CREATING WEALTH THROUGH EDUCATIONAL GRUBSTAKE SAVINGS ACCOUNTS

Jan 25, 2016 by

By Barry E. Stern, Ph.D. –

How to create wealth among low-income people? President Obama and now candidates Hilary Clinton and Bernie Sanders are advocating “free” community college (cc) for all. This would hardly do the job. Indeed, it would help those who need it least. However, low-income young adults could get on the wealth creation track by doing three things that have been proven worthwhile: (1) graduate from high school, (2) obtain sufficient reading and math proficiency to avoid the need for remediation later, and (3) obtain employment and save at least 10 percent of earnings. Suppose individuals from high poverty zip codes were to receive cash rewards for each of these achievements that would be deposited into their “educational grubstake savings account”? The funds could be drawn down to support education or entrepreneurship when the recipient was ready.

More detail on this grubstake proposal appears later. First, why not pander to young voters with “free” community college? Let me count the ways why not:

  1. Little impact on completion. Free college would have minimal impact on college completion rates since more than half of cc entrants need remedial basic education; though improving, the track record of remedial courses remains a national embarrassment. Fewer than 15% of remedial course takers ever earn a college degree or credential within 6-8 years (NCES).
  2. Further higher education inflation + regressive transfer of wealth. It would inflate the cost of higher education even more and likely result in a regressive transfer of wealth from those who need assistance to those who do not. The State of Florida, for example, found that their community college assistance was used more by middle income than low income students.
  3. Low income students already have access. Thanks to federal Pell grants, low-income students who qualify have access to postsecondary education. Although the amount of these grants has not kept up with tuition increases, community college is still very affordable. In 2015-16, the average community college tuition and fees is $3,435. When one adds room and board, the average cost for one year comes to $11,438. The maximum annual Pell grant for full-time students is $5,775. Along with other grants, loans, tax credits, gifts, savings and part-time work, a low-income student could make it, even with part-time work alone.  Assuming a modest workload of 15 hours/week for 45 weeks and pay at $10/hour, a student could earn $6,750; add that to the Pell $5,775 and the student with no dependents could cover the yearly cost of attending the vast majority of colleges.
  4. Not fair to 4-year colleges. The greatest education financial burden is carried by 4-year college students, not community college students whose tuition is largely subsidized by their states. Moreover, were free tuition to be limited to community colleges, there would be less incentive to attend 4-year colleges and universities. Some 4-year institutions would likely create their own 2-year degrees in order to benefit from a new pot of federal funds.
  5. National/world financial meltdown. Unless Congress could find a way to pay for “free” tuition, it would simply add to the federal debt which is now approaching $19 trillion. Many economists believe that if national annual deficits continue at the present levels, it would result in a worldwide financial meltdown and social chaos.
  6. Highest growth occupations do not require postsecondary training. Most occupationsexpected to see the highest total growth in the next decade— not the fastest growing, but producing the most jobs — typically do not require any formal postsecondary study to enter and require no more than high school preparation. Thus, large new college subsidies would simply augment the extent of underemployment of young people with postsecondary credentials and disillusion those who believe their investment of time and money in college would pay off.
  7. No business incentives to train their own. Finally, the proposal does nothing to incent businesses to train and develop their employees, although they provide most of the nation’s post-high school job training.

While “free” college, which states are free to try if their taxpayers are willing to pay the freight, is unlikely to create wealth for those who most need it, governmental assistance beyond Pell grants could be designed to help low-income adults accumulate wealth by facilitating lifelong acquisition of skills that will help them move to higher levels of prosperity. Why not try out in high poverty zip codes within a few metropolitan areas the development of educational “grubstake” accounts and perhaps tie these to the Earned Income Tax Credit? Specifically:

  1. Reward career and college readiness. Upon graduating high school and/or being assessed as career & college ready, students would earn a small government (federal-state-local) funded “grubstake” savings account – say $500 for graduating and another $1000 for passing reading and math tests to demonstrate career & college readiness. The account would be established at a bank of the student’s choice, earn interest and be available for investment in conservative portfolios of mutual funds. Funds could be used for further education and training at a qualified provider whenever the student chooses. Qualified providers would include not only public and private postsecondary institutions but also businesses that establish training and apprenticeship programs that meet certain standards. Additionally, grubstake savings could be used to capitalize one’s own business.
  2. Encourage savings from paychecks. Portable grubstake savings accounts would also be established for low-income workers from high poverty zip codes. Their employers would obtain tax credits for partially matching worker savings to encourage training that would help them qualify for promotions or better paying jobs. Grants that combine funds from different levels of government – local, state and federal – would increase the match for those working for small businesses. The match would increase under three conditions – (1) the smaller the business, (2) the lower the employee’s wage and (3) the more hours worked. Why involve government? Because employees in small enterprises rarely get tuition reimbursement or employer-sponsored training. The lack of training results in many who are stuck in dead-end jobs unless they are fortunate enough to be hired by larger companies. The “grubstake” could well increase mutual loyalty between small business owners and their employees. It could also be a way of linking the Earned Income Tax Credit to the recipient’s development through education and training.

This just-in-time, customized approach that favors those in small enterprises could be assessed by determining the extent to which it:

  1. Encourages savings among entry-level low-income workers
  2. Improves high school graduation rates and academic performance
  3. Reduces poverty and improves rate of transition of workers to higher income quintiles
  4. Improves the sustainability and growth of small businesses that participate
  5. Improves the economy of participating metropolitan areas compared to control group of similar non-participating metro areas.

 

Should enough of these indicators move in a positive direction, government and employers might wish to extend it to additional metropolitan areas.

Dr. Barry Stern is senior adviser to the Haberman Educational Foundation and consults in the fields of educational planning and workforce development . He is a former U.S. deputy assistant secretary of education and director of policy and planning for the Michigan Department of Career Development.

 

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