What’s the real college debt crisis? That question was addressed this morning at a New America event with authors William Elliott III and Melinda Lewis. Their new book, The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream, alleges that the biggest problem with student debt is inequality:
“Ultimately, the greatest costs are borne by the low-income students who must rely on this system, while students from more affluent families emerge unscathed. As a result, the Great Equalizer is becoming the Great Reinforcer.”
One of Elliott’s motivations for writing the book is his concern about unequal outcomes for borrowers and non-borrowers: because of debt, “effort and ability [alone] don’t lead to similar outcomes for people.” Debt is the difference. Students who borrowed, he pointed out, don’t achieve similar long-term outcomes as students who did not borrow.
This focus on inequality leads Elliot and Lewis to focus on student aid delivery mechanisms more than college costs as they search for solutions.
Elliott and Lewis see promise in some current policy proposals—such as debt-free college, free community college, and income-based repayment—but say that those proposals don’t go far enough. Instead, they say, we need a “paradigm shift” from a debt-driven model to a model based on savings.
At the panel, Justin King of New America Foundation rightly pointed out that few students and parents save for college and that the U.S. financial aid model disincentivizes savings. The mindset, he said, is, “Don’t you dare save money because it’ll reduce your financial aid later.”
Specifically, Elliott and Lewis recommend “Child Savings Accounts,” like those used in Maine, as a better model than borrowing. In 2014, Maine introduced a program that gives each of the roughly 12,500 babies born in Maine each year a $500 grant deposited automatically in a college savings account.
Elliott has praised child savings accounts before:
One policy strategy designed to provide every youth in the United States with an account is a universal Child Development Account (CDA). In their simplest form, CDAs are incentivized savings accounts that can be used for long-term investments, such as education, home and business ownership, and retirement. In the United Kingdom, for example, every child now begins life with his or her own savings account in the UK Child Trust Fund. A proposed CDA policy in the United States is the America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act. ASPIRE is being considered in the US Congress. It would create a savings account for every newborn with an initial $500 deposit, matching funds for deposits by low- and moderate-income families, and opportunities for financial education.
An up-front investment such as this, Williams and Lewis argued, would help to “build a college-going identity” in students while also inspiring them to save.
It’s an interesting idea. But, of course, the devil is in the details: How much will it cost? Will parents and students really start to save? Will a program of child savings accounts completely replace the direct loan program? What about Pell? Don’t loans instead of grants give students more “skin in the game”? Could this be a solution to tuition inflation?
More information about the event can be found here.