Student Debt, Wealth Inequality, and the Return on a College Degree: The Role of Children’s Savings Accounts

By William Elliott

Note: Dr. William Elliott is an Associate Professor and the Director of the Center on Assets, Education, and Inclusion at The University of Kansas. He recently participated the “Post-Secondary Education Option” panel  at the “Exploring Prominent Issues in Financial Resiliency and Mobility in Low- and Moderate-Income (LMI) Communities” conference sponsored by the Federal Reserve Bank of Kansas City. This blog reflects his presentation and not necessarily the opinion of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Research shows that in time, an investment in higher education eventually pays off. However, the payoff of investing in higher education varies greatly depending on whether one graduates with or without student debt. This blog summarizes the disparity of investment returns in education between those with and without student debt, and ways to make such returns more equitable.

The book, State of Working America, states that home ownership is the main source of wealth accumulation for the American middle class. However, according to Brown and Caldwell, students who graduate with debt may be forced to delay homeownership early in their careers. In fact, the homeownership rate for 30-year-old-headed households with student debt has decreased by more than five percentage points than those without student debt between 2003 and 2013. Further, homeownership is not the only arena where student debt holders are disadvantaged. Hilton Smith found that households headed by college graduates who had accumulated median student debt have about $134,000 less in retirement savings than those without student debt. Not surprisingly, families with college debt may have as much as 63 percent less net worth than those without outstanding student debt .

Evidence further shows that problems related to indebtedness are not confined to those who do not complete college or among those with large amounts of debt. For example, the fear of debt may deter students from higher education. Other research suggests that student debt may compromise (long-term wealth accumulation) outcomes by deterring college enrollment altogether or derailing completion.[1]

Children’s Savings Accounts (CSAs) are a policy tool that may help level the playing field. CSAs restore equity in returns on investments in education, improve the life chances of disadvantaged students, and help combat wealth inequality. CSAs are understood to improve children’s well-being by strengthening parents’ expectations of educational attainment, according to Child Development Accounts and Parental Educational Expectations for Young Children: Early Evidence from a Statewide Social Experiment . Students who have designated savings for college are more likely to end up actually enrolling in and completing college than those with the ambition but not the means, according to Elliott, Song and Nam. The impact of CSAs was most acute among low-income families, suggesting the potency of this policy tool. CSAs also serve as a gateway to a more diversified asset portfolio that may result in greater wealth accumulation, according to Friedline, Johnson and Hughes. Financial inclusion is essential to closing the wealth gap, as demonstrated by researchers at the Pew Charitable Trust, who found that income from assets has a strong relationship with moving up the economic ladder.

The Annie E. Casey Foundation estimated that children’s accounts could reduce the racial wealth gap by 20 to 80 percent, depending on participation and investment. Just as the 19th Century saw the Homestead Act and the 20th Century the GI Bill, both of which offered real promise to change systems and transform pathways to prosperity for generations, CSAs provide just such an opportunity for today’s reality—and tomorrow’s college students.

Note: To learn more about CSAs and other tools for financial resilience see the most recent issue of ProfitWise News and Views.

[1] Kim, Y., Sherraden, M., Huang, J., and Clancy, M. (2015). Child development accounts and parental educational expectations for young children: Early evidence from a statewide social experiment. Social Service Review, 89(1), 99-137.

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