The American Way of Poverty: How the Other Half Still Lives (39 page)

Recall Maria’s slide into homelessness in Phoenix after she left her abusive husband. It was an unnecessary coda to her already painful story; federally backed and properly publicized micro-lending systems could have provided reasonable alternatives, allowing her to leave her husband without ending up on the streets.

Such money could be loaned directly from government funds or used as collateral against commercial bank loans, so that banks would be more likely to lend small amounts, at near-equivalent interest rates to that charged their premium clients, to low-income borrowers who don’t have decent credit histories. Given the difficulty states have had in legislatively controlling the payday loan industry, developing
more attractive alternatives to this industry, and thus depriving it of vulnerable clients, might well be the best way to ensure that it simply withers on the vine.

DOWN PAYMENTS ON THE FUTURE

Revenues from the financial transaction tax should also be used to immediately make more widespread universal child development accounts. The idea behind these is simple but powerful: encourage parents to put money aside for their children’s college education by providing state-funded subsidies to bulk up the savings.

When the Labour government in Great Britain set up such accounts in the late 1990s—200 years after the radical polemicist Tom Paine had called for grants to be given to all women upon the birth of their children as part of a universal social insurance system—it argued that the grant would increase poor people’s ability to participate in the economy by giving them an incentive to invest either in post-secondary education or in meaningful job training courses.
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In the years following, the state invested billions of pounds in this, with a considerable degree of support from across the political spectrum. It was seen as a cost-effective investment in the country’s economic future, both financially aiding the poor and also, psychologically, encouraging them to believe they have a stake in their own future. Unfortunately, the program fell victim to the austerity budgets of the Conservative-Liberal coalition, elected in 2010, before it could really bear fruit.

A pilot childhood development account (CDA) program
does
already exist in San Francisco. All babies born in the city have a small city-funded education account set up in their name, so as to encourage low-income families to think of higher education as a possibility for their children. Another pilot program is up and running in Oklahoma. And a similar one, funded by philanthropist Harold Alfond, was set up statewide in Maine in 2008, giving $500 to every newborn
child in the state, so long as that child was enrolled in the state’s 529 college savings plan.
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Three years after it was created, about four in ten babies born in Maine were being enrolled in the education saving programs and were thus becoming eligible for the $500 gift. That wasn’t a great take-up rate, but it was a whole lot better than nothing.

There are roughly four million babies born each year in the United States. Providing each one of these with $500 to kick-start their education accounts would cost $2 billion annually. That’s chump change for an economy as large as America’s, but it would have huge benefits down the line, encouraging more families to save for college and thus making higher education more affordable, and less of a debt generator, for millions of people.

Implementing a small federal CDA program would be easy and wouldn’t need a separate revenue source. But ultimately, any remade social contract ought to have a far more ambitious higher-education component built in. And so we return to the idea of an extra line on our tax forms, to the concept of a dedicated government trust fund, floated by a quarter-percent income tax paid by employees and a quarter-percent tax paid by employers. That’s not a large sum: $75 a year for a person earning $30,000. But the payoff would be huge.

The concept is simple: if a family puts aside a few hundred dollars a year into one of the state-run education savings accounts, which is all that most families can afford, they’re unlikely to save anywhere near enough to put a kid through college. But if each child has a lump sum of several thousand dollars put into the education account by the government when they are born, over eighteen years that will have grown, through compound interest and other rates of return, into a large nest egg; probably not enough, by itself, to entirely fund a university degree, but certainly enough to fund a good part of that education. A payroll tax of one-quarter of 1 percent on employees and one-quarter of 1 percent on employers would seed a fund that could easily put aside $5,000 for higher education for each child born in the
United States. And because it is payroll-generated, that amount could, like Social Security, have a cost of living component built in legislatively, so that each year the amount set aside increased in line with inflation.

Add into that small additional annual contributions from each family, or the Pell Grant for lower-income students, and one gets closer to the concept of higher education that doesn’t saddle students and their families with lifelong debts.

Pooling resources, as is done with Social Security, but at the start of life rather than the end, allows everyone to benefit.

As an interim measure, for those who were born in the years before the tax reform kicked in, and who went to college subsequently, reserves from this fund—my proposal would generate considerably more per year than the $20 billion distributed annually to newborns, thus rapidly building up a reserve—could be tapped to subsidize a portion of their tuition.

And for those who, for whatever reasons, still didn’t go to college, despite having the money put into their education account at birth, that additional cash could be added into their Social Security payments upon retirement, to be paid out either as a lump sum once a person starts claiming Social Security, or as an extra annuity for a given number of years. Because people without a degree tend to earn less than their college-educated peers, and because Social Security payments are related to how much one earns over a lifetime, this would have an equalizing effect, ensuring that the non-college-educated retained a degree of financial security in old age. Assuming 3 percent annual growth via the state educational accounts’ investments, far more conservative annual rates of return than those that most retirement accounts anticipate, $5,000 left to grow during sixty years would, at the back end, be worth more than $30,000. At 5 percent annual returns, it would grow to more than $80,000.

Done well, such a program could plausibly become an integral part of the modern state, as essential to the financial well-being of
the young, and to the non-college-educated elderly in the twenty-first century, as Social Security became for the well-being of the old during the twentieth.

