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Melinda Lewis, Does Parents’ College Savings Reduce College Debt?

May 8, 2014

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   James Bullard, Federal Reserve Bank of St. Louis (5:54)

Keynote Address

- Introduction
   Ray Boshara, Federal Reserve Bank of St. Louis (4:05)

- Keynote Address
   Neil Howe, Founding Partner and President, LifeCourse Associates and President, Saeculum Research (36:03)

   Keynote Q&A (11:04)

   Extended Interview with Keynote Speaker Neil Howe (28:43)

Plenary One — A Micro and Macro Look at Younger Americans' Balance Sheets

- The State of the Balance Sheets of Younger Americans
   Lisa Dettling, Board of Governors, Federal Reserve System (14:25)

- Links Between Younger Americans’ Balance Sheets and Economic Growth
   William Emmons, Federal Reserve Bank of St. Louis (21:40)

- Discussant:
   Steve Fazzari, Washington University in St. Louis (18:14)

   Plenary One Q&A (15:06)

Plenary Two — Student Loans

- Student Loans and the Economic Activity of Young Consumers
   Meta Brown, Federal Reserve Bank of New York (21:12)

- Does Parents’ College Savings Reduce College Debt?
now playing  Melinda Lewis, University of Kansas (18:11)

- Discussant:
   Alex Monge-Naranjo, Federal Reserve Bank of St. Louis (19:01)

   Plenary Two Q&A (18:22)


   Michael Sherraden, Washington University in St. Louis (2:52)

   Clint Zweifel, Missouri State Treasurer (6:26)

   Tishaura Jones, City of St. Louis Treasurer (6:14)

Concurrent Session I

- Moderator:
   Julie Birkenmaier, Saint Louis University (4:36)

- Toward Healthy Balance Sheets: The Role of Savings Accounts for Young Adults’ Asset Diversification and Accumulation
   Terri Friedline, University of Kansas (22:23)

- Financial Decisions of Young Households During the Great Recession: An Examination of the SCF 2007-09 Panel
   Wenhua Di, Federal Reserve Bank of Dallas (19:00)

- Discussant:
   John Sabelhaus, Board of Governors, Federal Reserve System (14:38)

   Session One Panel Response (6:57)

   Session One Q&A (5:41)

Concurrent Session II

- Impacts of Child Development Accounts on Change in Parental Educational Expectations: Evidence from a Statewide Social Experiment
   Michael Sherraden, Washington University in St. Louis (13:09)

- Trends and Patterns in the Asset Holdings of Young Households
   Ellen A. Merry, Board of Governors, Federal Reserve System (15:19)

- Discussant:
   Trina Williams Shanks, University of Michigan (7:06)

   Session Two Q&A (28:58)

Plenary Three — Homeownership

- Moderator:
   Todd Swanstrom, University of Missouri–St. Louis (5:54)

- Homeownership and Wealth Among Low-Income Young Adults: Evidence from the Community Advantage Program
   Blair Russell, Washington University in St. Louis (15:57)

- Aggregate and Distributional Dynamics of Consumer Credit in the U.S.
   Don Schlagenhauf, Federal Reserve Bank of St. Louis (21:53)

- Discussant:
   John Duca, Federal Reserve Bank of Dallas (13:59)

   Plenary Three Panel Response (6:40)

   Plenary Three Q&A (8:46)

Plenary Four — Economic Mobility

- Moderator:
   Jason Purnell, Washington University in St. Louis (2:00)

- The Balance Sheets and Economic Mobility of Generation X
   Diana Elliott, Pew Charitable Trusts (17:58)

- Coming of Age in the Early 1970s vs. the Early 1990s: Differences in Wealth Accumulation of Young Households in the United States, and Implications for Economic Mobility
   Daniel Cooper, Federal Reserve Bank of Boston (17:11)

- Discussant:
   Bhashkar Mazumder, Federal Reserve Bank of Chicago (16:15)

   Plenary Four Panel Response (3:14)

   Plenary Four Q&A (19:02)

Closing Reflections: From Research to Policy

   Michael Sherraden, Washington University in St. Louis (15:59)

   Ray Boshara, Federal Reserve Bank of St. Louis (9:30)

Thank You / Adjourn

   Julie Stackhouse, Federal Reserve Bank of St. Louis (5:59)


Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.

Melinda Lewis: It's great to be here. Thank you for inviting us to share some new research looking at really the intersection between student debt and assets—asset accumulation and savings—both sides then of the balance sheet. But we've talked already today about student loans and their implications for the balance sheets of young Americans. And in fact as we heard earlier, increasingly those who may not be so young as well. The subtitle of today's symposium is about the American dream. And we believe that higher education, post-secondary opportunities are integrally related to economic mobility opportunities and therefore to a conception of the American Dream as many understand it.

So I'm going to talk about this particular study that looks at the potential for parental savings for higher education to be a protective against the accumulation of high dollar student loan debt. But I want to start a little bit with some discussion of the post-secondary education landscape just to set the stage then about where we believe some of the intersections are between college and post-secondary opportunities more broadly, and then debt and subsequently its implications for the balance sheet.

