity to gain insights into some
of the most pressing research questions concerning college savings and
completion. Below are some of these essential research questions that the CACF could
help answer:
- Are LMI students
more likely to enroll in and graduate from college if they have a 529? - How large do
balances have to be to be effective at facilitating access and completion for
LMI students? - Do matching funds
encourage LMI families to open and contribute to 529s? If so, which match rate
is most effective? -
Does opening and
seeding 529 accounts at birth or kindergarten encourage 529 participation? If
so, what is the best time to open the account and seed amount? - Which outreach
and marketing strategies are most effective at increasing account opening and
participation by LMI students? - Which strategies
for having employers help open and contribute to employee 529 accounts are most
successful at encouraging employee participation?
Promising
Innovation
Research is beginning to show that savings is an
important component in helping more students of all incomes access and complete
postsecondary education. The creation and growth of 529 plans has made it
easier for families to save, but these plans need to be improved for more low-
and moderate-income families to take advantage of them. While some states have
experimented with different strategies for encouraging these families to save
for college, their scope is often limited. Other states have not been able to
offer them due to budgetary constraints. The College Access and Completion Fund
is ideally suited to help create, implement, expand, and evaluate
completion-enhancing savings innovations by the states. The best practices
identified through the fund could be used to inform more states as well as
federal savings policy.
The College Savings Initiative
The College Savings
Initiative was launched in 2009 as a joint venture of the Asset
Building and Education Policy Programs
of the New America Foundation and the Center for Social Development (CSD) at Washington University
in St. Louis.
This work is supported by the Lumina Foundation for Education and the Bill
& Melinda Gates Foundation.
For more information about
the College Savings Initiative please go to www.collegesavingsinitiative.org
[1] More information about the Obama Administration’s
FY2010 budget proposals for education is available at http://www.ed.gov/about/overview/budget/budget10/summary/10summary.pdf
[2] A summary of the Student Aid and Fiscal Responsibility
Act (SAFRA) is available at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR03221:@@@D&summ2=2&.
[3] Boshara, Clancy, Sherraden, and Newville (2009). The Basics of Progressive 529s. New America
Foundation and the Center for Social Development at Washington University.
[4] Haskins, Holzer, and Lerman (2009).
Promoting Economic Mobility By Increasing
Postsecondary Education. Washington: Pew Charitable Trusts Economic
Mobility Project.
[5] College Board. Trends
in Student Aid 2008 (Page 14, Figure 12B) Available at http://professionals.collegeboard.com/profdownload/trends-in-student-aid-2008.pdf
[6] Kantrowitz (2009). Student Aid Policy Analysis: Growth in Cumulative
Education Debt at College Graduation.
FinAid.org.
[7] Nam
and Huang (2008). Equal Opportunity for All? Parental Economic Resources
and Children’s Educational Attainment. St. Louis: Center for Social
Development, Washington
University.
[8] Zhan and Sherraden (2009). Assets and
Liabilities, Educational Expectations, and Children’s College Degree
Attainment. St.
Louis: Center for Social Development, Washington University in St. Louis.
[9] Sherraden (2009). Savings and Educational Attainment: The Potential of
College Savings Plans to Increase Educational Success. St. Louis: Center for
Social Development, Washington
University.
[10] Clancy and Miller (2009). Creative Partnerships between GEAR UP and State
College Savings Plans: Experience and Policy Potential. St.
Louis: Center for Social Development, Washington University in St. Louis.
[11] Duflo et al. (2005).
Savings Incentives for Low- and Middle-Income
Families: Evidence from a Field Experiment with H&R Block. [Policy Brief No. 2005-5] Washington, DC:
The Retirement Security Project.
[12] More information about the Harold Alfond Challenge is
available on the Finance Authority of Maine website at: http://www.famemaine.com/NextGen/maineResidentBenefits/haroldAlfond.asp
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