Student loan debt was a problem long before Occupy Wall Street protesters added it to their list of grievances. The recession hit the younger end of the workforce particularly hard: the combination of a jobless recovery, rising tuition bills and mounting debt have become a crushing burden. Total student debt today is approaching one trillion dollars — exceeding the balance due on credit cards — and is second only to mortgage debt in American households. In fact, it's the only class of debt in which defaults are increasing. Given the state of the economy, much of this debt will never be repaid. It will remain an albatross weighing down an entire generation.
It's time to look ahead to a new paradigm, in which student loans are not the only answer. Let's consider the power of savings. Currently, we know scores of students never make it to college because they perceive it as financially out of reach. Others bail when they realize the debt burden will be too high. The cost proportionality of getting an education compared to the amount of borrowing necessary to finance it is way out of line. Students need a way to finance college without compromising their future financial well-being. Beyond efforts to limit tuition growth and create affordable educational options, there are significant advantages for placing a greater emphasis on savings.
A growing body of compelling research has illuminated the connection between savings and educational outcomes. Even modest-sized savings and asset holdings have the potential to alter the way people think about the future, which can lead to productive changes in behavior. For example, children with a savings account in their own name are more likely to have higher math scores than children without a savings account — scoring on average almost 9 percent higher.)
Studies have also shown savings are linked to expectations of high school graduation, academic achievement, and pursuit of postsecondary education.
Providing access to savings accounts can create a financial stake in college for students, and it’s a more effective strategy than simply advising them to save: if students have a tangible place to store funds, they are three to six times more likely to attend four-year colleges than youths with no savings. These accounts impel children to think about their postsecondary education. Opening the door to college motivates performance in certain ways, like staying in school and studying harder. And the earlier this starts, the better. Account ownership helps make the savings purpose more salient. We have observed that a college-bound identity takes shape long before children fully understand what it even means to go to college.
The concept of children's savings accounts has begun to take hold in a diverse set of countries including Britain, Singapore, Canada, and South Korea. In the U.S., 529 College Savings Plans have proven to be popular vehicles as earnings on deposits are tax-free. Unfortunately, to date they have had a limited reach among many households with modest incomes. That’s largely because the strength of the incentive to save is based on how much a family earns. If the family has a small tax bill or gets a refund, the incentive is particularly weak.
We should look for ways to advance more inclusive policies that create opportunities for more children. Early investments by the federal government in children’s future college plans may be less costly than bailing them out as young adults. Instead of waiting for parents to open accounts, let's make sure every child has an account to call their own.
One legislative proposal seeks to do just that. The America Saving for Personal Investment Retirement and Education (ASPIRE) Act would create accounts for every newborn. Each account would be seeded with a $500 contribution, and children in families earning below the national median income would receive matching funds for contributions of up to $500 each year. After account holders turn 18, they would be able to make tax-free withdrawals for multiple purposes, including the costs of postsecondary education. This is an approach that casts a wide net and allows all kids, regardless of the circumstances of their birth, to have a foundation for building their future.
How can the government fund these children’s savings accounts in the current economic slowdown? Through a system of tax preferences and direct spending, we already allocate $56 billion a year helping students pursue postsecondary education. Compare this to the $3.5 billion estimated cost to fund the ASPIRE Act during its first year. This approach can be tried at the local and state level. In fact, the City of San Francisco has begun offering each child entering public school a savings account. Their Kindergarten to College initiative (K2C) is a relatively low-cost investment designed to trigger significant returns, through increased savings, greater college access and degree completion, and lower debts.
If we think of children's savings accounts as a way to reduce ever-rising public expenditures on student loans, we can envision a more efficient, more hopeful, and more productive strategy for funding higher education. Instead of going into debt, young people could save money in advance.
Reid Cramer directs the Asset Building Program at the New America Foundation. William Elliott III is a New America Foundation Fellow and an assistant professor in the School of Social Welfare at the University of Kansas. This op-ed coincides with the release of a four-part series of reports, "Creating a Financial Stake in College," which focuses on the relationship between children's savings and improving college success, which is authored by Elliott and published by the New America Foundation and the Center for Social Development at the Washington University in St. Louis.
A majority of more than 800 bankruptcy lawyers in a survey say they have seen an increase in clients with student loans over the past few years and that most of those debtors are unlikely to be able to discharge their loans due to "undue hardship." The survey, published by the National Association of Consumer Bankruptcy Attorneys, found that 62 percent of the lawyers have seen bankruptcy cases involving student loans increase at least 25 percent since 2008. A paper published with the survey warns of a "Student Loan ‘Debt Bomb,' " and calls for restoring the ability to discharge student loans in bankruptcy.
Nearly half of the for-profit colleges in California are being kicked out of a state student aid program because of their default rates, The San Francisco Chronicle reported. Under a California law, those with three-year loan default rates of 24.6 percent or higher are barred from having their students receive Cal Grants. About 4,900 Cal Grant recipients were enrolled at this colleges when the law took effect in the fall. Those who had been previously enrolled were allowed a partial grant.
Protests against Sallie Mae's $50 "forbearance fees," which the lender charges to borrowers who cannot pay their loans and opt to let the funds accumulate interest, unpaid, rather than defaulting, have spread to Facebook. Thursday, Sallie Mae changed its policy after a petition to end the fees gained more than 75,000 signatures: after the borrowers have begun repaying the loan, the $50 fee will be applied against the loan's balance rather than pocketed by the company.
But that wasn't enough for many who wanted to see the fees vanish entirely, and many commented on the Facebook page for Sallie Mae's Upromise accounts asking that the policy be changed. The company later removed the Facebook posts, according to before and after screenshots. The "before" screenshot was provided by Change.org, the website where the petition started. (By Monday evening, more commentshad appeared. Sallie Mae representatives did not respond to a request for comment from Inside Higher Ed.)
Sallie Mae said Thursday that it will still charge a quarterly $50 fee to student loan borrowers in forbearance, but that the charges will be applied to the borrowers' accounts once they "resume a track record of on-time payments," a spokeswoman said. The lender charges the fee when private student loans have gone into forbearance, continuing to accumulate capitalized interest although borrowers do not have to make payments. An online petition criticizing the fee as an "unemployment tax" had accumulated 77,000 signatures as of Thursday, building pressure on Sallie Mae to alter its policy.
In an e-mail message, Martha Holler, senior vice president for corporate marketing and communications, said that after "giving it careful consideration for some time," Sallie Mae will apply the "good-faith payment to the customers’ balance after they resume a track record of on-time payments," retroactive to forbearances granted as of Jan. 1. The former student who started the petition, Stef Gray, said in a statement of her own that the change did not go far enough. "At the end of the day, Sallie Mae is still asking unemployed college grads to fork over money they don’t have," she said. "Sallie Mae needs to drop this unfair fee for good.”
A petition asking Sallie Mae to revoke the $50 quarterly "forbearance fee" that the lender imposes on borrowers who are unable to repay their student loans has gathered more than 75,000 signatures. Forbearance, when loans continue to accumulate capitalized interest although borrowers do not have to make payments, is the last resort to avoid default, and the petition protests the $50 fee as an "unemployment tax."
"As an unemployed person desperately looking for work, I need every extra dollar I have to pay for rent, electricity and groceries," wrote Stef Gray on the petition. "But Sallie Mae is preying on people like me and cashing in on the fact that we need more time to find work before we can repay our student loans."
Such fees are not uncommon on private loans, and Sallie Mae has defended them as a way to ensure that the borrower is committed to continuing to pay.