College Cost

Podcast: Mark Huelsman on Encouraging College Savings

Mark Huelsman — Mon, 09 Nov 2009 20:29:00 -0500

In this version of New America's weekly podcast, Media Relations Manager Kate Brown sits down with Mark Huelsman, Program Associate with New America's College Savings Initiative to discuss the connection between savings and college completion, the advantages of 529 college savings plans, the ability of low-income families to save for higher education, and policy proposals to help them do just that.

An MP3 recording of this interview is available below. For more on Mark Huelsman, click here.

The Case for Helping Low-Income Families Save for College

Mark Huelsman — Thu, 04 Jun 2009 15:46:00 -0400

Note: This post was originally published on Higher Ed Watch, New America's commentary on the world of higher education, run by the Education Policy Program.

Recently, 529 college savings plans have come under criticism. Like many stakeholders in the economy, 529 plan owners have not been isolated from financial pain, and many critics have used recent market volatility and plan underperformance to call for reform. Others, however, have gone further and called for policymakers to abandon 529s in particular, and savings overall, as a plausible conduit to help families afford college. As New America's recently launched College Savings Initiative is charged with examining and improving 529 plans, we feel that it is important to respond to some of these arguments.

To their credit, many critics of these plans share our general goal -- to increase postsecondary access and affordability for low- and middle-income students. We simply differ over whether or not 529 plans provide a promising tool for helping students attend and complete college who could not otherwise afford to go.

Consider this: A recent Gallup survey from Sallie Mae indicates that, while 62% of parents are saving for college, only 32% of those making less than $35,000 have put any money aside for this purpose. Furthermore, half of those low-income families are saving even less (or in some cases not at all) in light of the recession. This is, quite obviously, cause for concern. But is encouraging savings -- and college savings plans as vehicles to do so -- really the answer? We believe so.

The general anti-529 argument, which has made the rounds in recent months, goes something like this: College prices have gone through the roof, to the point where many low- and middle-class families are being priced out altogether. Exacerbating the problem is the fact that many families have lost wealth in the market, including in 529 plans, which have a shorter time frame to recoup. As a result, we should scrap the savings model since it's overly risky. This wouldn't be a problem because, after all, low- and middle-income families don't have enough money to save in the first place and don't reap as much tax benefit from 529s. A better approach would be to simply increase spending on Pell Grants or other forms of federal aid, and at the same time, significantly increase subsidies for state universities to make college more affordable, and bolster attempts to control the price.

Unfortunately, this approach amounts to throwing the baby out with the bath water.

We recognize that, for most families, 529s will never hold enough to fund an entire education. Instead we see them as a significant part of a balanced financial plan - including grants, loans, scholarships, work study and other forms of aid. In this vein, we should certainly use all policy levers necessary - including increased student aid funding - to make college more affordable and accessible. It is the potential of the college savings plan, however, to incorporate progressive features, which we believe could have broad effects, both financial and behavioral.

College savings, at the very least, replace college debt that comes with interest to pay. This is critical because the less student loan debt families incur, the more money they have at their disposal - for a home, a retirement, or for emergency short-term savings.

Some have questioned whether 529s can even be considered "assets" like a house or a retirement fund, since the 529 is a means to an end, and homeownership/retirement is an end in itself. To that, we would point to the fact that many families have lost the home equity that was supposed to be "permanent" or, in some cases, the homes themselves. Yet we don't find it likely that many would argue that homeownership has become a bad idea. To be sure, responsible homeownership, as well as a retirement fund and, yes, an education, all have important roles to play in building wealth over the life course. And unlike a home, you can't foreclose on a college degree.

Still, one might ask: Why the emphasis on savings and assets, broadly? In other words, should policymakers instead focus on increasing earnings (of which increased savings will be a natural byproduct)? To that, there are several arguments.

First, two decades of research from the asset building field suggest that asset ownership is a useful tool in generating income for the populations we're discussing. Second, there is also evidence to suggest that, controlling for other factors, a parent's savings and net worth correlate with a child's educational attainment. As one example, a 2008 paper from the Center for Social Development on the topic can be found here; it finds that parents' liquid assets have significantly positive associations with years of schooling, high school graduation, and college attendance. Finally, college savings can make for savvier consumers. If families have more personal funds to spend on college, the likelihood increases that they will shop around for a better deal. If people start saving, they inevitably think about costs earlier, making them more conscious of price options. If policymakers can get families to save on a broader (or even universal) scale, it has the potential to create competition among major universities to give students more bang for their buck.

This is not to say that 529s, as currently structured, are perfect. Too many 529 administrators incorporated too much risk in their investments, which meant that so-called "conservative" investments were anything but. In general, there are a couple of ways to fix this without going so far as to dismiss the very idea of the investment plan. For instance, how about mandating that each state plan has a truly safe capital preservation option, such as an FDIC insured account, that a family can use as the tuition bills become larger on the horizon (like a number of states currently do)? Or in a down market, how about allowing families to change their mix of investments quarterly (as opposed to twice a year, which is now a temporary rule)? Or, if we want to stretch out the timeline for those families who have had the misfortune of losing money as college approaches, perhaps allow 529 monies to temporarily be used to pay off student loans.