So not surprisingly, you know the conversation in popular press as well as in the literature reflects a growing awareness and in deed preoccupation with rising college costs understood really in most of the analysis to be as much, if not more, about shifting costs from the collective responsibility—particularly the robust public funding of post-secondary education—to individual students and families. And certainly something that many here are familiar with—some maybe more than others—if perhaps hypothetically you have four children who will be in college at the same time, you're well aware of how expensive college is and what that's going to look like for balance sheets of families as they move forward.

But we also look at other factors that are shaping the landscape of higher education, including the eroding value of financial aid, the shift from need-based assistance to merit-based assistance, which then can serve to preclude post-secondary educational opportunities for low- and moderate-income students, in particular. And then understanding growing levels, incidence and amount, as was just illustrated of student debt, as a consequence of the ways in which Americans are responding to this particular post-secondary education landscape. It's clear in the literature that perception matters a lot here, that sticker shock can influence enrollment decisions and that in particular those students who may be more likely to be loan adverse—commonly believed to be those who are low income and students of color—may be particularly impacted then by these policy trends and what they mean for how the cost of college may be communicated and experienced. And again this matters not just in the abstract and not just on balance sheets, but really about this question of, you know, "How viable is the American dream as a likely future for young adults today?" The policy landscape, these convergence of factors, may be serving to steer young adults either to debt dependence or away from post-secondary education, both trajectories with real implications for their economic futures.

Our research at ADI and that which we've conducted with some partners, including some work done her with the St. Louis Fed in the past, looks at a couple of different ways in which debt, we believe, matters for young Americans and for the larger economy—a couple of different dimensions here. First is that loans may not support educational outcomes as we wish and as they were designed to do. The literature in this area certainly is still evolving, but there's some evidence that high dollar student loan debt may have some negative implications for college completion and persistence to degree. Again, that matters especially when you think about accruing liability in the form of student debt without perhaps realizing the same increase in human capital that you would expect to accompany that.

There's also some analysis conducted by Dr. William Elliott, the primary author on this paper and presented here at the Fed last year, that really calls into question to some extent this life cycle accounting of student loan debt that would have us believe that it all comes out in the end because students are better off when they get a college degree. And we're certainly not questioning that piece of it—that higher education is still a powerful way to access the ladder of economic mobility—but when we look at how those with outstanding debt fare post-college compared to those who have no outstanding debt, then it makes these policy questions about how we might craft policy to mitigate some of the assumption of that debt. Perhaps even more urgent, households with outstanding student debt have 63% less net worth, 40% less home equity and 52% less retirement savings than comparable households without that outstanding debt.

The body of knowledge that sees savings as a compliment to student debt and that sees some of the advantages of asset approaches to college financing, that body of knowledge is developing. We see assets associated with increased college enrollment, persistence in graduation, and some research by faculty colleagues at ADI you'll hear from tomorrow, has illustrated that having savings as a child, increases the likelihood that individuals have stronger financial well-being post-college, as well. But what we haven't known in this evolving scholarship is the extent to which some of these effects may be mitigated or negated in some way by high student debt, and so that's what this particular study sought to address. This study asked, you know, specifically can parental savings reduce student debt? And when I talked to folks about this paper—in fact was in DC and talking with people last week—I think the immediate instinctive answer should be of course it would. But we really haven't known that. We haven't known, for example, if students would adjust their behaviors by perhaps going to more expensive institutions, or working less, or engaging in different types of responses that might then obscure the protective value of parental savings on the reduction of student loan debt. And we haven't known if perhaps students who have parental savings and students who borrow are two entirely distinct populations. And so it was really a desire to tease out this intersection between parental savings for college and later assumption of student debt that this particular study addressed.

In the interest of time and to get to our discussion, I'm not going to go into great detail about the methods, but I wanted to highlight a few pieces so that we can know that we're speaking from a common base of understanding. Certainly, we'd be happy to talk with folks about that later. In the materials that follow, you'll not only have the paper, but also this presentation available online so that you can dive into greater detail in those areas. But these are data that come from the Education Longitudinal Survey made available to the public by the National Center for Education Statistics. A specific point of interest about this example that I think speaks to a need for some additional analysis and investigation, is that we limited the sample—we did not include in the sample anyone who had gone to a two-year school or who subsequently went to graduate school. We limited it to those who went to four-year institutions, got four-year degrees. And that was because those who choose different educational trajectories may have different levels of student debt. But clearly there would be some interest in additional research to look at the effects of institutional selection on debt loads and how other choices that students make individually, and in the aggregate, are shaping those questions about why student debt is rising and what all contributes to it. The paper has more details about the controls that were used.

