Full text of Bridges (Federal Reserve Bank of St. Louis) : Bridges, Spring 2009

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Linking

Lenders

And

Communities

spring 2009

P U BL I S H E D Q UA RT E R LY
BY T H E C O M MU N I T Y
d e v elop m en t

Bridges

D E PA RTM E N T OF
T H E F E D E R A L R E S E RV E
B A N K O F S T. L O U I S

I N DE X

4

Growing Small Businesses
in Rural Communities

6

The Rising Cost of College
Exploring Innovation

Spanning
the Region

9

0

w w w. s t lo ui sfed . or g

Child Development Accounts

Innovative Plans Build Savings For Youth, Starting at Birth
By Julia Stevens

I

n a global economy, people
require ongoing investment
to remain competitive and
successful. Research suggests
that having savings and other
assets (owning a house, for
example) is as important for
people’s long-term development as income. Therefore,
programs that promote saving
and accumulation of assets may
be important to help people
become and remain economically viable.
Children are in particular
need of investment as they
grow and develop into young
adults. But statistics suggest that we are not investing
sufficiently or effectively in
our children. As of 2008, the
Children’s Defense Fund (CDF)
notes that “epidemic numbers

The

of children” are at risk in the
United States, with 5.8 million
living in extreme poverty, teen
pregnancy rates on the rise and
educational achievement scores
falling. In fact, among industrialized nations, the United
States ranks 21st in science
scores, 25th in math scores and
last in three categories: child
poverty, the gap between rich

Federal

Reserve

Bank

of

St .

and poor, and adolescent
birth rates.
Child development accounts
(CDAs), first proposed in 1991
by Michael Sherraden, director of the Center for Social
Development at Washington
University in St. Louis, offer an
innovative approach to making long-term investments in
America’s children.

Louis:

Central

to

America’s

Ec o n o m y

What are CDAs?
CDAs are savings or investment accounts that benefit a
child’s future. Often opened at
birth, CDAs allow parents and
children to accumulate savings
over approximately 18 years.
With regular saving, often supplemented by the government,
a child will have a nest egg by
the time he or she graduates
from high school. This nest
egg can be used by the child to
successfully launch himself or
herself into early adulthood.
Although CDA programs differ in design and features, most
share common characteristics.
With few exceptions, savings
accumulated in CDAs can only
be used for approved purposes.
These commonly include postsecondary education, a down
continued on Page 2

™

Accounts
continued from Page 1

payment on a starter home,
and seed capital to start a small
business, among others.
As an incentive to save, most
CDAs are “seeded” with an
initial deposit of around $500
to $1,000 and deposits made
by children and their parents
are matched, often at a 1:1 ratio
up to a certain limit.
Recognizing the difficulty
of saving for low-income
households, the accounts of
lower-income children receive
additional financial assistance.
This assistance may take the
form of a larger initial deposit,
a higher match or a grant.
Ideally, CDAs are universal
—available to all—in the same
way that public education is
universal. The government
usually provides the initial
deposit and match funds.
Although these funds are usually offered as a grant or subsidy, a recent proposal in the
United States would make the
initial deposit and match funds
a long-term, low-interest loan.
Why CDAs?
CDAs are particularly attractive for long-term investment in
a nation’s children (and longterm investment in a nation’s
future competitiveness and
viability) for several reasons.
Most CDA accounts are
opened at birth, allowing
savings to be accumulated
over approximately 18 years.
This long span of time means
that regular deposits of small

amounts can make a difference,
thus making saving a realistic
goal for families of low or modest income.
Having savings may improve
outlook and expectations,
and children are in the best
position to capitalize on this
improved outlook for the long
term. Research shows that
having savings that are specifically for college may increase
a child’s expectations of
attending college and improve
academic achievement.
Among lower-income
families, CDAs may effectively
interrupt the cycle of transgenerational poverty. Studies
have shown that economic
status is often passed from one
generation to the next within a
family. No matter the economic
background of a family, a CDA
provides a child the opportunity to obtain an education,
buy a house or establish a small
business—all opportunities that
improve the child’s chances of
increasing their economic status
over the long term.
CDAs around the World
Canada, Singapore and the
United Kingdom have instituted national CDA policies.
Although sharing the common
theme of investment in children,
the programs differ in design.1
Canada provides all children
with a tax-deferred savings
vehicle to encourage savings for
post-secondary education. The
first C$2,000 deposited every
year by parents or children is
eligible for a 20 percent match,
with an additional match for

