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The Ladder

A Blog from New America's Asset Building Program

Student Loan Deal Misses Bigger Threat to College Access

Published:  August 13, 2013
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Although President Obama and Congress have acted to preserve affordable student loan rates, they’re failing to address a much more serious threat that could impair college access. College enrollment could decline dramatically – no matter what the loan rate - as a result of the loss of household wealth during the recession.

In this first look into how the recession impacted the financial well-being of families, the Federal Reserve's Survey of Consumer Finances discovered a staggering 40 percent loss in wealth. Between 2007 and 2010, the typical household saw a drop from $126,400 to $77,300. Unsurprisingly, most of the decline was due to the burst of the housing bubble, which has left almost a quarter of all mortgages under water and resulted in over 4 million foreclosures.   

What do housing values have to do with college achievement? First, wealth provides the resources to finance a college education when income isn’t enough. Since the costs of tuition and room and board at a public, four year university can amount to one quarter to over one half of the annual incomes of families in the bottom 60 percent of wage earners, families must rely on another way to pay those bills. For most of these families, their home is their greatest, and often only, source of wealth.

During the boom years, home prices went up and this equity was easier to tap. Families cashed out part of the value of their home to meet a range of expenses, including paying for their children’s college education. Research by Michael Lovenheim at Cornell University estimates that the drop in home prices that occurred from 2006-2010 cost the bottom 60 percent of wage earners over half of their home equity. As a result, college enrollment by children in these families could drop by 30 percent.

Second, housing value, and wealth more broadly, gives children something that’s essential for pursuing a college degree: the feeling that it’s possible. Research demonstrates that children from families who own homes and have other financial assets are more likely to go to college. One reason: The sense of financial security children gain from their environment creates the expectation that future doors will be open to them. Children who come from low-wealth families expect financial challenges that will limit their options. A study by the U.S. Department of Education in 2002 found that even among college qualified, low-income twelfth graders, only 63 percent expected to attend a four-year college compared to 88 percent of college qualified, high-income students. Simply put, expectations are just as key to going to college as the check to pay for it.

Losing almost a third of middle- and lower-income students from the ranks of the college educated would inflict a serious blow to their financial outlook as well as our national economic security. Workers who are in the skilled, college educated labor force have higher incomes, are much less likely to live in poverty and to become unemployed during times of economic downturn. On a macro level, this contributes to higher productivity, increased labor market stability, and higher federal and state revenue in the form of higher taxes. This is the looming crisis that demands action. 

So, what should we do? In the short term, measures like increasing the amount of Pell grants and expanding the income range of students who are eligible can serve as a stop-gap for the families who have been hardest hit by the collapse of the housing market. In the long run, though, it’s essential that we invest in building the wealth that provides the resources and expectations that middle class and low-income students need to go to college.

A clear lesson of the Fed report and implications it has for college enrollment is that the financial circumstances of parent often dictate the opportunities of their children. One way to circumvent this entanglement is to start with the kids. Research by William Elliot III at the University of Kansas has shown that children with a savings account in their name are four to six times more likely to enroll in college than peers who don’t, regardless of the amount saved and controlling for factors like income and other demographic characteristics. The idea is simple: When you save for something, that “thing” becomes real and motivates you to do what it takes to acquire it. 

But to make sure that every child has the opportunity to save for college, we need a federal policy. The ASPIRE Act is a legislative proposal that has been introduced in multiple congresses with bipartisan support. It would establish an account at birth for every child, seed that account with $500, and provide a direct match incentive for families earning below the national median income. This design will maximize participation and encourage the growth of savings for the families who need it the most. At 18, the account holder could use money invested over her lifetime for a college education. 

Changing the way we finance college from a debt driven model to a savings driven one could create better educational and career opportunities for all students. It could also mean that the chances of them pursing those opportunities will have more to do with their effort and intelligence than the value of their home.

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