September 21, 2020

New strategies for California students to avoid college debt

New strategies for California students to avoid college debt


Photo: Larry Gordon/EdSource

Students at Cal State Northridge’s library computer lab

In 2021, the new California Kids Investment and Development Savings (CalKIDS) program will provide each child born in California with a minimum of $25 to invest in a ScholarShare 529, California’s tax-advantaged college savings plan.

I encourage each child to participate in CalKIDS, which will be the largest college savings plan of its type in the nation when it launches. I believe it will enable more young people to avoid costly student loan debt by saving for college in advance. Studies have shown that students with some savings are more likely to enroll in college.

The program was enacted last year in the 2020-21 state budget to encourage the families of the approximately 450,000 babies born in the state each year to save for college and to demonstrate the state’s commitment to providing a college education. CalKIDS will establish for each child a seed account of $25 and possibly other financial incentives for opening and contributing to a ScholarShare 529 account.

CalKIDS is administered by a state agency, the ScholarShare Investment Board, which I chair. Each child will be enrolled automatically and receive a notification letter in the mail with instructions on how to register and view their account. After that, families will be encouraged to use that money to build on their college savings by making contributions to the account or depositing money from friends, family and charitable organizations.

Establishing a college savings plan when a child is born is a great, proactive way to avoid racking up enormous college debt later on. As the state’s banker, I know that student loan debt is not only a burden for students and their families, it is harmful to our state’s economy.

Hefty student loan payments impede a graduate’s ability to invest in our California community — to start a business, buy a house or begin saving for retirement. Some 80 percent of people between the ages of 22 and 35 who have student loan debt and have not yet purchased a home blamed their education loans, according to the National Association of Realtors.

The monthly payment to repay the average student loan debt of $29,000 for recent graduates with a bachelor’s degree from public colleges and universities is $305 (this assumes you’re paying the average student loan interest rate of 4.53% for undergrads and enroll in the standard 10-year repayment plan.)

But consider this alternate scenario: If the student’s family had invested $305 a month in a 529 account or the stock market when their child was born, they would bank $65,880 over 18 years. Assuming a 7 percent rate of return (which is what legendary investor Warren Buffett claims you should expect in the stock market over the long term), the interest earned would be an additional $11,401.

As a nation, we need long-term solutions like CalKIDS to reduce the burden of college loans. Student loan debt ($1.54 trillion nationwide as of June 2020, according to the Federal Reserve Bank of New York) exceeds car loan ($1.28 trillion) and credit-card ($86 billion) debt in the United States.

In January, I plan to sponsor legislation that will conform California law with the recently approved federal SECURE Act in order to allow California families to use funds from their ScholarShare 529 college savings account to pay down student loan debt without state tax penalties. The SECURE Act permits $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 for each of the beneficiary’s siblings.

Also, Gov. Gavin Newsom signed legislation authored by state Sen. Bob Wieckowski, D-Fremont, which I sponsored, that protects ScholarShare 529 accounts from judgments by creditors in bankruptcy cases. This protects families from losing their college savings, especially when the pandemic has brought economic pain to millions.

There are other solutions to make college more affordable also under discussion:

  1. Have Congress make college student loans debt-free for the lowest income students who attend public two-year colleges, including covering the full cost of books, meals, transportation and child care;
  2. Double the maximum size of federal Pell grants up to $12,690;
  3. Automatically enroll student borrowers in one of four federal income-driven repayment plans and cap repayments at 5% of discretionary income (the Biden campaign’s plan) instead of the existing 10% cap; and
  4. Keep the Public Service Loan Forgiveness program, which cancels federal student loan debts after a set number of years for full-time government (federal, state, local or tribal) or nonprofit employees.

Addressing student loan debt will take years, but at least California families can take a small step in 2021 by enrolling in the CalKIDS children’s savings account program.

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Fiona Ma is California’s 34th state treasurer. Find CalKIDS information here.

The opinions in this commentary are those of the author. Commentaries published on EdSource represent diverse viewpoints about California’s public education systems. If you would like to submit a commentary, please review our guidelines and contact us.

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