Congress: Don't squander America's big investment opportunity

Two years into economic recovery from the Great Recession, over 46 million Americans live in poverty, including 16 million children, according to the latest data released by the US Census Bureau. But beyond these staggering numbers, the report also clearly identifies a key investment opportunity that could produce higher incomes, lower rates of poverty, a more resilient labor force, and even higher tax revenue.

To cash in on the investment, America needs to help poor children and their families save for college. A growing body of evidence demonstrates strong links between savings and educational outcomes, such as increased academic performance, college attendance, and degree completion, even after controlling for factors like income. Helping more poor students go to college generates benefits that compound throughout their lives, their children’s lives, the economy, and throughout local, state, and federal budgets.

It has long been true that a college education increases job security, earnings, and economic mobility. And this latest Census data shows that workers with more education have been better able to weather the recession’s storm. The unemployment rate, for example, for college graduates is half of that of high school graduates, and their poverty rate is less than a third of the national average.

The problem now is that students from low-income homes are earning college degrees at the lowest rate in three decades. The US Department of Education finds that even low-income students with demonstrated academic success attend college at rates considerably lower than their high-income counterparts (77 percent versus 97 percent, respectively).

One impediment these students encounter is rising tuition costs and the growing gap between a family’s ability to pay and access to traditional forms of financial aid. While higher-income families are better able to absorb these costs, they can be prohibitive for lower-income students or result in financially debilitating student-loan debt.

Expanding existing financial aid for low-income families would help offset costs for students already on a college bound path but the problem is that many low-income students dismiss the possibility of college long before the first payment is made.

The belief that college is financially out of reach can be the greatest impediment to getting more poor youth on a college track. This perception can form as soon as the fifth grade, and students can reduce academic effort and engagement in other preparatory activities in response. One promising way to overcome this expectations barrier is to get children to begin saving for their educational futures as early as possible. Research shows that saving for college is uniquely able to boost both the expectations and resources to expand college access to low-income students.

Unfortunately, these families also face considerable barriers when trying to save, including from complicated and restrictive rules in the public assistance programs designed to increase their financial stability.

In Texas, for instance, the Supplemental Nutrition Assistance Program (SNAP) – formerly food stamps– Medicaid, and Temporary Assistance for Needy Families (TANF) each have different asset limits, ranging from $1,000 to $5,000. A family with $4,000 in savings could receive SNAP benefits but not TANF or Medicaid benefits. The family is then faced with the choice of either having to forego the immediate assistance they need or spend down the balance of their savings, making them more vulnerable in the long run. Removing these disincentives is a necessary first step.

The US also needs to help kids themselves build savings by making sure that every child has access to a college savings account, one with his or her name on it. Versions of this approach have been implemented in recent years at the state and local level, including in North Dakota, Maine, and San Francisco.

Ultimately, however, only a federal policy can reach every child. The ASPIRE Act, introduced in previous Congresses with bipartisan support, provides a model for implementing this approach on a national scale.

At birth, a savings account would be set up for each child and seeded with an initial deposit. Since the account would be issued to all children, this policy would circumvent barriers to account ownership that low-income families traditionally face. Matching contributions for children living in households earning below national median income would provide an additional savings boost. At age 18, students could use the accounts for college as well as other purposes.

This represents just one way that policy could expand savings, and consequentially educational opportunities for low-income students. Helping families save and build assets is already a national priority. In fact, the federal government expects to dedicate almost $520 billion this year for that purpose. These incentives, however, come primarily through the tax code as exemptions, deductions, and credits that never reach the low-income families for whom they would have the greatest impact. A policy like ASPIRE would help to close this gap.

In the wrangling over the budget deficit, “investments” have been labeled euphemisms for “spending.” But the advantages to connecting poor children with a college degree are clear. College educated Americans have increased economic mobility in addition to greater financial security. A recent study found that only 16 percent of Americans born in the bottom income quintile who earn a college degree stay at the bottom, compared to 45 percent of those without.

Over the long run, helping poor kids save for college gives Americans the greatest bang for their buck. Euphemism or no, that’s the kind of opportunity a savvy investor would jump at.

Rachel Black is a policy analyst in the Asset Building Program at the New America Foundation.