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low-income families. A grant
program supplements the savings of middle- and low-income
households, providing an initial
grant of C$500 and an additional C$100 annually, in addition to the match. The funds
accumulated in the account
must be used for post-secondary
education or the government
funds must be returned.
Singapore provides a CDA
account to all children from
birth to age 6. Savings accumulated by age 6 are matched
at a 1:1 ratio up to a cap of
S$6,000 to S$18,000, depending on the child’s birth order.
(Because Singapore’s program
is meant to promote population growth as well as child
development, larger financial
incentives are available to the
third and fourth children of
a household.) The savings
in the CDA account can be
used for child care, educationrelated expenses and medical
expenses. Unused funds can
be transferred to a college savings account when the child
turns 7 years old.
The United Kingdom
provides all children with a
tax-advantaged Child Trust
Fund at birth seeded with an
initial deposit of £250 (or £500
for lower-income children).
An additional deposit of £250
(or £500 for lower-income
children) is provided at age 7.
Unlike Canada’s and Singapore’s programs, the U.K.’s
program does not provide a
savings match. Another difference is that the funds in
the U.K. may be used for any

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purpose after the child reaches
18 years of age.
Toward a Federal CDA Policy in
the United States
The Center for Social Development is leading an innovative experiment in Oklahoma.
SEED for Oklahoma Kids
(SEED OK) tests the impact
of giving every child a CDA
at birth for post-secondary
education. The experiment
is intended to be a model for
a national CDA policy in the
United States.
In 2007, approximately 2,700
newborns from across Oklahoma were randomly selected
to participate in this research
study. Of these newborns,
1,360 (the treatment group)
received $1,000 in a special
SEED OK account in the
Oklahoma College Savings
Plan, and another 1,360 (the
control group) did not receive
an account.
Through SEED OK, families
in the treatment group can save
for their children’s future and
may receive matching funds
for their savings, depending
on their household income.
Both groups will be followed
throughout the duration of
the seven-year experiment to
investigate the impact of CDAs
on saving for college, family
attitudes and behaviors, and
outcomes for children.
SEED OK uses the Oklahoma College Savings Plan, a
529 College Savings Account,
as the CDA’s financial vehicle.
Nicknamed for the applicable
section of the federal tax code,

“529s” are state-sponsored
plans that allow all individuals
to save, regardless of income,
for post-secondary education.
Although specifically created
for college savings, aspects
of 529’s design—including
centralized accounting, low
deposit minimums and matching provisions—make them a
promising, tax-advantaged savings tool that could be used to
build a national CDA policy. In
fact, the design of SEED OK is
meant to be scalable—that is, a
design that can be expanded in
size from a state-level program
to a federal program.
The groundwork for SEED
OK was laid by a four-year
national research initiative on
CDAs, known as Saving for
Education, Entrepreneurship
and Downpayment (SEED).
The national SEED initiative
includes 10 CDA programs at
community-based organizations across the United States,
totaling more than 1,000
accounts. The programs target
children of various ages, including infants and children in
preschool through high school.
Research in the SEED initiative
has included in-depth interviews with parents and youth,
focus groups with parents, a
survey of parents and monitoring of the SEED accounts.
Challenges and Opportunities
Preliminary findings from
SEED and early experiences
implementing SEED OK suggest some challenges.2
Most parents in the SEED
initiative understand the

