Reduce students' debt-burden by encouraging saving
VOICE OF REASON
Published: Monday, August 27, 2012
Updated: Monday, August 27, 2012 20:08
Politics is a messy business. Despite all the politicking and speechifying of candidates and political parties, there are rarely obvious answers to the complex problems of public policy.
But sometimes, it is perfectly clear that everyone is full of crap and that the discussion about an issue has gone entirely off track.
One such issue is the endlessly controversial discussion of federal student loans. Earlier this summer, we witnessed Democrats and Republicans wrangling with each other about how to finance an extension of the current 3.4 percent interest rate on Federal Stafford Loans.
These are fixed interest-rate loans offered by private loan providers and backed with the full faith and credit of the U.S. government. The discussion surrounding student loans has been revived once again as partisan debators rage over cuts to federal student aid in vice presidential nominee Paul Ryan’s budget proposal.
The federal government has been offering student loans since the 1950s, and the Stafford Loan program that was the subject of the most recent controversy has been in existence since 1965. Since then, it has been the national government’s policy to expand access to post-secondary education by subsidizing debt.
Subsidizing debt seems like a good idea, but it has very serious consequences. Over the past several decades, colleges have had virtually no incentive to control costs.
With more college aid available to students in the form of grants or government-backed loans, colleges can simply boost tuition as the cost to students is offset.
These tuition hikes prompt greater calls for aid to students and continue a vicious cycle that drives up tuition costs. Brandeis students are certainly no strangers to this harmful trend.
Last year, Brandeis’ total cost of attendance rose 3.9 percent. This year, the total cost of attending the University has increased by 4.1 percent for returning students, and almost five percent for new students. That means costs totaling $56,022 for returning students and $56,407 for first years—not exactly small change.
Furthermore, it is an iron law of economics that when you subsidize something, you get more of it. Subsidizing student debt will lead to more students taking on debt, more graduates who will have to work for years to pay off their debts and even more pressure on students who are graduating into an inhospitable job market.
However, politicians and experts from both parties take it as a given that the federal government should subsidize student debt.
So, what’s the alternative? Instead of subsidizing student loans, the government should begin to subsidize student saving. This would help move people away from debt-financing solutions and encourage them to build savings that could defray tuition costs. Not only would this reduce individuals’ debt burdens, but if people were financing college by depleting hard-earned savings rather than by receiving “free” money in the present, they may become more cost-conscious.
This could, in turn, put downward pressure on college costs. People would be encouraged to start saving as early as possible, so that savings could be built that might be as sizable as any loans they could have gotten. The argument here is that people tend to view loans as “free” money in the present, since they don’t have to be paid back until graduation. That makes people less cost-conscious. It’s psychologically very different to deplete a savings account than to receive a loan.
A simple way to encourage saving while encouraging lower education costs would be to provide a federal tax deduction for higher education costs.
This deduction could have a fairly high cap of the average annual cost at a four-year public college or university.
The federal government could also expand tax-preferred education savings accounts. The $2,000 per beneficiary contribution limit on Coverdell Education Savings Accounts could be raised, allowing people to save more money tax-free for their children’s educations. Similarly, efforts could be made to expand the use of state-run 529 college savings plans, especially among low-and moderate-income earners.
An even bolder policy would be exempting all saved income from taxation until it is spent. This would greatly encourage personal saving among all groups of people, and put every American family in a better position to finance the college educations of their children.
Several bills have been proposed in Congress over the past decade that would create a system of universal, tax-preferred child savings accounts.
The KidSave Accounts Act of 2007 and the ASPIRE Act of 2009 were two such efforts. These bills would have provided every child in the country with a seeded savings account at birth into which contributions could be made until the child reached adulthood.
Lower-income Americans would receive government matches for their contributions. These accounts would allow every child to build substantial savings by the time they began their higher education, and are worthy of serious consideration.
This is far from a comprehensive list of proposals for moving toward a system of financing college education through saving rather than debt. None is perfect.
Exempting savings from taxation could greatly reduce the tax burden of wealthier Americans, shifting the burden to the middle-class.
Child savings accounts could prove paternalistic, costly, and fail to build savings among lower-income Americans.
But they all avoid the pitfalls of our current system of subsidizing the student loans, which leaves too many college graduates with too much debt.
Making college affordable to more Americans will require much more than preserving the student loan status quo. It will require upending it.