Counterbalancing Student Debt with “Asset Empowerment” and Economic Mobility

By William Elliott, Monnica Chan and Anthony Poore

Education provides one of the best opportunities for American children to build the capacity to climb up the economic ladder. It has even been called the “great equalizer” in American society. In today’s tightened labor market, providing equal access to postsecondary education is more critical than ever. The Georgetown Center on Education and the Workforce projects that 70% of jobs by 2020 will require some postsecondary education or credential. Unfortunately, equitable access and success in postsecondary education are hard to come by. In 2013, students born in the top family income quartile were 8.5 times more likely to earn a bachelor’s degree by age 24 than students born in the bottom income quartile—a gap that has steadily grown since the 1970s, according to Postsecondary Education Opportunity.

There are many reasons for this educational attainment gap, ranging from very personal stories to broader resource disparities across communities and systematic changes in how we finance and incentivize higher education. These trends include rising tuition and fee rates and declining state funds for need-based student financial aid. As a result, education after high school is increasingly too expensive for students from lower-income families. This, on top of the data showing that lower-income students are less likely to earn a bachelor’s degree by age 24, suggest a deterioration in education’s potency as an equalizing force.

A student’s economic standing certainly plays a significant role in affording postsecondary education. In 2012, only 17% of dependent full-time undergraduate students had expected family contributions (EFCs) greater than the costs of college attendance. In other words, over 80% of these students lacked the resources to pay for postsecondary education without at least some financial assistance—an increase from previous years, according to Postsecondary Education Opportunity.

Currently, student financial aid comes from a mix of sources: Federal and state governments, postsecondary institutions, employers and other private sources offer grant aid to students. More and more of the cost of college, however, is financed by students and their families. This shifting of education costs, combined with rising tuition and fee rates, forces many students and families to face tough decisions on how to finance their education such as delaying college enrollment, studying part-time or taking on loans. Indeed, most Americans recognize this burden, as a recent Gallup Poll for the Lumina Foundation showed that 79% of adults think that education beyond high school is unaffordable for everyone in the country who needs it.

Tough decisions around how people pay for college may have ramifications affecting not only college enrollment, but also college preparation, college access, college completion and post-college success. In particular, research reveals that overreliance on student debt as a means of financing college may imperil education’s equalizing potential at many points along the pipeline.

A review of research by the Center on Assets, Education, and Inclusion (AEDI) at the University of Kansas shows the following:

  • College Preparation and Enrollment. Some students are loan-averse. This has led to talent loss, when highly qualified low-income students either fail to enroll in college or are steered toward enrolling in a less-selective college, solely to avoid assumption of high debt.
  • College Access. Overall, research suggests that student loans have little—or even a negative—effect on access. As the public dialogue about debt’s dangers escalates, aversion effects may only increase.
  • College Completion. Though evidence is admittedly mixed, a preponderance of the evidence suggest that as student debt load rises, so too do dropout rates, particularly for poor and minority students. As the college-completion gap by race and income is even starker than the enrollment gap, there is reason for concern with any approach that fails to support students all the way to graduation.
  • Post-College. A growing body of research suggests that borrowers marry later, delay buying a home, have less retirement savings, have less net worth, and have higher levels of financial stress than those without debt. Some studies have even found that college-leavers with student debt may lag behind their less-educated peers in the race to build the positive net assets that provide the foundation for a sound financial future.

What makes the student debt problem even more concerning is evidence from a new report by the Federal Reserve Bank of New York that indicates even very small amounts of student debt can bring about financial hardship, not just “high” debt of $100,000 or more that is often discussed in the media. This analysis suggests that the student debt problem is much bigger than outright default, and that avoiding debt complications may be much more difficult than just reducing borrowing to more “reasonable” levels. Mere tweaks around the margins of financial aid policy attempt to soothe Americans’ conscience about the burden student loans are placing on a whole generation of students. But if even small loans can erode some of education’s advantages, those tweaks along will be inadequate in reducing potential negative effects of student debt.

What America may also need is a counterbalance to debt dependency, an asset-empowered approach to financial aid, consistent with its preference for building from individuals’ efforts and ability, and aligned with the purposes to which it seems to have assigned higher education. Children’s Savings Accounts (CSAs) can provide that counterbalance.

Helping children and families build assets from birth can help to balance out the current just-in-time, debt-dependent approach to financial aid. CSAs may work on multiple dimensions—preparation, access, completion and post-college financial health—to improve outcomes with an approach that seems wholly consistent with the American Dream calculus that relies on effort plus ability to realize outcomes. The concept of saving to pay for college is not unlike how our moms and dads may have paid for college, but adapted for 21st-century college cost realities, where tuition has rapidly outpaced most families’ meager savings. CSAs usually allow deposits from children, their parents and other relatives, as well as third parties, such as scholarship programs, to build balances robust enough to pay today’s and tomorrow’s bills. In modern CSA programs typically initiated at birth or kindergarten, families’ investments are leveraged with an initial deposit and/or matching funds to add public or philanthropic funds to families’ savings, usually at a 1:1 ratio. Accounts are administered through partnerships with traditional deposit institutions or state-supported 529 college savings plans, and children grow up knowing that college is in their futures, and within their families’ financial grasps.

