College costs have exploded in recent years, and California has been at ground zero. The College Board estimates that tuition and fees for four-year schools in the UC system have shot up 57 percent since 2008, the fourth-highest rate in the nation.
Instead of compensating for tuition increases, states are handing out less financial aid than before. The Stanford Public Policy Institute estimates that financial aid per student dropped 40 percent, on an inflation-adjusted basis, between 1990 and 2007. The burden of paying for college has shifted onto families, and student-incurred debt. The average student with loans graduated with almost $27,000 in debt in 2011, with lower-income students carrying heavier loads.
And that’s for the students who manage to enroll. The costs of attending remain out of reach for about half of all low- and moderate-income students who are qualified for college.
So why are California and other states helping foot the college bill for the wealthiest families?
In the mid-1990s, Congress established 529 college savings accounts that carry generous state and federal tax benefits; balances grow tax-free, and withdrawals used for college expenses are never taxed. Today, there are 11 million 529 accounts with around $167 billion in deposits nationwide.
That sounds like good news, but only out of context. The families most motivated by the 529 tax incentives are the ones with the highest amount of taxes to shelter, not the ones with the greatest need. According to the Government Accountability Office, the median financial assets of families with 529s are $413,500. And the advantages escalate as 529 beneficiaries get richer.
For example, households earning over $150,000 had a median “withdrawal” (meaning the amount of money saved in the account and used for school) from their 529s of around $18,000 and a tax savings of over $3,000, according to the GAO. Households earning under $100,000 had a median withdrawal of around $7,500 and tax savings of only $561. So not only are higher-income households able to save more successfully; they also receive a greater amount of public subsidy — via tax breaks — to do so.
It doesn’t have to be this way.
Groundbreaking research from Willie Elliott, a professor at the Assets and Education Initiative at the University of Kansas, shows that college savings, even in very modest amounts, help build the positive expectations that can keep low-income students on the path to college — and can reduce the debt of those who graduate. And when low-income families know about accounts (surveys show they are often unaware of 529s), are given access to accounts, and receive sufficient incentives to save (tax incentives often don’t help because such families often have little or no tax liability), they save as well.
One model for a new approach to college savings is already being practiced successfully in California. In 2010, San Francisco created a system of universal college accounts for public school students. Kindergarten to College creates and seeds accounts with $50 for every public school student entering kindergarten and provides an additional $50 to students eligible for the National School Lunch Program. There are also matches for student deposits.
A similar approach could be implemented in the 529 system; every child could be given an account, with seed deposits and matches for those who need the boost. This type of system sends the message to every student from the first day of his or her academic career that college is within reach, and we’re going to help you get there. The results could have transformative effects on broadening college access and increasing affordability.
As states evaluate ways to get a greater return from their existing investments, they should look to change their existing 529 programs in ways that build the expectations, and balances, of all students.