Are All Types of College Financial Aid Created Equal?

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Bridges
By: William Elliott
Winter 2012-2013 Edition

One of the primary research questions driving the work of the Assets and Education Initiative (AEDI) at the University of Kansas is this: Are all types of college financial aid created equal? Increasingly, the evidence suggests that the answer may be "no"--that asset approaches to helping children pay for higher education may yield superior educational outcomes and may provide for a better future than relying on student loans.

Compared to students without savings designated for college, those with college savings are twice as likely to be on course for college completion. While research about the precise psychological, social and institutional mechanisms through which these effects are realized is still evolving, it is increasingly clear that saving changes how students think about college. Importantly, because assets accumulate as students progress toward college, the changes in educational expectations and behavior that occur can improve academic performance, helping them prepare both financially and intellectually for higher education.

Evidence of these educational outcomes through students' careers has contributed to interest in children's savings. However, the question remains--Does saving for college only make a difference in students' achievement at the point when they have saved enough to pay most of their college expenses? If so, how can systems be designed and financed to provide adequate savings, especially for low- and moderate-income (LMI) students whose families are unlikely to be able to contribute significantly?

Some of AEDI's recent research suggests that even very small account holdings may yield significantly better educational outcomes than a complete absence of savings. Having a school savings account with even $1 or less increases the odds that a child will enroll in college. Obviously, these small amounts of money do not make a huge difference in students' actual college financing, but they may help students see themselves as people who go to college--what is often called a "college-bound identity." Just opening an account and designating some of that money for higher education may turn college into an important goal rather than just a dream, with a strategy for how to overcome cost barriers. These differences in outcomes are sustained throughout the college experience; for example, a student who has designated school savings from $1 to $499 is more than four and a half times more likely to graduate from college than a child with no savings.

This is not to say that policies that provide matches for students' savings and use institutional structures to facilitate larger balances are not important. Indeed, these educational outcomes mostly follow a pattern of increasing strength as deposits grow.

Given that research suggests that designating savings for school with very little money can have a positive effect on LMI students enrolling in college, and that even a small amount of savings designated for school ($1 to $499) can have a positive effect on those students continuing to graduation, supporting students' savings may be a path to college financing that deserves additional investigation.

Additionally, it may be true that relying heavily on student loans jeopardizes the long-term financial health of U.S. households. In contrast, there is evidence to suggest that children's savings can improve the balance sheets of families.

http://www.stlouisfed.org/publications/br/articles/?id=2368

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This page contains a single entry by CFED published on April 25, 2013 3:31 PM.

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