importance of saving, and
many of them save despite
their limited incomes. Economic barriers, however, make
it difficult for low-income
parents to save; and, although
they do save, they save at fairly
low amounts.
Voluntary enrollment does
not work. Despite attractive
incentives, enrollment rates in
SEED and SEED OK are low.
Focus groups with parents who
did not enroll their children in
SEED suggest that distrust of
financial institutions, embarrassment about lack of financial
knowledge and discomfort sharing personal financial information discouraged enrollment.
In SEED OK, it appears that
paperwork necessary to open
an account is also a barrier to
enrollment. A system of universal CDAs with automatic enrollment would go far to addressing
both of these barriers.
Policy Initiatives
There are currently five
federal proposals for special
savings accounts for children:3
America Saving for Personal
Investment, Retirement, and
Education (ASPIRE) Act:
Every newborn would receive
an account endowed with a
one-time $500 contribution.
Children in households earning below the national median
income would be eligible for a
supplemental contribution of
up to $500.
Young Savers Accounts:
These accounts would serve as
Roth IRAs for children. Parents would be allowed to make

On

the

internet

at

Shown at a CDA Research and Policy Symposium last fall in St. Louis are, from left:
Michael Sherraden, director of the Center for Social Development at Washington University;
Jim Bullard, president of the Federal Reserve Bank of St. Louis; and Edward Lawlor, dean of
the George Warren Brown School of Social Work at Washington University in St. Louis.

deposits using their current
IRA contribution limits.
401Kids Accounts: Savings
accounts would be opened in a
child’s name as early as birth,
with up to $2,000 of after-tax
contributions permitted per
year. The funds could be used
for education expenses, for a
first-home purchase or could
be rolled over into a Roth IRA
for retirement.
Baby Bonds: Each child
would receive a $500 bond
at birth and at age 10. Funds
could be used for college or
vocational training, buying a
first home and retirement savings. Families earning below
$75,000 a year could direct
their existing child tax credits
into the accounts tax-free.
Portable Lifelong Universal Savings (PLUS) accounts:
Granted to every newborn for
retirement savings, each PLUS
account would be endowed
with a one-time $1,000 initial

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www.stlouisfed.org

deposit. Contributions would
continue as adults, with a
mandatory 1 percent of each
paycheck withheld pre-tax and
automatically deposited into
their account. (Workers could
voluntarily contribute up to
10 percent). Employers would
also be required to contribute
at least 1 percent (and up to 10
percent) of earnings.
Julia Stevens is an editor with the
Center for Social Development at
Washington University in St. Louis.
Endnotes
1 Vernon Loke and Michael Sherraden,
“Building assets from birth: A global
comparison of Child Development
Account policies,” International Journal
of Social Work, forthcoming.
2 Drawn from unpublished work by
Deborah Page-Adams and Edward
Scanlon of the University of Kansas
School of Social Welfare.
3 Adapted from unpublished work by
Reid Cramer and Ray Boshara of the
New America Foundation.

Gardening on Main Street

Growing and Tending to Small Businesses in Rural Communities
By Jean Morisseau-Kuni

G

rowing a business has
often been compared
to tending a garden.
In a garden, you need to have
the right climate, along with
the nutrients plants need to
thrive and the proper amount
of sun, water and fertilizer.
When “growing” small businesses, communities need to
make sure they have the right
mix of nutrients—or components—to support business
growth and development. These
include a trainable workforce,
financial resources, business
services, space, city infrastructure and business networks.
When a business “garden”
has an imbalance in these
components, its growth can
be stifled. Unhappy business
owners will relocate to a community that will help them
flourish, and new business
owners looking for a location
will avoid the area altogether.
A balanced business climate
needs to have a diverse blend
of businesses and business
services that complement
each other and work together.
Businesses tend to thrive in
communities where they have
access to financial institutions
and alternative funding sources,
networks, educational institutions and city government.

The square around the Marion County Courthouse in Palmyra, Mo., was the site of several
improvements in 2000 after a local community group got involved.

Assessing the Climate
in a Business Garden
The Missouri Rural Entrepreneurship Initiative at the University of Missouri-Columbia’s
Rural Policy Research Institute
found that growing a small
business in a rural setting is
vastly different from growing a
small business in an urban setting. Rural communities often
are missing components that
are vital to business development and growth. They also
found that, by measuring a
community’s strengths and
weaknesses in relation to 10
components, they could assess
whether the climate in the
community was conducive to
business growth.

