RALEIGH — The U.S. House of Representatives has passed a student loan reform bill that will likely result in significant changes to the way college students finance their educations. Such reform is needed. However, the overwhelming costs and debt associated with higher education call on us to consider the role of savings in college financing.
A recent study by the Pew Charitable Trust found that the cost of higher education has increased by 50 percent over the past 10 years, while median income grew by just 3 percent. Students and their families are increasingly taking on significant levels of debt -- in North Carolina, the average debt per graduate is approximately $17,000. Credit cards are increasingly being used to finance educational costs; half of college students nationally have four or more credit cards.
Policymakers should make it easier for more families to save for college, rather than financing their children's education with debt alone.
Despite tremendous efforts to make college affordable in our state through programs like Learn and Earn and the Carolina Covenant, students continue to struggle to pay for and complete college. Students at historically black colleges and universities (HCBUs) have been hit particularly hard by college costs and debt financing. The N.C. Institute of Minority Economic Development reports that students at North Carolina HBCUs have the highest aggregate loan rates in the nation.
Not only does a high level of debt have an immediate impact on the student -- increasing the likelihood of dropping out and denting credit scores --there is also a broader impact. Higher education provides the best opportunity for children to move up the economic ladder, which benefits society's bottom line. The Pew Charitable Trust found that adult children with parents in the bottom income quintile nearly quadrupled their chances of moving all the way to the top quintile by obtaining a college degree. But in the face of repaying significant debt, many children, especially poor children, are failing to even enroll, and those who do are struggling to complete their degree.
Saving for college has a twofold effect: it establishes an expectation of college attendance early on for a child, and it can minimize the amount of debt or provide a cushion to reduce financial stress for a student. Children growing up with savings for college are more likely to do better in school, to graduate and be prepared for college. Children with savings accounts are also most likely to learn and retain financial concepts and lessons.
The key is to make saving for college feasible to those who will benefit the most -- students from low and moderate-income households. Two innovative proposals should be considered by lawmakers.
College 529 Savings Plans, which provide tax benefits to households that save regularly for education, are one important tool for starting to save early on. While limited data exist on who holds these accounts in North Carolina, it is evident from national research that low-income households are least likely to participate. Making college plans progressive by providing initial deposits and matching contributions to income-eligible households can allow even minimal monthly savings to grow to significant levels.
With just a small pilot program, Arkansas was able to leverage $250,000 in public dollars to encourage savings for nearly 500 children now planning to go to college. A cutting-edge policy tool expanding on the concept of college savings plans, children's savings accounts, can also serve as a model for starting savings early. Such a policy provides children with a deposit at birth that grows over time and serves as a focal point for family and community support of a child's educational aspirations.
An innovative opportunity proposed by the College Board at the federal level is to create an account for every child whose parents would qualify to receive a Pell Grant. Contributions by the government would be made each year based on parents' eligibility, thus not relying on a single snapshot of a household's ability to pay. The account would also earn interest and children would know from an early age that there is money being set aside for them to attend college.
At a time when many of our economic theories seem of questionable reliability, it remains clear that education is essential to economic success and mobility. North Carolina boasts the oldest public university in the nation and has long championed education as the key to economic growth. Now more than ever, our state must ensure that all North Carolina children have access to affordable educational experiences.
"College savings" need not to be quite the contradiction in terms that it has become for many families. Indeed, it should be a call to action to invest in the continuing education of our future workforce.
Alexandra Forter Sirota is director of policy and research at Action for Children North Carolina.
