Student Loan Debt: Can Parental College Savings Help?

Abstract

ollege costs are high and continue to grow as American students and their families are borrowing at unprecedented rates to keep pace with the increasing costs. The College Board (2012a), which produces an annual report tracking college costs, estimates the total annual cost of college attendance plus room and board at a private four-year college rose by 4.2 percent in 2012-13 to $29,056 (College Board, 2012a). Even the traditionally more affordable in-state, public four-year college costs were $8,655 for the 2012-13 school year, an increase of 4.8 percent from the prior school year. While these figures may reflect Postsecondary education costs in the United States today are rising with an increasing shift from societal responsibility to individual burden, thereby driving greater student borrowing. Evidence suggests that (i) such student debt may have undesirable educational effects and potentially jeopardize household balance sheets and (ii) student loans may better support educational attainment and economic mobility if accompanied by other, non-repayable financial awards. However, given declines in need-based aid and falling state support for postsecondary costs, policymakers and parents alike have failed to produce a compelling complement to debt-dependent financial aid that is capable of improving outcomes and forestalling assumption of ever-increasing student debt for a majority of U.S. households. This article, which relies on longitudinal data from the Educational Longitudinal Study, finds parental college savings may be an important protective factor in reducing debt assumption. However, several other factors increase the likelihood students will borrow: perceiving financial aid as necessary for college attendance, expecting to borrow to finance higher education, having moderate income, and attending a for-profit college. After controlling for student and school variables, the authors find that parental college savings increase a student's chance of accumulating lower debt (less than $2,000) compared with students lacking such savings. Policy innovations to increase parental college savingssuch as children's savings accounts-could be an important piece of the response to the student debt problem in the United States. (JEL I2, I22, I24)

Subjective Financial Well-Being During Emerging Adulthood: The Role of Student Debt

“…Walsemann, Gee, and Gentile (2015) found that student loans were significantly associated with poorer psychological functioning among college students. Outstanding student debt was also associated with weaker financial health and lower net worth (Elliott & Nam, 2013; Fry, 2014), lower retirement savings (Elliott, Grinstein-Weiss, & Nam, 2013), and lower likelihood of purchasing a home (Gicheva & Thompson, 2015).…”

Does Student Loan Debt Contribute to Racial Wealth Gaps? A Decomposition Analysis

“…Some studies suggest that the value of assets may be a better gauge of overall financial health than net worth, because these focus on the results of human capital development, rather than counting student debt as a liability, as in net worth measures. Elliott, Grinstein‐Weiss, and Nam () use the 2007–2009 SCF panel to assess whether student loan debt is associated with total assets. Their findings indicate that median 2009 assets for households with no outstanding student loan debt were higher than those for households with outstanding student loan debt ($207,000 in 2009 vs. $174,000 in 2007).…”

“…We follow the theoretical framework as specified in Elliott, Grinstein‐Weiss, and Nam () to address our first question.…”

Understanding Student Loan Decisions: A Literature Review

“…A few studies have argued the important role of college savings (Elliott & Nam, ; Elliott, Song, & Nam, ). When parents open college savings accounts, students were more likely to report paying for their college attendance with family contributions (Elliott & Nam, ). Even small amounts in a child's savings accounts influenced both college enrollment and graduation (Elliott et al., ).…”