Over the past several years, there has been rapid growth in CSA programs. Statewide programs have been started in Maine, Oklahoma, Nevada, Connecticut and Rhode Island, and major CSA legislation has been proposed in Massachusetts, Vermont, Montana and New Hampshire. Adoption of CSAs is also occurring at the local level in such places as San Francisco, Wabash County, Ind., Lansing, Mich., and Albuquerque, N.M. Policymakers in communities around the country are exploring ways to integrate CSAs into public welfare and financial aid systems, in pursuit of an asset alternative to problematic student borrowing.

CSA programs are not just about moving away from debt dependence. CSAs are valuable not just because they are “not loans” but also as an approach to financial aid in their own right. In contrast to student debt’s erosion of the capacity of the education system to serve as the great equalizer in society, a report by AEDI suggests that CSAs demonstrate considerable promise to help strengthen its capacity.

  • College Preparation. While most children participating in CSAs today are still quite young, analysis of interim indicators reveals promising progress in the direction of college preparation. For example, the link between social-emotional well-being and academic achievement has been rigorously tested by education researchers with strong support. SEED for Oklahoma Kids (SEED OK) experimental data collected and analyzed by the Center for Social Development indicates that CSAs are helping to equip young children with the social and emotional competencies that, later, correspond to improved educational outcomes.
  • CSAs also positively affect preparation for college by making higher education appear more like a reality. College expectations are children’s and parents’ perceptions of the subjective probability that the child will be able to attend and graduate from college in the future. Education research consistently shows that higher college expectations lead to increased academic efforts and achievement. A review of research by Elliott and colleagues shows that having money designated for college as a child is linked to higher expectations. SEED OK experimental research also shows that parents have higher expectations for their children attending college when in a CSA program.
  • College Access and Completion. In contrast to student loans, correlational research by Elliott suggests that children’s savings shows some potential for improving a student’s chances of making it all the way to graduation.
  • Post-College Financial Health. Correlational evidence from University of Kansas assistant professor Terri Friedline and colleagues suggests that CSAs may be a gateway not only to greater educational attainment, itself a conduit of economic mobility, but also to a more diversified asset portfolio of the sort that is independently associated with improved financial prospects. As such, it might matter little if children are able to accumulate large stocks of assets in their savings accounts, but the test is whether, as a gateway financial instrument, CSAs lead to greater asset accumulation in other forms such as stocks, retirement accounts and real estate. This asset-building not only stands in sharp contrast to the bleak financial fortunes of heavily indebted recent college graduates; it also positions young adults for significantly improved economic outcomes over their lifetimes. For example, the Pew Charitable Trusts finds capital income has a strong relationship with moving up the economic ladder.

The educational effects outlined above are based on small-dollar accounts, suggesting that assets can be transformational even in relatively small doses, though more research is needed. Importantly, evidence indicates that low-income families can save in CSA programs. However, many Americans face obstacles to capital accumulation, and most families participating in CSAs do not save large amounts of money on a monthly basis. Therefore, introducing families early on to the idea of saving for college, maybe even as early as a child’s birth, and providing families with real opportunities to save seems important. Further, finding ways to help families build balances in conjunction with other efforts to reduce college costs may also be crucial if CSAs are to be a part of positively changing the patterns of educational attainment rates in this country.

If we dare to imagine financial aid as an investment in the economic mobility system, not just as a way to pay next semester’s tuition, there may be hope for the millions of current and future Americans aspiring to—but discouraged and priced out of—postsecondary education.

Possibilities include augmenting existing scholarship or grant programs with opportunities for early commitment asset-building programs. For example, we could leverage historically important and respected programs like the Pell Grant by dedicating a portion of funds each year to students in as early as fifth grade, allowing students and their families to invest this money to accumulate even more assets for college. Foundations could leverage the dollars they are using for scholarships in similar ways. Why not think about scholarship programs as seed money for CSAs, since our great-great-great grandparents had the Homestead Act and our grandparents had the GI Bill?

If it turns out that college is not in a particular young adult’s future, maybe these accounts could even be used for other mobility investments, such as homeownership, entrepreneurship or retirement. The current financial aid system and mushrooming student debt levels is a comparatively recent invention that represents more of a policy drift than an intentionally charted course. Together, we must dare to dream of a better future for the next generation of children, an asset empowered future.


William Elliott is associate professor at the University of Kansas School of Social Welfare and founding director of the university’s Center on Assets, Education, and Inclusion. He can be reached at Monnica Chan is director of policy & research at the New England Board of Higher Education. She can be reached at Anthony Poore is deputy director in the Regional & Community Outreach department at the Federal Reserve Bank of Boston. He can be reached at The views and opinions presented here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System.







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