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The Ladder

A Blog from New America's Asset Building Program

New Report: Rebalancing Resources and Incentives in Federal Student Aid

Published:  January 29, 2013
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New America's Education Policy Program has a new report out today that presents a comprehensive package of reforms to the existing federal student aid system for higher education. The Education team makes a compelling case for the need for reform:

In short, the present federal financial aid system is no lon­ger up to the demands of the times. It was built in a differ­ent era and has evolved haphazardly over the decades, in response to fiscal exigency and interest group pressures. It has become unwieldy, inefficient, and overly complicated, in a way that wastes taxpayer dollars and fails to provide institutions and students with the resources and incentives they need to complete high-quality college degrees....Taxpayers and students need an aid system that is simpler, more understandable, more effective, and fairer.

In particular, they propose reforms that dramatically strengthen the Pell Grant program, simplify the federal student loan program, eliminate education tax breaks which currently favor higher-income families, boost programs that support disadvantaged middle and high school students, and make institutions of higher education more accountable to both students and taxpayers.

The Asset Buildng Program has also looked at the way education-related tax breaks disproportionately favor higher-income Americans. Our Assets Report has a section that looks at federal tax spending on education and shows that tax-preferential treatment of 529 accounts overwhelmingly serves upper-income people. Thus, scrapping 529s from an equity standpoint makes a lot of sense: a recent GAO report found that only 3 percent of American families utilize them and that those who do have them have three times the median income of those who don't. But what about from a savings promotion standpoint?

Here in the Asset Building Program we've historically looked for ways to make savings vehicles for higher education more inclusive of lower-income people, because our research strongly supports the idea that savings do matter. Research by Willie Elliott, Terri Friedline and colleagues strongly links access to children's savings accounts and even incredibly modest levels of savings to better educational outcomes for students. For example, Willie Elliott found that even when "controlling for important factors including race, gender, academic achievement, parents' education, household income and net worth, children with savings designated for college are twice as likely to be on course as children without savings designated for college" (on course simply means enrolled in or having graduated from a two-year or four-year college by age 23). While an adequate and equitable financial aid system is undeniably critical to making college accessible and affordable to Americans regardless of their income background, savings have an important role to play in preparing students from an early age for the very notion that higher education is within reach.

The Education paper includes another idea for how to support the college aspirations of young lower-income students: triple the funding for the GEAR UP program. They identify GEAR UP as "the most promising" of federal programs aimed at "raising the college aspirations and improving the academic preparation of disadvantaged students." Importantly, they recommend improvements to the cohort aspect of GEAR UP, which will help institutionalize consistent programming for students beginning in middle school. However, even GEAR UP may not start early enough to truly capitalize on the aspirational power of children's savings. Terri Friedline examines savings behavior from a developmental perspective and points out that children as young as six can articulate the desirability of saving and that by eight or nine children are ready to save on their own, with support from family, educators, and a safe banking structure. Thus, perhaps some of the additional funding for GEAR UP could be used to support the College Savings Account Research Demonstration which the Department of Education announced last year. This demonstration incorporates a savings account mechanism into existing GEAR UP programming.

To learn more about the other proposals, check out the report here. This is an important read for any asset building practitioners and policymakers whose work carries over into the education arena. While the Education team at New America is coming at this topic from a different angle than the asset building field, we share a common purpose: to ensure equitable access to higher education for all Americans regardless of socioeconomic background and this kind of big-picture package of reforms is a very useful contribution.

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