College Savings

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.

New America Event, 11/5: Linking Savings to College Access, Affordability and Completion

Mark Huelsman — Tue, 03 Nov 2009 15:55:00 -0500

Just last year, tuition and fees at four-year public colleges rose 6.5 percent. Unfortunately, this continues a decades-long trend of rising college costs, even during periods of economic unease and low inflation. Escalating prices have also coincided with stagnation in need-based financial aid availability, the result of which has been mounting levels of student debt for low and middle-income families. In this context, there has been greater reliance on savings, particularly through 529 college savings plans, in order to increase college affordability and reduce debt.

But there is also an emerging body of research linking savings to important educational and behavioral benefits, as well as college completion.

The Obama Administration has indicated that saving, broadly, will help lay a new and sustainable foundation for economic growth, and that saving for college in particular can help America regain its global education lead. How can college savings plans be reformed to help achieve these goals, particularly for low and moderate income families? What has the Obama Administration learned from its recent review of 529 plans? How are states, through their 529 plans, helping families combat the rising cost of higher education? And how are families actually saving for college, given the current economy?

Join the New America Foundation's College Savings Initiative this Thursday, November 5th, for a discussion of these questions and more, featuring Alan B. Krueger, Assistant Secretary for Economic Policy at the U.S. Treasury Department. This event will also feature commentary by Dan Ebersole, State Treasurer of Georgia, Margaret Clancy of the Center for Social Development at Washington University in St. Louis, and Scott Buchanan of Sallie Mae.

A live webcast of the event can be seen on the event page.

How Americans (Actually) Save for College

Mark Huelsman — Fri, 18 Sep 2009 22:44:00 -0400

This week, Sallie Mae and Gallup released "How America Saves for College", an annual report on higher education savings behaviors. The whole survey deserves a read, but here are a few highlights:

Only 32% of low-income families (those making under $35,000 a year) have saved for college. By contrast, 62% of all families have saved for higher education.
The current economy is impacting college savings behaviors. For example, 36% of low-income families are saving less for college than before. Only 5% are saving more.
Families making under $50,000 who are currently saving for college put away, on average, larger amounts than those making between $50,000 and $150,000.
Families making under $50,000 annually save 7.5% of their income for college, on average. By comparison, the average college savings rate among all income levels is 3.6%.
In order to reach estimated "savings goals," low-income families need to save nearly 10% of annual income until a child reaches college. On the other hand, families of all income levels only need to save 5.7% of annual income to reach their savings goals.
529 college savings plans are the third most popular savings vehicle for college - with one-third of all families using them.
Only 4% of low-income families consider themselves "very familiar" with 529 college savings plans. A whopping 75% were "not at all familiar."

What are the key takeaways from this survey? And how can we apply these findings towards enlightened federal policy?

First, this provides yet more evidence that the poor can save, when given the opportunity to do so. In fact, annually, lower-income families are outpacing higher-income families in both savings rates and amount saved. See the graph at the bottom for the breakdown.

Despite the admirable behavior, low-income families are expected to save a much greater percentage of their income to reach savings goals. While families of all income levels expect to need 5.7% of income socked away for college, lower-income families need to save 9.9% of income. Low-income savers are putting away more than the 5.7% that the average family needs, but less than the 9.9%.

The importance of these numbers is twofold: First, those lower-income families that are saving are outpacing families higher up the income spectrum, which makes the importance of facilitating enrollment in college savings vehicles paramount - especially considering that low-income families that do not save vastly outnumber those that do. Second, the playing field needs to be leveled for lower-income savers in order to reduce the need to save one-tenth of income on higher education.

Near the end of the report, families are asked what would motivate them to save more. Two of the more striking answers:

Over half (52%) of low-income families would be "very likely" to save more if presented with a matching contribution from an employer.
If money in college savings accounts were excluded from financial aid eligibility consideration, nearly a third (32%) of low-income families would be "very likely" to save more.

These two answers are noteworthy, as there are current policy models to provide these incentives (or remove disincentives, as is the case with the latter issue). First, the state of Illinois recently passed legislation creating a tax credit for employers to provide 529 plans. Additionally, 11 states currently provide matching funds for 529 plan contributions to families below certain income levels, similar to employer matches in retirement plans.

Second, a handful of states have already excluded assets in college savings plans from financial aid calculations. However, current federal policy dictates that 5.6% of the assets in a parent-owned 529 plan can be used in federal financial aid calculations. 5.6% may not seem like much, but any penalty may discourage low-income families from saving out of fear that Pell Grants and other forms of aid will be taken away if they save. By excluding all 529 assets from consideration, federal policymakers could remove a significant disincentive that many families cite as a reason for not saving.