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The initiative team retained
the Community Policy Analysis
Center in Columbia, Mo., to
develop a guidebook and refine
a survey that rural communities
could use to assess their small
business climate. The result
was Growing Entrepreneurs from
the Ground Up. (See related
story: “The Survey.”) Although
this survey was originally created as a self-assessment tool,
some communities found that
inviting an outside party into
their community to conduct the
survey was the best way to get
to the heart of many issues.
One Town’s Mission
to Revitalize Main Street
Over the past 30 years, many

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rural communities watched as
their “Main Street” changed
from a retail hub to a vacant
reminder of better days.
Consumers who had once
patronized Main Street shops
now chose the convenience of
nearby malls and supercenters
over smaller establishments in
the heart of town.
Starved for business, retail
establishments closed, empty
storefront windows displayed
“For Rent” signs and downtown
lost the magic it once held.
The problems on Main Street
were soon felt all over town as
community leaders struggled to
replace lost income from sales
taxes that had dried up.
In Palmyra, a small rural
community in northeast Missouri, changes on Main Street
did not go unnoticed by local
business owner Irene Meyers
and a group of residents and
fellow business people. They
realized they needed to organize to reverse the drought that
was hurting the downtown
business community. Meyers began researching ways to
rebuild and in 1996, with the
help of Missouri’s Department
of Economic Development, the
Palmyra Area Community Betterment (PACB) association
was organized.
PACB’s mission was to bring
together resources that would

improve the quality of life and
economic conditions in Palmyra.
The hard work of rebuilding
Main Street by attracting new
business owners began.
The Missouri Community
Assessment and Planning
Process (MoCAPP) program
helped by conducting an
assessment of Palmyra and
finding grant money for community improvement projects.
In 2000, PACB efforts paid
off when it launched a project
that added new lights and park
benches to the courthouse
square. However, along with
the success of the project came
the realization that they needed
to refocus and create a comprehensive revitalization and
economic development plan
that included engaging business owners.
While attending a regional
workshop on community development, Meyers heard representatives from the Federal Reserve
Bank of St. Louis talk about the
Growing Entrepreneurs from the
Ground Up survey. She realized
that Palmyra could benefit from
inviting the Fed to survey the
town’s business owners.
Palmyra’s survey began in
October of 2007 and, by December, PACB had a copy of the
final report. Meyers invited the
Fed to present its findings at the
community’s annual meeting.
More than 100 citizens
attended the meeting to hear the
findings from the Fed’s survey
and MoCAPP’s updates to its
assessment. After the reports,
attendees were split into work
groups to discuss how to

approach the issues. Everyone
had the opportunity to vote for
the goals they wanted the community to pursue.
This collaborative effort
created a list of 15 community development goals, with
six coming from the Growing
Entrepreneurs from the Ground
Up report. Recommendations
included hiring a professional
planner/developer, redesigning
curbs and sidewalks for safety
and aesthetics, and establishing
a downtown historic district.
PACB quickly found that
fulfilling the goals was going to
take a lot of work and money.
The goal that received the most
votes was to hire a professional
planner/developer to focus
on community and economic
development. However, there
was no city or PACB funding
available for the position.
PACB members didn’t let that
stop them. Using a recommendation from the survey, they
did some intensive research
and developed an innovative
initiative to raise money. Calling its initiative “The Community Investment Plan,” PACB
asked residents to pledge one
dollar a week, or $52 dollars annually, to help Palmyra
achieve its development goals.
To promote the fund-raising
drive, PACB held a community
meeting to outline the plan,
the local newspaper ran a
story about the meeting, and
the plan and the results of the
Growing Entrepreneurs from the
Ground Up survey were posted
on www.showmepalmyra.com,
the town’s web site. Money

