The Case Against Helping Low-Income Families Save for College

A couple of weeks ago I published a column in the Chronicle of Higher Education more or less denouncing 529 college savings plans on the grounds that policymakers have used them to avoid the hard choices inherent to actually keeping college affordable while simultaneously inducing families to gamble away their hard-earned money in a casino run by a particularly mendacious house. 

Not long afterward I received an appreciative email, signed, simply, "Mom who lost the college funds for her daughter."  

I thought of that while reading about the recently announced initiative spearheaded by the New America Foundation and the Center for Social Development (CSD) at Washington University in St. Louis to increasing 529 college savings plan participation among low-income families. 

As a liberal circa 2009, I know I'm supposed to be all about asset building for the poor. It's one of those clever policy ideas that lets you be in favor of improving the economic lives of low-income households without associating yourself with retrograde, dependency-generating social programs. A hand up, teach a man to fish, etc., etc. Welfare for a post-welfare world. And of course I'm not really opposed to giving every newborn a savings bond or something along those lines. There are worse ways to spend public money. (Mass incarceration and ruinous foreign wars come to mind.) 

And yet...I have qualms.

First, I don't think 529 accounts are really assets at all. Most non-rich people accumulate assets in two forms: housing and retirement savings. There's a permanency to both of these things. You become a homeowner and (recent catastrophic events notwithstanding) build up equity over time. Eventually you own the house (or the next one, or the one after that) free and clear and it provides a roof over your head for the rest of your life. Similarly, the point of saving for retirement isn't just to spread your income out over your whole life. It's to save enough money so that income from the assets is enough to sustain you. In both cases the idea is to build something that holds core value while providing additional ongoing benefits, something than can be passed on from one generation to the next.

529 plans are just a way to extend the cost of college over time. "Pre-paid tuition plans," for example, are actually another form of 529s, and there's really no difference--you pay over 22 years (or less) instead of four, and when you're done, there's nothing left. Your kid has something of value, of course, something asset-like, but you're back to square one. 

Obviously, part of the appeal of 529s is the tax savings on investment income. But that means you have to take on risk of investment losses--a risk exacerbated by the (relative to houses and retirement) shorter time horizon and the total inflexibility of when you need to spend the money. Retirement can be delayed or spending adjusted in a downturn, and a house that's lost value is just as good at keeping you warm and dry. But if you lose the college funds for your daughter, her whole life is turned on end.

New America's chief assets person, Ray Boshara, says that "Structured and invested properly, 529s hold enormous, un-tapped potential to get more students, especially those least likely headed to college, on a path to attend and complete college." Putting aside for the moment whether "enormous" is empirically justified, I assume the phrase "invested properly" is a nod toward the practice of reducing investment risk as college approaches. Which is a good idea--but it also diminishes expected returns and further reduces 529s to simply stretching the college payment timeline and little else. If you assume some families are going to make money in the market, then you have to assume that others are going to suffer terrible losses for no other reason than they unluckily had children at the wrong time. That's a steep price to pay. 

Plus, more broadly, doesn't the best way to help low-income families save involve helping them earn more money than they need to spend, so there's some left over to save? In other words: helping them not be low-income anymore? And if they're poor, presumably any money they save comes at an unusually high opportunity cost in terms of foregone consumption.  A lawyer making half a million dollars a year who saves $1,000 for college presumably feels nary a pinprick of pain. What is that--a 60-inch flatscreen instead of a 64-inch? 40 fewer minutes playing blackjack in AC? For a poor family, by contrast, $1,000 means less housing, food, basic amenities--important stuff. And keep in mind, the lawyer is the one getting a better tax benefit out of 529s, because he's paying at a higher rate. 

New America, to its credit, wants progressive 529s that subsidize accounts for low-income families. But this still seems a lot like pre-funded Pell grants. Why not just use the same money to increase Pell grants? The argument then turns toward behavioral effects. The director of the CSD says "There is evidence that savings for college may focus attention of parents and children on post-secondary education, affecting their outlook, orientation, course selection, discipline, and academic achievement." That's an interesting contention--what evidence and how does it get to "may" focus attention? This would be useful to know, given the shocking lack of good research linking student financial aid to college-going. I'm sure New America is fully in favor of increasing income equality and lowering college costs and investing in Pell grants, too. But there's only so much money to go around. 

In other words, it's less that I think all of this is a bad idea per se and more that it seems like one more in a ever-growing list of small-bore college access programs that ignore the two overwhelmingly important issues: out-of-control price increases and inadequate public support. By creating the appearance of a solution, it's easier to leave the actual solutions undone. Instead of inventing complicated new ways to help low-income families save scarce dollars so they can pay for colleges that get less affordable by the year, let's just make college affordable in the first place.