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A Penny Saved for College is a Penny Not Borrowed for College

While I usually leave it over to our friends at Higher Ed Watch to discuss the latest hullabaloo in the world of student loans, something in today's Wall Street Journal stopped me on a dime. From WSJ:

New numbers from the U.S. Education Department show that federal student-loan disbursements-the total amount borrowed by students and received by schools-in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion.

Gulp. For many families, financing higher education without piling on too much debt was already a steep proposition. Like everything else post-financial crisis, it's gotten even more difficult. Job losses, home equity losses, market swings, stagnation in federal aid, state budget strains, and tuition increases have resulted in increasing uncertainty and hopelessness over household budgets, and a dramatic spike in the amount of money students are borrowing for college. Much can be blamed on the economic mire in which we find ourselves. But the point remains: many students and families are taking on unsustainable levels of debt, and it's affecting important life decisions. And in turn, it's affecting our ability to jumpstart the economy.

Before a long Labor Day weekend of despair sets in, however, this author offers hope to drink in: There are ways for Congress, the Obama Administration, States, and the financial industry to collaborate and give families a way to escape crushing levels of debt. The tonic? Targeted and meaningful savings incentives.

Perhaps ironically, the vehicle that could drive students to sustainable amounts of debt is an investment strategy that has taken as much heat as anything in the Monday-morning quarterbacking of personal finance and economic discourse: the 529 college savings plan.

529 plans have been around for decades now, though they've only existed in their current form since 2001.* And only fairly recently have some states, who are given considerable leeway to innovate with their plans, begun to realize that they can wield their power in facilitating more responsible, workable ways to finance higher ed. These have taken the form of matching contributions (like an employer with a 401k), lowering fees, partnering with scholarship programs, and more. I would argue that, not only have states only scratched the surface in giving its families a good deal on savings, but there has never been a better time for the 529 industry to submit its product as the alternative to massive borrowing. To paraphrase Dr. Franklin: a penny saved and matched is 1.5 pennies a student doesn't have to borrow. 

In general, the industry (or rather, the states) needs to get serious about helping people who are currently being crushed: Low- and middle-income students. States can do this through a number of ways, and the Feds can certainly help -- with funding and/or guidance (a Treasury Department review is currently underway in assessing how these plans can be more effective and frankly, provide a safer return). First, more states should institute reforms targeted at low-income families, to counterbalance the fact that they receive no real tax benefit from contributing to 529 plans. If states' budgets are too dried up to do so, the Federal government seemingly has the authority to fund some state initiatives. This can take any number of forms, which I won't exhaust you with, but some of which you can find at the dazzling 

The original point of college savings plans was to help out a struggling middle class -- not rich enough to be carefree about paying for college, not poor enough to receive substantial federal Pell Grant awards to cover higher education costs. But as college has become more expensive and, at the same time, nearly necessary to climb the economic ladder, low-income families have received comparatively less federal aid than decades ago.

One could argue that the easy solution is to simply provide more federal aid. Maybe. But incentives to save, even when it's not enough to fund a college education, can impact more than just the personal bottom line. Even a small amount of money, stocked away explicitly for college, provides goals for students beyond high school. And just as unsustainable amounts of student loan debt can delay important life decisions after college -- like starting up a small business, completing graduate school, or even, as the WSJ notes, a marriage -- savings can reorient students towards a higher level of education than they otherwise would have completed.

There are caveats. Savings for most families, while important, is rarely going to serve as the only strategy to send the kids to school. That's okay. Scholarships, work-study, and yes, some borrowing, can get a student across the finish line with minimal damage on his or her future finances. And families are always going to be required to take it upon themselves to understand their investment choices and plan accordingly; no one is immune from the whims of the market.

That said, there are very few strategies that could chip away at the mountain of student loan debt families are currently placing upon themselves. Savings incentives seem like a great place to start.


*While states began creating college savings plans in the late 1980s, usage of 529s hadn't taken off until they were added to the Internal Revenue Code in 1996 and then given tax-advantaged status in 2001. 49 states, the District of Columbia, and an independent private consortium sponsor plans.