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at

soon started coming in, but
surprisingly, not just from
residents. Some of the first
pledges came from former residents who still care about the
community.
Meyers feels good about the
interest and changes in the
climate on Main Street. The
plan lets everyone feel they can
get involved, she said. “When
folks ask me how much money
I think we can raise, I tell them
as much as we need to make
our goals realities. It’s easy to
say that we have a lot of work
ahead of us, but now we have a
plan,” Meyers said.
PACB originally hoped to
hire a community planner
within a year, but the recent
downturn in the economy has
slowed their efforts. What it
hasn’t hurt is their enthusiasm
for the task ahead of them.
“The Growing Entrepreneurs
report is what gave us the
push we needed. It re-energized our base and gave us
food for thought and discussion. We’ll be ready when the
economy starts flowing again,”
Meyers said.
Loren Graham, Palmyra’s
mayor, also said he has been
pleased with outcomes of
the report.
“When citizens become
interested in what’s going on,
and I’m able to fill board positions that have been vacant for
a long time, I’d call that success,” Graham said.
Jean Morisseau-Kuni is a community development specialist at the
Federal Reserve Bank of St. Louis.

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The Survey
The Growing Entrepreneurs
from the Ground Up survey is a
series of questions weighted on
a scale of 1-7, with 1 being the
lowest possible score and 7 the
highest. The questions focus
on characteristics that communities need to have a healthy
business climate. In addition, a
series of open-ended questions give business owners
the opportunity to share their
personal insights on community
strengths, weaknesses and
opportunities.
Once the survey is completed,
communities are given the
results and a list of actions they
can take to make the most of
their strengths and to address
deficiencies in the small business environment. Resources
and tools—such as web sites,
books, seminars, programs and
foundations—are included.
Communities can benefit from
assessing their small business
environment and finding ways
to beef up the components that
will help their “business garden”
grow. The survey is not about
hiring a consultant. It’s about
looking at strengths and weaknesses and organizing efforts to
address community needs.
More information about
the initiative and the survey is
available from Missouri Rural
Development Partners at
www.mrdp.net or by calling
Jean Morisseau-Kuni at 314444-8646.

The Rising Cost of College

Student Loans Harder to Find in Tight Credit Market
By Rajeev Bhaskar and
Yadav Gopalan

H

igh school students
contemplating going to
college are confronted
with a myriad of questions,
including how much it will
cost and how they will pay for
it. Unfortunately, the cost of
education keeps rising and the
availability of credit, especially in this current economic
environment, keeps dwindling.
This article takes a closer look
at various aspects of the financial needs of college-bound
students, from what makes up
the overall cost to what types
of student loans are available.
We also look at the rising cost
of college and the impact of the
credit crisis on student loans.
The Overall Cost of College
Going to college can be
expensive. There’s tuition and
fees, but there’s also room and
board, books and supplies,
transportation, and other miscellaneous expenses.
The cost breakdown for
these categories as a percent of
the overall cost varies by the
type of institution (private or
public), in-state or out-of-state,
two-year or four-year.
According to the College
Board 2007-2008 survey,
published tuition and fees
constitute 67 percent of the

Costs for Out-of-State Students
at Four-Year Public College
Transportation: 3%

Misc. expenses: 6%

Books and supplies: 4%

Room and board
27%

Tuition and fees
60%

Source: The College Board, Annual Survey of Colleges.

total expenses for students
enrolled in a four-year private college. This compares
to 60 percent for out-of-state
students enrolled in a public
college, 36 percent for in-state
public students and 17 percent
for a public, two-year college.
Room and board, on the
other hand, comprised the
largest category of expenses for
a student attending a public,
two-year college and for an
in-state student attending a
public, four-year college. The
pie chart breaks down the

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expenses for a typical out-ofstate student attending a fouryear public school. Tuition
and fees comprise the largest
share (60 percent) followed by
room and board (27 percent),
books and supplies (4 percent),
transportation (3 percent), and
other miscellaneous expenses
(6 percent).
Paying for College
Students who attend college
choose from a variety of options
to pay for the overall costs.
According to a 2008 Sallie Mae-