Broadly, low-income families should not be discouraged from saving and should not be expected to save nearly twice the percentage of income for college as higher-income savers in order to meet the expected cost of higher education. This survey should provide policymakers with an impetus to focus on some of the existing and promising policy models for making saving for college easier on families that have already shown they can do it.

Improving College Savings Plans

David Newville — Fri, 11 Sep 2009 18:25:00 -0400

Earlier this week my colleague Rourke O'Brien and I had an op-ed on improving 529 college savings plans published in the Oregonian. In it, we argue that 529s are a promising saving vehicle for helping families of all incomes pay for college and get ahead, but they need to be reformed in order to work better particularly for low- and moderate-income families. The excerpt below describes some of the reforms we suggest:

"Some of the changes they should recommend include the federal government or states providing direct incentives for low- and middle-income families to invest in college savings plans by matching a portion of annual deposits. Thirteen states already do this or something similar to it. The federal government could also provide tax incentives for employers to encourage them to enroll their employees in 529s for their children and match contributions, similar to what many do for retirement today with 401(k) plans."

The Treasury Department also released a report this week with additional recommendations for reforming 529s and an emphasis on making sure more low- and moderate-income families are able to benefit from this important savings vehicle. For more information on improving and expanding 529s or the College Savings Initiative, please go to www.collegesavingsinitiative.org.

Treasury wants to Improve 529 Plans; Geithner Thinks Saving for College Will Spur Economic Growth

Mark Huelsman — Thu, 10 Sep 2009 20:54:00 -0400

Yesterday, Vice President Biden took his Middle Class Task Force world tour to Syracuse University to discuss college access and affordability. The forum's all-star lineup also included Treasury Secretary Tim Geithner and Education Secretary Arne Duncan.

The event coincided with a report from the Treasury Department on the effectiveness of 529 college savings plans (full disclosure: New America, through the College Savings Initiative, is mentioned as a resource multiple times). You can read Treasury's observations and recommendations here.

More interesting however, was Secretary Geithner's full-throated support of saving broadly -- and saving for higher education in particular -- as a means to close achievement gaps and regain America's footing as a global education leader. From Geithner's remarks:

College affordability is central to two key economic trends. Over the past generation, we have gone from a nation of savers to one of borrowers. We have devoted too many resources to consumption and not enough to investment. During this same period, we have also lost our global educational lead. While we once outpaced all other advanced economies in the percentage of our population that graduated from high school and college, much of the rest of the economically developed world has now caught up or surpassed us.

On the potential of 529 plans, and the populations for which they can be improved:

These plans can be an immensely effective way for Americans to save for college. They are generally administered by the states, and they allow people to put aside money for college and enjoy investment earnings that are free of federal taxes and, in some cases, receive state tax benefits, as well. When state tax benefits are included, a typical middle class family can accumulate 25 percent more in 529 accounts than they can in a typical taxable savings account.

But in a report being issued by Treasury today, we find that these accounts are not being broadly used by Americans who could benefit from them. For example, only 5 percent of families with children in the middle of the income distribution have 529 accounts, while nearly one third of those in the top 5 percent of the distribution have them...

...Helping Americans save more for college will help more go to college. Helping Americans save more generally will help the overall economy. Only by pursuing both aims and reversing the unfortunate trends of the past generation will we achieve the President's goal of a new foundation for growth and a sustainable prosperity for all Americans.

While the forum, and the report, were spurred by a desire to help (if the name of the task force didn't give it away) middle-class families, improvements in the 529 platform could have a broad impact down the economic food chain as well. Research shows that even small amounts of targeted savings can lead to behavioral changes for low- and middle-income families. If Treasury and other policymakers are serious about college savings as a way to spur economic growth, then those who stand to benefit the most will need incentives to do so.

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

Mark Huelsman — Fri, 04 Sep 2009 19:03:00 -0400

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 collegesavingsinitiative.org.

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.

Illinois Helps Employees Save for College -- Through the Workplace

Mark Huelsman — Fri, 21 Aug 2009 19:30:00 -0400

By Jackie Williams, College Savings Initiative

The state of Illinois recently passed a bill, SB 77, creating a state income tax credit for employers making matching contributions to their employees' 529 college prepaid and savings accounts. The credit is a 25% match of the employee contribution, not to exceed $500 per employee. The provision is effective for the current tax year and runs through December of 2020.

This is an important step forward to involve employers in helping employees save for their children's or even their own higher education expenses. Most of us don't learn about saving and investing until we begin fulltime employment. This is typically when we begin contributing to 401K accounts. So why not encourage greater savings discipline for college at the same time employees are investing for retirement?

