Reducing Higher Ed Debt: K-12 Education Savings Accounts Can Help Beyond K-12

There’s a national conversation right now about whether or not lawmakers should cancel student loan debt­—and how much they should consider wiping out. President-elect Biden has suggested canceling up to $10,000 per student; other federal policymakers have urged canceling $50,000 per person.

Both plans face challenges. Most notably, canceling $10,000 of student debt per borrower would be a $369 billion commitment according to the Urban Institute, and the $50,000 plan would cost just under $1 trillion.

Second, the vast majority of student debt is held by graduates of selective institutions and graduate students—people who usually fall into affluent populations. That’s why three-quarters of all benefits from eliminating all college debt would accrue to the top 40 percent of income earners.

Third, they do not address the main cause of student loan debt, which is college affordability. Merely canceling the debt mostly of former students will not change future students’ need to finance their education through debt if nothing else changes.

What if there was another way to help reduce the costs of higher education—a more local solution that federal policymakers haven’t yet considered?

One way to help tackle college affordability without these fiscal or equity concerns is to empower aspiring college students to be more financially prepared for college, thus lessening the need for loans. States can offer exactly that by implementing education savings accounts (ESAs).

ESAs allow families to receive some of the public funds dedicated to their children’s K-12 education into government-authorized savings accounts. With restricted-use prepaid cards, families can pay for a variety of education resources, such as private school tuition, individual public school classes, online courses, tutoring, textbooks and more. Crucially for this discussion, ESA funds roll over from year to year and can be deposited into college savings accounts.

In other words, ESAs allow kids to have customized K-12 educations that apply state dollars to areas families would find most helpful—including college education.

To see how much ESAs could help fund college education, let’s look at the state currently with the most comprehensive ESA policy in the nation: Arizona. The Grand Canyon state allows students with special needs and circumstances to participate in its ESA program. Participating students whose households are up to 250 percent of the federal poverty level receive 100 percent of the base per-pupil funding of their previous public or charter school, while participating students above that income level receive.

Using some back-of-the-envelope calculations using the most recent public enrollment and expenditure data from the National Center for Education Statistics, Arizona spent an average of $9,956 per student in fiscal year 2018. (It should be noted Arizona’s ESA participants are especially likely to have individualized education plans, which often requires more funding.)

A 2013 study suggests that families do not spend all of their ESA funds. On the low end, families left 26 percent of funds unspent. For the sake of argument, let’s say this ratio holds today. If we assume a student receives $9,956 each year, and they only spend 74 percent of it, they have $2,589 to put into a college savings account each year. Without the interest, that student will have saved $33,657 over the 13 years of their K-12 education.

To put that number into perspective, a year of tuition at Arizona State University costs about $12,000 this year. Most students don’t pay the sticker price of tuition, but even if our hypothetical student was paying full price, they already have 70 percent of the funding needed to earn a degree at a top university. While plenty of students still would need to take out loans to pay for the remaining 30 percent, the need for debt obviously decreases drastically.

Alternative education may be even more financially feasible for ESA recipients. For example, at Rio Salado Community College, not far from Arizona State in Tempe, a full-time student would pay $2,040 in tuition. That rate means our hypothetical student could complete some higher education programs solely through their K-12 education dollars.

The amount of funding students would receive from ESAs varies state by state, as education funding varies state by state. But Arizona provides a glimpse of just how powerful putting education dollars in the hands of students can be. Unlike the student loan cancelation idea, implementing ESAs would be a structural reform that provides a long-term aid to college affordability. Also, unlike student loan cancelation, ESAs do not require a massive financial burden on taxpayers who may not have borrowed or attended college at all. Because ESAs simply restructure K-12 funding, their fiscal burden is minimal.

Kids are encouraged to study hard to prepare for college, but ESAs allow them to prepare financially, too.