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Gallup study, parents pick up
the largest part, paying 48 percent of the overall cost of college.
An average student covers 33
percent of the cost with income,
savings and loans. Grants and
scholarships contribute 15
percent toward the cost, while
the rest is made up by support
from friends and relatives.
The study, which involved
interviewing hundreds of
families with college-aged
students during the 2007-2008
academic years, breaks down
the 48 percent provided by
parents into 32 percent from
income and savings and 16
percent from loans. Similarly,
the student contribution can be
broken down into 10 percent
from income and savings and
23 percent from loans. Therefore, the overall amount of
borrowing by students and
parents is close to 40 percent
of the overall college costs,
which is significant. The types
of borrowing that parents
and students typically use
include: private and public
educational loans, home equity
loans, credit cards, retirement
accounts and other loans.
Disparities exist, however, in contributions across
income levels. Higher-income
families—those with income of
$100,000 or higher—on average pay more from income and
savings, compared to middle-

Who are the Lenders?
Both the government and
financial institutions provide
funding for student loans.
Financial institutions—banks,
credit unions, thrifts and other
lenders, including nonprofit
organizations—participate
in student lending either by
providing the funds for federal
loans such as Stafford and PLUS
through the Federal Family

continued on Page 8

Resources Available
to Students
There are many resources
available for students and
families seeking funding help
for college. Government
agencies, nonprofit organizations and private institutions
provide a wealth of free
information on the Internet
regarding student loans,
costs, lenders and planning
tools. Students and parents
should be able to find the
information they need to
plan and pay for college on
the following web sites:
http://fafsa.ed.gov
(federal student aid web site offering online application for federal
student loans)

www.college.gov

Figure 1

Bank Loans to Consumers

(Department of Education web site,
the “go to” source for information
on post-secondary education)

Percent of consumer loans (excluding credit cards)
to total loans for U.S. and community banks

www.finaid.org
(a comprehensive web site on
student loans, scholarships and
aid with useful links)

12
11
10

www.collegeboard.com

9

U.S. banks

8
7
6

internet

Sep 08

(a network of financial institutions
and schools providing information
on the FFEL program)

www.students.gov
(U.S. government web site providing
links to other government resources
for students and parents)

Source: Call Reports data

the

Mar 08

Sep 07

Mar 07

Sep 06

Mar 06

Sep 05

Mar 05

Sep 04

Mar 04

Sep 03

Mar 03

Sep 02

Mar 02

4

On

(information on colleges, standardized testing and financial aid from
a nonprofit organization)

www.nchelp.org

U.S. community banks

5
Sep 01

Types of Loans for Education
The Sallie Mae-Gallup study
reaffirms the importance of
loans and that savings and
income alone are not enough
to pay down college costs.
Although parents and students
use many types of loans, we
focus here on educational loans.
Educational loans are divided
into three broad categories:
federal student loans (Stafford
and Perkins), private education
loans and parent loans.
The most common educational loans taken to finance
higher education are federal
student loans. These loans
typically have lower interest
rates with no credit check or
collateral required. They come
in two basic forms: the Stafford
loan and the Perkins loan.
Stafford loans are the most
popular loans among students
and are sometimes subsidized
by the federal government.
Perkins loans, on the other
hand, are meant for undergraduate and graduate students in
extreme financial need.
In addition to federal loans,
private education loans also are
available to students. Private
lenders usually use students’
credit scores to make the
loans, which often supplement
federal loan amounts that are
not enough to pay for costs. In

Education Loan (FFEL) program
or by directly making private
student loans. According to the
web site www.finaid.org, there
are over 2,000 education lenders
nationwide, although most of
the volume comes from the top
50 lenders. The top 50 include
most of the big banks, as well as
several nonprofit organizations.
Sallie Mae, once a government
entity but now private, is the
largest lender.
Figure 1 shows consumer
loans—auto loans, student
loans and medical and other
personal expense loans—as a
percentage of total loans at all
U.S. banks and U.S. community
banks (banks with assets of
$500 million or less). In addition to the originators, there is
an active secondary market that

addition, private educational
loans often provide flexibility
in repayment.
Parents also take out educational loans for their dependent
children in the form of the
Parent Loan for Undergraduate Students (PLUS). Loans
through this federal program
can be used to cover any costs
not already met by the student’s
financial aid package.

Mar 01

and lower-income families.
Middle-income families—those
with income between $50,000
and $100,000—rely most heavily on loans while lower-income
families, on average, receive
more scholarships and grants.

