Savings! A “Solution” To College Debt? Or To Everything?

So with the diploma bubble showing signs of a nearing collapse, William Elliott III, an associate professor at the University of Kansas, has written an editorial stating that “Student Loans Are Not The Answer.” Instead, Elliott wants families to save for college and then pay for college out of that savings.

“We’re now learning about the significant effects that savings for college have on education outcomes… Children’s savings accounts capitalize on the power of savings. All Americans have access to a type of CSA: 529 plans, which are tax-advantaged savings vehicles to support college education operated by each state. Ideally, CSAs combine this tax-advantaged status with other key incentives, such as matching contributions, automatic enrollment, and financial education, to encourage low- and moderate-income families to save for college.”

This is an idea that could work, but it would need to be modified.

As is, the saving plan encourages tuition inflation to keep climbing. If everyone saved a certain amount for college, and colleges knew about this, then their prices would tend to rise even more. After all, one only gets the tax advantages if one spends the savings on education. So everyone would know that people had money that was earmarked for college, and that some or much of it would disappear if they tried to spend it for some other purpose.

To augment Elliot’s plan, let’s empower students so that, when they reach college age, they get to decide how to spend the money. They can use it on college, or on an unpaid internship that will give them entry into a certain career. Or they can use it as expense money while they take a low paying job and work for the promotions that will come with experience and on-the-job learning. Of course, these options are not all mutually exclusive. They can take a few needed courses as well as work in a certain industry.

If this happens, then colleges will know that they can only win over potential students 1) if they offer a product that truly helps the student get a better job than he would if he used his time and money otherwise, and 2) if they can keep their prices down to allow the student to keep more of his savings for other purposes.

Number 2 is important. While every potential student should value a good education more than immediate consumption goods (like a video game, for example), greater prosperity is achieved when prices fall so that students can both pay for college and buy other stuff as a reward for saving money and delaying gratification all those years. So for student savings accounts to really help make college affordable, those savings accounts MUST NOT BE locked into education.

So if we follow Elliot’s logic, rather than a tax advantaged education savings account, what will really help people afford college is giving tax advantages to savings in general.

The one thing missing from all this would be an end to the Federal Reserve’s below-zero interest rate policy. Once interest rates rise, then banks can offer savings accounts that are actually superior to throwing money in a mattress.

I know some will scream that allowing savings in general will not direct people to education. But remember, directing them that way will only cause further price inflation in education. Also, it will teach all children to grow up with a future orientation. Once they have that orientation, education will become an attractive choice to the extent that such education is reasonably priced and offers real value for the future.

The beauty here is that true education savings reform entails true reform for all savings.