Smart way to save for college

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Graduation season is upon us, and as families across the nation gather to celebrate, too many young people will graduate with crushing amounts of student loan debt. This year’s crop of graduates will carry an average of $26,500 in debt. They’ll join the ranks of millions of other adults who collectively carry more than $1 trillion in student loans. This debt colors the lives of the country’s young adults, forcing them to postpone purchasing homes, opening small businesses and starting families.

Despite the cost, a majority of high school graduates do enroll in some form of higher education. They are motivated by the prospect of significantly higher lifetime earnings and greater prosperity; indeed, our national success depends in large part on theirs. What can be done to reduce their debt load upon graduation?

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We can enable parents to save and remove disincentives to saving. Research indicates that savings are an important protective factor with the power to shield students from high-dollar debt. On average, graduates with parents who put aside college savings have about $3,200 less student loan debt than those who did not.

Unfortunately, economic pressures have severely hampered the ability of families to save. One study found that only 49 percent of college graduates had parents who had saved for their college education. Other surveys indicate that of the parents who are saving for college, almost one-third had reduced their deposits in the previous year, reflecting the considerable challenges faced by American families today.

Moreover, the current vehicles for college savings are inadequate and not well-used; the Government Accountability Office found that only 3 percent of U.S. families utilize state 529 college savings plans or Coverdell plans, and that no more than 40 percent of even those who said saving for college is a priority are using such accounts.

Even if parents can’t save enough to pay for college entirely, a small amount of savings can make a difference. If students have savings of only $500, they are three times more likely to enroll and four times more likely to graduate college. Conversely, there is little evidence to correlate loans to college completion, and the specter of high-dollar debt may deter disadvantaged students who are particularly loan-averse. In addition, dependence on student loans can have significant negative effects on post-college financial well-being, while early findings suggest that having savings from a young age may be associated with having more diversified asset portfolios in adulthood.

Congress must promote good public policy that enables all Americans to save for their children’s education, especially low-income Americans. In recent years, children’s savings accounts (CSAs) have gained in popularity. These accounts are seeded with an initial deposit and built by contributions from family, friends or the children themselves. In addition to these investments, we could further incentivize college savings through redeploying existing financial aid resources, with the potential for improved educational outcomes and, after college, a stronger foundation of financial security.

Unfortunately, current policy often serves as a disincentive to savings. Today, savings balances often count against the asset limits in public benefits such as the Supplemental Nutritional Assistance Program (SNAP), commonly known as food stamps. These asset limits force families to choose between saving money for college and putting food on the table. For this reason, I (Rep. Cartwright) will introduce the Children’s Savings Accounts Offer Parents Plenty Of Reasons To Understand aNd Invest in Tuition Yearly (CSA Opportunity) Act, which would right this wrong by exempting 529s and CSAs from asset limitations in common federal benefits.

College savings accounts alter the aspirations of children by sending a message that they should expect more from their own futures. They also help students to build their human capital without mortgaging their financial futures. When we force parents to choose between saving for college and keeping the lights on, we essentially punish financial responsibility. We should end this difficult decision for families and provide the opportunity for all families to save for their children’s education. 

Cartwright has represented Pennsylvania’s 17th Congressional District since 2013. He sits on the Natural Resources; and the Government Reform and Oversight committees. Lewis is policy director for the Assets and Education Initiative, advancing policy based on research into the role of assets in addressing educational inequities.