Fresh off the presses are two reports highlighting the dismal state of college affordability: the first was released Wednesday by the State Higher Education Executive Officer's Association showing that college costs rose 8.3 percent last year and the second from Sallie Mae released last Tuesday (slightly less fresh) showing that less families are savings for college and those that are are saving less.
The recession dealt a blow to the incomes of many families, so it shouldn't be surprising that they are less able to stash money away for the future when they're having a hard time just making it through the week. But, as we've often argued, the ability to save often has less to do with the resources available to save as it does the policies that support saving. And, for the families who will have the greatest challenge meeting the rising costs of college, the policies that should be helping them save today to meet those expenses when the time comes aren't making the grade.
Take the 529 plan. In the mid-nineties, Congress affirmed the value of saving for college by authorizing states to establish special accounts and endowing them with a tax advantaged status to entice families to participate. Fast forward fifteen years later, there are 11 million accounts with around $167 billion in deposits nation-wide. And have the gates of colleges swung open to welcome the low-and middle-income students typically kept out due to cost? Hardly. According to the Sallie Mae report, about half of parents earning between $35,000 and $100,000 and almost 80 percent of parents earning below $35,000 say that they've never even heard of a 529, much less use one. So, who does? People who don't need any help paying for college. According to the GAO, the median financial assets of families with 529s are $413,500.
One reason for the high rate of participation among the higher income set is that the incentive to save comes in the form of tax advantages based on a household's tax rate. So, the higher your income, the higher your marginal tax rate, the higher your tax benefit. These families have more to save and more to gain from saving. According to the same GAO report, households earning over $150,000 head a median 529 distribution of around $18,000 AND a tax savings of over $3,000. This is compared to households earning under $100,000 with a median distribution of around $7,500 and tax savings of only $561. In a way, this is like telling rich families that their efforts to save for their children's college education is more valuable than that of the lower income families.
Not only do lower-income families get less help to save, but rules in public benefits programs can actually penalize families who do. Asset limits restrict the amount of money a household can have an be eligible to participate. College has been affirmed as an important goal and 529s have been exempt from counting toward the asset test in SNAP. The problem is, according to the Sallie Mae survey, most lower-income families report saving for college in their basic savings or even checking accounts, which do count toward the asset test. Since this limit can be as low as $2,000, this puts families in a position where even very small financial disruptions can undermine their efforts to put their kids through college.
So, higher income families get paid to save and lower income families get penalized if they do. What can be done? A former colleague Mark Huelsman and I outlined a few options in a paper we released last year. Among them, get rid of asset limits. There are a lot of reasons why that's a good idea. Next, make sure that lower income families have meaningful incentives to save and access to an account to save in. Policies like the Financial Security Credit or the ASPIRE Act, which would create universal savings accounts at birth, would do just that. These steps could make a dent in the cost of paying for college, but perhaps more importantly, they could help build the expectations for going to college that keep so many lower income students from pursuing that goal. In fact, the Department of Education will soon be offering a savings account to some participants of its GEAR UP program for just that reason.
College costs are likely to continue to rise. The degree itself will continue to be a credential that conveys economic mobility. Making it easier and more valuable for lower income families to save is an important part of the strategy to improve access to that credential among the students who have the most to gain from it.