Generally, these fixes all come with tradeoffs, and the implications of some remain unexamined, but the point remains that these investment vehicles could stand to be improved without being scrapped. The College Savings Initiative hopes to do so by conducting research on innovative 529 features such as matching deposits and seeding accounts, as well as studying policy options such as reforming higher education tax credits to better meet at-risk populations. Without the option of a 529, low-income families would lose yet another opportunity to reap the benefits of saving and investing, and move up the income ladder. Savings is certainly not a silver bullet, but we believe it is an essential part of any plan to address the college affordability crisis.

Shining a Light on the University of Phoenix

Ben Miller — Wed, 18 Jun 2008 22:58:00 -0400

"Bring on the data," was the message echoed loudly by representatives of for-profit colleges at a recent event on the sector hosted by the American Enterprise Institute (AEI), a conservative think tank. That same day, the University of Phoenix, the largest chain of for-profit trade schools in the country, took its own step in that direction by releasing the first of what it promises to be an annual self-assessment of academic outcomes.

At first glance, it appears that the for-profit sector is prepared to usher in a new age of accountability in higher education. But just how ready are these schools to let the sunshine in on their actual performance?

Consider the University of Phoenix's self study of its students' success. While perhaps a laudable step toward transparency, there are serious questions about the methodology the institution used to carry out the assessment. (It certainly wouldn't be the first time that the for-profit sector has preached openness while providing misleading data, about the performance of its students, particularly in the areas of graduation and job placement rates.)

The study was based on comparing the results between "freshmen" and "seniors" at Phoenix and elsewhere on the Measure of Academic Proficiency and Progress (MAPP), a national exam designed by the Educational Testing Service (the different levels are in quotations because the university sets its levels by credit hours obtained, not years completed).

As presented, the results are quite impressive. Seniors showed improvement over freshmen in all MAPP areas, and Phoenix students overall scored at levels roughly equal to students at comparable institutions. Despite starting at lower achievement levels than peer institutions, Phoenix students made gains from their freshmen to senior year that were equivalent to students at these other schools.

But, as Inside Higher Ed pointed out, the data the university used to make these comparisons are problematic. Most troubling is the fact that Phoenix's study is not longitudinal -- meaning the university didn't actually evaluate the same students as freshmen and then again as seniors. While the for-profit giant is not the first college to take this approach, doing so is especially problematic at schools like Phoenix that predominantly enroll nontraditional students of a diverse range of ages and levels of work experience.

As Trace Urdan, a research analyst on the for-profit higher education industry, recently pointed out in a comment he submitted to Inside Higher Ed on the Phoenix report, it is entirely misleading to compare a 20-something "freshman" with little work experience and a General Equivalency Diploma with a "senior" who is a 40-year-old middle manager with college experience who has come to Phoenix to learn a new skill. The two are apples and oranges. Without at least comparing similar students, we can't know whether the achievement gains were caused by Phoenix or by other factors.

The Phoenix study also contains an estimate of its cost to taxpayers, presumably to make the point that these achievement gains come at little governmental expense. By focusing on the costs to taxpayers, however, Phoenix shifts the attention away from the hidden costs to students, who ultimately must live with the debt they amass to attend such a high-priced institution.

Not surprisingly, Phoenix's estimate of taxpayer expenses shows that students at public and private non-profit colleges cost the government substantially more than individuals enrolled at for-profit trade schools, primarily because of the direct federal and state support for these institutions. (Phoenix, in fact, makes the questionable assertion that it actually generates $322.79 in per-pupil taxpayer revenue because of the federal taxes it pays. See chart below.)

While Phoenix's analysis makes the school seem cheaper, there are some troubling areas in which it is substantially more expensive than other types of institutions. The largest taxpayer expense at for-profits, for example, is the expected cost of future loan defaults. The report estimates the cost of defaults is $38.93 for public colleges and $77.38 for private ones, compared to a whopping $220.26 at for-profits and $298.51 at Phoenix.

While Phoenix presents the higher default cost as more than offset by the federal taxes the university pays, it fails to mention the devastating consequences that defaulting on a loan can have for indebted students. For example, the government has the authority to seize portions of borrowers' paychecks, tax refunds, and Social Security payments without a court order. This affects an individual's ability to consume, save, or contribute to the economy in other ways -- which is a further loss of taxpayer revenue.

Ignoring the costs to students also leads to distorted policy recommendations. For example, a recent piece in Reason Magazine fawns over Phoenix, saying by many measures it is "the most successful institution for higher education in American history." This is certainly true in terms of enrollment and profit. But what about the students it serves? The article defends the school, saying "Phoenix offers the educational equivalent of a subprime mortgage: not the best product the industry has to offer, but a potentially valuable option for people who might not otherwise get into a desired market."

In reality, attending Phoenix is similar to taking out a subprime mortgage instead of obtaining a widely available subsidized loan from a local non-profit lender -- in this case a community college. These schools often offer similar products and cater to comparable populations, while charging tuition that is nearly $10,000 cheaper, according to the College Board. Even if a student successfully pays off their "subprime mortgage," is the education at Phoenix sufficiently superior to a community college to justify the tuition differential?

While the Phoenix study is a baby step toward transparency, the university still has a long way to go to produce a robust picture of its effectiveness. We especially want Phoenix and other for-profit colleges to demonstrate the added value that their students get from attending such a high-cost institution, rather than taking similar, cheaper programs at community colleges or at other low-cost state universities. If for-profit institutions really want to "bring on the data," they should be prepared to let the sunshine in on this area.