Employers have the capacity to encourage better academic participation by making it easier for employees to contribute to savings plans. Offering payroll deduction and providing financial support in the form of matching contributions are two important ways that employers can support their workers. The workplace is often an important classroom for learning about saving and investing.

In the current economic environment, individuals with post-secondary education and training have fared better than those without. Employers have a vested interest in facilitating participation in these plans in order to encourage better educated workers including their own workers.

The Illinois proposal had been around before the legislative session that saw SB 77 enacted. Sometimes it takes time for a good idea to find traction. The Illinois Legislature took an important step forward by enacting this provision. Hopefully other states will follow their lead.

"Fresh" Still Means "Good"

Justin King — Fri, 19 Jun 2009 18:37:00 -0400

I know it's hard to keep up with the kids and their lingo these days. That's why it's refreshing to see some old school, Webster's approved usage from time to time. In this case, the Democratic Policy Committee has released their annual report, "The 2009 Fresh 50: Fifty New Policy Ideas for Senate Democrats." In this case the "fresh" in question means:

"new; not previously known, met with, etc.; novel: to uncover fresh facts; to seek fresh experiences."

Though, we could also make the argument for definition #17:

"Slang. a.exciting; appealing; great."

Regardless, the upshot is the same. The "Fresh 50" is an annual compilation of new policy ideas that might be appealing to Democrats in the United States Senate. The list is compiled by the DPC staff and disseminated to all US Senate offices and beyond as a helpful resource of promising new ideas for their consideration and potential action. As they say in the report, "These ideas do not represent the positions or agenda of the Democratic Leadership in the Senate. They are the result of a brainstorming exercise meant to develop fresh, new ideas for review and consideration by Senate Democrats." We're thrilled to have three ideas from the Asset Building Program deemed "Fresh" for 2009.

The three ideas are:

1) "Green" Bonds;
2) 529 Plan (College Savings) Innovation; and
3) Rental Assistance Asset Accounts

You can follow those links to find more about our work and proposals in those areas. You can also read the whole report, and find out why the DPC thinks these are good ideas.

While we certainly think these ideas have merit, I want to point out that we believe they've got merit and appeal beyond any one sector of the political spectrum. Our history of work here is strongly bipartisan and we work as hard as possible to maintain the breadth of our appeal. With that said, it's certainly nice to be recognized for our hard work.

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.

As If Saving for College Didn't Seem Daunting Enough...

Mark Huelsman — Mon, 13 Apr 2009 20:38:00 -0400

Things I found really, really silly this weekend: This doomsday-sounding article from CNBC titled "529 Plans Won't Cover the Cost Anymore."

Quick synopsis: 529 plans (like investment vehicles everywhere and, say, the global economy) have performed poorly. College is expensive. But, unless you're really lucky/rich, they weren't supposed to fund an entire education anyway. Wait, some 529s offer age-based options and they certainly get you in the habit of saving for college. And, in any economy, you should be looking for scholarships and grants too.

Since this is a blog and not a policy paper, I can say the following:

Umm, duh?

Perhaps this is another case of headlines gone horribly awry, but I feel like the premise of the article is not only odd, but dangerous. Of course many families are unable to save enough in a 529 plan to fund an entire education (which makes the 'Anymore' in the title seem beyond goofy). Of course a student should be seeking out scholarships and any form of aid he/she can find. Of course savers should be more vigilant about their mix of investments in this market.

But why make it seem as though 529s are out of favor for half of the piece, or worse, make it seem like a family shouldn't consider utilizing their many advantages? If I were thinking about saving for a child's education (or my own, for that matter), I would come away utterly confused. Should I be saving more than I thought I'd have to? Are 529s good or evil? And, not being wealthy, if I probably couldn't sock away enough in a 529 to cover the entire cost of a college education, is it worth it to use them at all? Should I even be saving for college?

The answers, though it eludes CNBC's personal finance advice, are obvious: Yes, saving for college is more important than ever. Be aware of the states that offer progressive matches for 529 accounts. Take advantage of tax-free savings and low minimum deposits. Pay close attention to your mix of investments.

But policymakers don't get off the hook. Free advice for them: Expand the saver's tax credit to include 529s. Offer matches to low-income families. Offer initial deposits into accounts when opened. Mandate a super-safe investment option. Get fees under control. Give employers a tax credit for offering them to employees. Give employers a credit for automatically enrolling employees. Consider reforms that enroll families in kindergarten or at birth. Generally, reward saving and incentivize more of it.

And finally, advice to financial advice columnists/bloggers: A helpful article wouldn't unnecessarily scare the pants off already confused and gun-shy families and students.