Phased in initially as a 0.25 percent tax, it could be increased, over a decade, to 1 percent, ultimately providing more than enough money to allow each child to have $20,000 put aside at birth, to grow over time either into a near-complete subsidy for higher education, or into a near-guarantee of economic security in old age for those who don’t attend college. The additional tax burden would cease to intimidate voters, once it became clear how much they, and their families, stood to gain from not having to service student debt for decades, and from not having to worry about economic security in old age.

In the same way as payroll contributions for Social Security and Medicare came to be accepted by most Americans, so too a phased-in Educational Opportunity Fund (EOF) tax, if championed by a progressive political party, ought to be as palatable, and, ultimately, as salable to an electorate. Without a sense of shame, people in the mid-twenty-first century could say they were on educational opportunity income, in much the same way as people today say they are on Social Security or Medicare. They could say that they and their families had earned the right to be on this program by paying taxes into it over decades; and that their paying taxes into it now will provide their children and grandchildren the right to access it down the road. It would be an easy and affordable way to create an inter-generational sense of common purpose.

To make such a program more attractive to national debt hawks, who have long argued that the country’s largest challenge involves the size of its national debt, I propose the following: Once the EOF has fully kicked in, and has been shown to massively reduce student debt—and to thereby free up many thousands of dollars a year in income that ex-students would otherwise have had to set aside to pay down their private, student debts—I propose that the EOF then be raised to 1.5 percent, on both employees and employers, with
all
of the additional revenue generated by raising the tax above the one percent level needed to fund higher education being used exclusively to pay down the national debt.

Again, everyone would win: at a relatively low cost, the EOF, phased in over the course of more than a decade, would replace the private risks currently imposed on those seeking higher education with pooled risk; would dramatically expand the long-term financial security of the portion of the population, lacking higher education, currently most at risk of an impoverished old age, and would also eventually generate huge sums of money that could be used to help pay down the national debt. The additional tax burden imposed on Americans by this reform would more than be cancelled out by the long-term financial benefits accrued under an EOF regimen.

All of this is important. In 2000, the total level of student debt nationwide was estimated to be around $200 billion.
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A mere twelve years later, that number had increased to an astonishing $870 billion—or $24,000 for each graduate who left college having taken out loans. And, while underwater homeowners could use the bankruptcy system to clear their mortgage debts, there was no legal mechanism in place to allow student-loans to be similarly discharged.

In April 2012, when Michigan Congressman Hansen Clarke proposed HR 4170, a Student Loan Forgiveness Act that would allow people to discharge their debt if they had paid at least 10 percent of their discretionary income on student loans for at least ten years, more than 1 million people signed petitions in support of the legislation.
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Yet the GOP-led House didn’t pass it. Despite the passage of other significant student loan reforms during the first Obama administration, the country remained more awash in student debt than in financial obligations built up via credit cards and auto loans. The vast majority of that money was owed by younger graduates, who had attended college during a period of public disinvestment in higher education.
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“The total sum is a lot, having to make three separate payments on three separate loans. It seems pretty daunting, like it will take a lot
of really careful budgeting. It seems pretty hard to imagine having to pay back large sums of money, with interest accruing, over the next ten, fifteen years, while also having the concerns of a career, a job, a family, things like that,” 22-year-old Javier Trejo, who had recently graduated with a political science degree from St. Louis University in Missouri, told me when I interviewed him at the community center in Albuquerque at which he spent his time volunteering, as part of the Jesuit Volunteer Corps, in exchange for a $100 per month stipend. He was back home in Albuquerque because, fearful of ever higher levels of debt, he had deferred attending the graduate program in public policy to which he had been admitted.

All indicators suggest the trends toward ever higher levels of student debt will continue in the years to come—debts that for a growing number of workers will prove not just difficult, but to all intents and purposes impossible to repay—thus undermining the basic economic calculus that a higher education will lead to a lifetime of financial benefits for attending college in the first place.

In part, the growing financial burden placed on students has emerged because cash-strapped public universities are raising their tuition fees by amounts far in excess of the rate of inflation. In the 1990–91 school year, to take just one example, a student attending one of the University of California campuses could have expected to pay $1,820 in tuition; by 2012 that number had gone up to more than $13,000.
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In part, it’s because quality education, be it public or be it private, like quality healthcare, involves ever more emphasis on technology, and technology comes with a price tag. In part, though, it’s because Pell Grants and other assistance to lower-income students, as well as the amount of money states pony up to fund their university systems, have taken huge hits in recent years, as conservative rhetoric around budgeting has emerged center stage.

In 1979, Howard Friedman noted in his book
The Measure of a Nation
, a Pell Grant covered three-quarters of the cost of a four-year college; thirty years later, it covered only one-third.
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Where, two generations ago, the GI Bill sought to use federal dollars to broaden
educational access, today federal lawmakers roll back educational assistance to lower-income Americans. In early 2011, Republicans attempted to cut Pell Grants by $20 billion, a move that would have removed approximately 1.7 million recipients from the rolls.
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They failed. But, a few months later, as Democrats and Republicans jousted over raising the national debt ceiling, Pell Grants
were
restructured in a way that made roughly one hundred thousand families ineligible for them, reducing from $30,000 per year to $23,000 the amount a family could earn without having to pay toward higher education, and limiting the number of semesters students could qualify for the grants.
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In Paul Ryan’s budget plans for 2012 and beyond, the GOP again targeted the education grants, pushing for cuts of approximately 20 percent in the years to come.