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A new report, Community
Colleges: A Route of Upward
Economic Mobility, by
St. Louis Fed economist
Natalia Koles­nikova, looks
at both the benefits and
downsides of community
colleges and the types of
students they attract: their
goals, educational choices
and outcomes.
The report is available
online at www.stlouisfed.
org/community. Click on
“Other Publications” and
“Research.”

Natalia Koles
nikova
Federal Reser
ve Bank of St.
March 2009

Louis

Figure 2

continued from Page 7

Average Cost of a Four-Year College Program
in constant (2008) dollars, enrollment-weighted

provides the necessary liquidity to the primary market. The
other players that complete
the student loan market are
guarantee agencies, service providers and collection agencies.
Over the last decade, there has
been a gradual decline in these
loans, especially at the smaller
community banks.

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LENDERS

$40,000
$30,000

Private four-year

$20,000
$10,000

Public four-year
08-09

05-06

02-03

99-00

96-97

93-94

90-91

87-88

$0
84-85

Escalating Costs
The rise in education costs
has been faster than the rise
in the overall basket of
goods over the last 10 years.
Increased education costs have
been in the 4.5 percent to 7.5
percent range annually since
1998 in comparison to a 1
percent to 5.5 percent range for
overall inflation.
Figure 2, from a College
Board survey, illustrates the
rising trend of college costs for
both public and private fouryear colleges over time in constant 2008 dollar terms. The
costs included in these trends
are tuition expenses, fees and
boarding costs.
The cost for private institutions has risen at a faster pace
than for public institutions over
the last 30 years. The published cost at a four-year private
institution for the academic
year 2008-2009 was an average
of $34,132 compared to 30
years ago when it was $15,434
for 1978-1979. The cost for a
four-year public school, on the
other hand, was much lower:
$14,333 in 2008-2009. Since

$50,000

81-82

Community colleges play a
critical role in U.S. higher
education and in the economy. For many who cannot
afford a traditional four-year
college, these two-year colleges are a pathway to economic opportunity. With the
current economy in crisis,
their role is magnified.

Student Loans

78-79

Community
Colleges Topic
of Fed Report

NOTE: Average costs are derived from the sum total of published rates of tuition,
fees, and room and board.
Sources: Annual Survey of Colleges, the College Board, Integrated Postsecondary
Education Data System (IPEDS), U.S. Department of Education, National Center for
Education Statistics

2000-2001, however, there has
been a steep increase in college costs, especially at public
institutions. The costs rose by
a total of 33 percent, even after
adjusting for inflation over this
eight-year period. These rising
costs put a huge burden on
students, especially in today’s
slow economy.
Impact of the Financial Crisis
on Student Loans
The current financial crisis
has presented extraordinary
challenges for families with
college-bound students. As
noted earlier, savings and personal borrowings on the part of
parents and students comprise
the largest share of higher education financing. Borrowing
by parents, especially through
home equity lines of credit,
has diminished significantly
as house prices have dropped.
Bank lending to consumers

#
8

AND

C OMMUNI T IES

for personal expenses, such as
college, has also slowed down,
especially recently. The overall
credit market has tightened,
and loan volume has dropped
sharply. (One study notes that
60 private lenders originated
$19 billion in personal loans
in 2008; by the end of January 2009, thirty-nine of these
lenders had stopped lending
and the rest had tightened their
lending standards.1)
As a result of this contraction, the Department of Education has seen a 10 percent
increase in federal aid applications. Subsequently, Congress
introduced legislation in 2008
to keep college financing channels open for families with
college-bound students.
The legislation, signed into
law as the Ensuring Continued
Access to Student Loans Act
(ECASLA), contained a variety
of measures to ensure higher

