Asset-based Complements for a 21st

Century Financial Aid System

What is AEDI?• Our mission is to create and study

innovations related to assets and economic well-being with a focus on the relationship between children’s savings and the educational outcomes of low-income and minority children as a way to achieve the American Dream

What are we up against?• What percent of low-income, college-qualified students

enroll in college within two years of high school graduation?

• What percent of low-income, college-qualified children graduate with a bachelor’s degree?

• What is the average amount of student loans for a graduating college student?

• What percentage of all jobs will require at least some college by 2018?

• What is the expected annual shortfall of U.S. college graduates until then?

• At what age can a child connect his/her savings account with paying for college?

Cost shifts and the great retreat• Total costs at public institutions increased 4.8% in

2012-2013. High costs may discourage low-income enrollment.

• As states and the federal government cut budgets, students and families are expected to pick up the tab. – States spent 28% less on higher education in 2013 than in

2008, and these cuts can be directly correlated with increases in tuition/fees and reductions in educational quality.

• Shifting the cost burden to individuals denies the societal benefits of a well-educated population.

College: still worth it?• In 2011, the unemployment rate for those

with a Bachelor’s degree was less than half that of those with only a high school diploma; median weekly earnings were more than 1.5 times greater.

• Those with a high school education or less lost 75 percent of all jobs during the recent recession.

RETURN ON INVESTMENT: WHY FINANCIAL AID MATTERS

The state of the financial aid system and its effects on educational and financial outcomes

prior to, during, and following college

Student loans: what’s the problem?

• The percentage of undergraduate students who obtained federal loans increased to 35% in 2011–2012. Today, ~57% of public four-year college students graduate with debt.

• Total borrowing for college hit $113.4 billion for the 2011—2012 school year, up 24% from five years earlier.

• Households carry this debt for years. About 18% of U.S. households have outstanding student debt.

Loans and the low-income student

• American policy views student loans as investments in long-term achievement, but this borrowing has real costs.

• While high-income households are more likely to have student debt, outstanding debt as a share of household income is highest for low-income families.

• Reliance on debt may make disadvantaged students less likely to enroll, given aversion to borrowing, or influence the type of education pursued.

Loans and outcomes• Educational Outcomes:– Student loans>$10,000 may actually reduce graduation rates,

especially among low-income students. – Studies suggest that every $1,000 increase from mean loan

amount results in 60% decrease in the probability of graduation for low-income students.

• Financial Outcomes:– ~41% of student borrowers suffer delinquency or default.– 40% of those graduating with student loan debt delay a major

purchase.– Additional $10,000 of education debt reduces the long-term

likelihood of marriage.

Towards a 21st Century financial aid strategy

• Crafting a financial aid strategy that can promote educational attainment and equip all U.S. students for success can:– Improve educational outcomes, before and during

college– Restore higher education as a route to economic

mobility– Promote long-term financial health

Is All Financial Aid Equal?

Pre-College Educational Outcomes

College Access

Outcomes

College Completion Outcomes

Post-College Financial

OutcomesStudent loans

N / A + / – – –

Savings and wealth

+ / – + + +

* Pre-college: Math achievement, GPA, HS graduation College access: College enrollment College completion: College graduation, years of schooling Post-college financial: Marriage, savings, net worth, home ownership

Why savings: short-term access

• Forty-five percent of low or moderate-income students with no account, 49% of students with only basic savings not designated for college, 71% with school savings <$1, 65% with school savings from $1 to $499, and 72% of students with school savings of $500+ enroll in college.

• Opening an account turns college into an important, not an impossible, goal, with a clear strategy for how to overcome cost barriers.

Why savings: medium-term outcomes

• Five percent of students with no account, eight percent with only basic savings, 13% who have school savings but less than $1 saved, 25% who have school savings from $1 to $499, and 33% of students who have school savings of $500+ graduate from college.

• Seventy-four percent of students with college savings are on course, compared to 41% of students with no savings, a gap of 33%.

Why savings: long-term preparation

• Spells of asset poverty prior to age 11 have a negative effect on academic achievement scores.

• When students and their families save money for college, they reinforce a college-bound identity.

• When parents save for students’ schooling, the presence of such resources can bolster expectations. These expectations influence parents’ interactions and, then, students’ academic behaviors.

Why savings: longer-term financial foundation

• Only asset-based financial aid policies have the potential to strengthen students’ financial foundation post-graduation, by instilling habits of savings, reducing the long-term cost of financing, and connecting young adults to financial institutions.– More likely to own accounts– More diversified asset holdings– Higher net worth

What does young adulthood look like for a borrower?

• Having outstanding student loans is also associated with lower household net worth—a measure of economic stability.

* Weighted data from the Survey of Consumer Finances Median net worth values are reported

Net Worth in 2007

Net Worth in 2009

Has student loans $68,427 $42,800Does not have student loans

$149,023 $117,700

What does young adulthood look like for a college-saver?

• Children’s savings accounts are associated with more accumulated savings and total assets in young adulthood.

* Includes student loans

Savings Amounts

Financial Assets

Net Worth*

Children with savings accounts

$2,000 $6,025 $1,000

Children without savings accounts

$100 $1,000 $0

People in poverty can save, but kids?

• Marketers have long understood the economic power of children as consumers, but they can save, too.

• Low-income children respond to the same incentives and opportunities as other savers, providing support for an institutional theory of asset accumulation.

But can they save enough?

• Assets change the way children think about college, and about their futures.– These attitude, expectation, and behavior effects

may be just as important as the money in charting students’ educational trajectories.

• With the right matches and incentives, children can save sizable balances, but even $1 can develop an identity as “college-bound”.

Not a fortune, but a world of difference

Enrollment Graduation

No college savings 45% 5%

$1 to $499 saved 65% 25%

$500 or more saved

72% 33%

• For low- and moderate-income children, having even small amounts of savings improves the odds of graduation.

Savings

Children's positive college

expectations

Increased academic effort and

engagement

Improved educational attainment and college preparation

Family's college

expectations

HOW DO WE GET THERE?

Policy Options for Asset-based Financial Aid

Child Development Accounts

• Accounts, ideally opened at birth, to extend asset-building opportunities, and their associated educational outcomes, to all children in the United States– ASPIRE Act– Cuyahoga County– San Francisco, CA– State 529 matching plans, Maine’s $500 initial deposits– SEED OK demonstration– American Dream Accounts Act

Key Policy Elements• Facilitate automatic deposits and include proven

institutional features • Match savings • Invest early, ideally at birth – Reimagining scholarships and grants as ‘early

commitment’ programs?• Protect assets during periods of economic insecurity

• Align financial aid and public benefit policies– To encourage mental designation, put accounts in

students’ names – Remove disincentives to savings

Policy choices for going to scale

• Universal v. targeted• 529s v. deposit institutions• Incentives for matches v. academic milestones

v. prize-based savings• Direct v. tax-administered incentives• Restricted to college v. tiered accounts• Mandatory account opening v. ‘opt-out’

Resources• Assets and Education Initiative:

http://www.aedi.ku.edu/ • Biannual Report on the Assets and Education

Field (AEDI initiative): http://ae-bireport.com/ • Center for Social Development: http://

csd.wustl.edu/Pages/default.aspx • New America Foundation: http://

assets.newamerica.net/dashboard

QUESTIONS?

Kindergarten to College in San Francisco: CDAs in

Action• http://afootinthedoor.info/