New Study Suggests that Parent College Savings Reduces Student Loan Debt

It may seem obvious that students whose parents saved for the student’s college were less dependent on student loan debt. After all, every dollar saved is a dollar less borrowed. But, a new research study from the Federal Reserve Bank of St. Louis finds a dramatic decrease in student loan debt for some families. Students whose parents had college savings plans were 39 percent less likely to have student loan debt at college graduation, even after controlling for household income and other variables. Among the students who graduated with some student loan debt, the students with college savings plans graduated with $3,209 less debt.

With college costs skyrocketing, many parents often get discouraged by the amount they’ve been able to save for their children’s postsecondary education. They worry that their children may need to take on significant loan debt that may impact their educational attainment and economic mobility. However, this study demonstrates that even a little college savings can have a big impact on student loan debt.

Researchers reviewed longitudinal data from the Educational Longitudinal Study (ELS) of the National Center for Educational Statistics (NCES), finding that asset accumulation strategies such as parental college savings and Children’s Savings Accounts (CSAs) may lessen student loan indebtedness as compared to those students without access to such savings.

CSAs have been shown to reduce the price of college by providing students with money to pay for college and “improving engagement in school prior to college by making college appear within reach, thereby, reducing the educational attainment gap.” Research also shows that students and their families with savings have greater rates of college enrollment, college persistence and college graduation. Having a college savings plan sets up an expectation that the student will enroll in college. By having savings available for their children’s college education, students end up with reduced levels of debt they might otherwise be forced to borrow to attend college.

Borrowing for college expenses has real costs for students, who increasingly leave college with debt. Not only has the percentage of students graduating with debt from college increased but, more importantly, the amount of the student debt on a per-borrower basis is now at an all-time high of approximately $33,000 for Bachelor’s degree recipients. Above a certain level, student loans may actually be detrimental to college persistence and completion. For example, student debt below $10,000 has a positive relationship with college completion while debt above $10,000 has a negative relationship with college completion.

The researchers suggest that, “realizing the full potential of asset-based college financing approaches may require that policies rely significantly on redistributive measures (e.g., initial deposits, matching and incentives) capable of combating the challenges within today’s higher education” environment as an attempt to solve the student debt problem.

Will parental college savings solve the college debt crisis facing today’s students and families? Probably not. But, as the authors of the Federal Reserve Bank of St. Louis study advocate, “parent college savings plans such as the adoption of Children’s Savings Accounts (CSAs) can be part of a strategy to help reduce college debt.”

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