I do want to talk just a little bit about what the variable of interest does include and where it isn't specific. This parental savings variable does not look at different vehicles for savings. So, again, as we think about policy implications, it would be perhaps important to look at specifically parents' savings in state-sponsored 529 savings plans versus savings accounts that are held in traditional financial institutions. This does not do that. It doesn't go into the different types of accounts although certainly there may be effects from those account differences. I'll talk a little bit more about the particular analysis in the discussion of some of the limitations, but certainly, you know, if there are additional questions there, we'd be happy to talk about that.

So what did we find then? I want to talk about the sample as it looked and some of the descriptive results that stand out from that, and then talk specifically about what we found from the propensity score matching both in terms of the continuous variable and the different thresholds of the assumption of student debt.

One place to begin that I think would warrant some additional discussion is that there's some evidence that that landscape of college costs and financial aid that I began with may be influencing the post-secondary educational decisions, the choices made by this generation of young adults. A majority perceive that financial aid was very important for choosing a college and that they would have to choose a college based on cost. So when we think about the relationship between educational attainment and economic mobility, and really this fundamental question of how do we simultaneously support the development of human capital and financial capital thinking about how the way in which students experience the post-secondary educational landscape and opportunities available to them, may be important to examine. Forty-nine percent of parents had put savings aside to pay for college. That is somewhat lower than you find in some other surveys, but not dramatically lower. It is the case that many, including many parents who believe that college is eminent for their children, are not saving for that likelihood for a variety of reasons, but which clearly offer some opportunities for policy intervention. Most college graduates receive their degrees from public or private, not-for-profit colleges instead of for-profit institutions. As I'll talk in just a minute, that institutional selection was significant. And among these four-year college graduates, 69% have student loan debt with an average debt of almost $24,000. That pretty closely parallels some other figures regarding average student loan debt. Interestingly, of course it does reveal that many students are able to make it through post-secondary education without borrowing or at least borrowing in any significant degree which opens questions about the different constellation of protective factors that are at work for them.

What do we see in terms of the results then? First, there is at least some reason to believe that preparation and expectation may be related in some way to later interaction with student loan debt. The perception that student financial aid is very important, expecting to have student loans of at least $2,000 and having applied for financial aid, all related to student loan borrowing, as is living in a moderate income family. There is some reason to believe that those at the very high income level and those who are very low income may be somewhat better served by the protections of the financial aid system and those parental asset holdings, then those two were in the middle. Again, beginning to point to particular areas of focus—as we talked about in discussing generations for policy interventions—and attending a private college both for-profit and not-for-profit related to both incidence and level of student loan debt.

There's a lot of stuff here. I'm only going to highlight just a couple. Again you're going to get this in your online materials because we wanted you to have some of this, kind of, guide. But I'm only going to highlight three of these things. So the first is that graduates with parents who had put aside college savings for them, the key finding from this particular study, have about $3,200 less student loan debt than those who did not. Not, you know, absolutely absolving certainly the risk that students borrow, a not insignificant chunk of that average student loan debt and certainly at least pointing to this relationship in a way that could be explored and exploited for some greater effect. Students who expected to borrow between $2,000-$19,999, have about $14,000 more student loan debt and those who expected to borrow $20,000 or more, have about $31,000 more student loan debt when compared to those who expected to borrow $2,000 or less, getting at those expectation effects. And graduates who attend a private not-for-profit college, have higher student loan debt that those who attend a public college, and particularly when you look at those who attend a private for-profit college, $16,000 more in student loan debt when compared to those who are at a public institution.

There are a lot of risk factors and really only one protected factor that leaps out: just look at that first bullet there. Among the variables controlled for, having parents with college savings is the only factor that reduces the odds of being in the "Owes less than $2,000" category, as compared to the "Owes between $2,000-$19,999" category. The other pieces are just going into deeper detail looking at these thresholds and trying to tease out what some of those effects are.

We're going to address limitations and then to wrap up the time, just begin to plant some seeds about what we see as some of the potential implications. Hopefully we can have some discussion there as well. The first is that even with using this matching and the analysis, we cannot completely rule out that some unobserved factor actually explains these effects of parent savings. This is a relatively new area of analysis and clearly there is a need for the use of different data sets and replication as we explore these relationships more. We don't have the ability to know really anything about dosage effects here, you know. We're just looking at parental savings, yes or no, and don't know how much in savings is needed to engender this protected effect. Particularly given the considerable constraints that parents face in saving for college, knowing how much you really need and where parents should be aiming in order to protect their children from some of these debt effects is an important additional component that we need to explore.

And then finally, and certainly significantly, the study does not control for household net worth. And so therefore, you know, it may be that it's not college savings per se that matters, but having access to those other financial resources. Again, the use of this particular analysis model was designed to control for that to the greatest extent possible, but that must be acknowledged.

In conclusion, we know that student borrowing is an important factor in young Americans' and young adults' balance sheets and so given the existence of this relationship—a parent relationship between parental savings and the assumption of college debt—we need to look at what types of systems and what types of policies might facilitate parental savings as at least part of the answer to the question of "What do we do about this college debt problem?" in looking at young adults' balance sheets.

Thank you very much.