education financing during the
current turmoil in financial
markets.2 It was anchored by
a Department of Educationsponsored federal education
loan buyback program from
private lenders that was meant
to inject liquidity in student
loan credit markets. The buyback program targeted FFELs,
which include the Stafford and
PLUS federal loan programs.
FFELs have been very
popular in the past. For
example, during the 2007-2008
academic year, 7.5 million
students and their families
took advantage of this type
of financing, which totaled
roughly $91.8 billion. However, in early- to mid-2008, this
market dried up, with major
private lenders ceasing to make
FFELs due to unprofitability.
The loan buyback program was
seen as an essential vehicle to
get credit flowing in this market again. Subsequent to the
initial passage of ECASLA last
summer, President George W.
Bush signed into law a one-year
extension on the buyback provisions so that the Department
of Education could buy back
FFELs through mid-2010.
ECASLA also allowed for
an additional $2,000 to the
unsubsidized Stafford loan
limit.3 Furthermore, the bill
increased the scope of the Academic Competitiveness Grant
(ACG) and the National Science
& Mathematics Access to Retain
Talent Grant (SMART) so that
students who had already been
receiving Pell Grants could avail
themselves of these additional

Exploring Innovation

funding sources. In addition,
ECASLA also gave parents the
option to defer repayment of
PLUS loans to six months after
the student finished enrollment
at an institution, at least parttime; the bill also expanded
eligibility to PLUS loans for
parents who were delinquent on
medical or mortgage payments.
ECASLA also allows the
Department of Education
to designate institutions for
Lender of Last Resort (LLR)
loans upon approval from the
Secretary of Education. This
provision increases the ability
of individual schools to expand
student loan access on a systematic basis.
The new Obama administration is also actively working
with Congress to ease the burden on families with collegebound students. Just very
recently, a new piece of legislation was passed that increases
the tax credit for eligible college expenses and increases the
grant for low-income undergraduate students.

A Conference on Community Development

“Innovation in Changing Times”

There is still time to register.
April 22 – 24, 2009
www.exploringinnovation.org

Exploring Innovation

Today’s economy presents many challenges for those working in
the field of community development. This conference will focus on
innovative programs that can have a positive impact on your community and help your organization not only survive, but thrive.
A special feature of the conference is the Innovation Café, a new
twist on the traditional cyber café. In addition to offering refreshments and a place to network, the café will have computers
available to those who want to share ideas on the “Innovation Flip
Chart,” respond to the “Question of the Day,” enter a chance to win
the “Fed Prize Challenge” or simply connect with others for dinner.
For details on this event and to register, go to www.exploringinnovation.org.
Sponsor:
Federal Reserve Bank of St. Louis,
Community Development Office

Rajeev Bhaskar and Yadav
Gopalan are research associates
at the Federal Reserve Bank of
St. Louis.
Endnotes
1 Carpenter, Dave. “College financial
aid system facing stiff test,” Associated
Press 01/24/2009

Partners: CFED, Enterprise Community Partners, NeighborWorks
America, Opportunity Finance Network and Social Compact

2 The full text of H.R. 5715 can be
found at federalstudentaid.ed.gov/
ffelp/library/HR5715PL110-227FINAL.pdf
3 Tomsho, Robert and Lueck, Sarah.
“Senate Clears Bill on Student
Lending,” The Wall Street Journal
05/01/2008

On

the

internet

at

Innovation: Anyone can do it!

#
9

www.stlouisfed.org

the Region

Spanning
Illinois Tax Credit Program
To Help Small Businesses
A new tax credit program
is designed to stimulate the
economy in low-income areas
in Illinois by helping existing
small businesses expand and
by attracting new small business projects.
The Illinois New Markets
Development Program will provide state tax credits to investors
against their state income tax liability. The program is expected
to pump at least $125 million
into small businesses through
New Markets Tax Credits.
To qualify, investors must
make investments into federally approved Community
Development Entities (CDEs).
CDEs are organizations that are
federally certified by the Community Development Financial
Institution (CDFI) Fund and
that demonstrate a mission of
serving low-income communities. CDEs are held accountable to the communities they
serve through representation
of community members on the
CDE’s governing board.
Businesses that benefit from
CDE investments normally are
unable to borrow from traditional lenders because they lack
an established credit history
or collateral.
Investors and organizations
interested in learning more
about the Illinois New Markets Development Program or
becoming an Illinois qualified

The region served by the Federal Reserve Bank of

CDE should
St. Louis encompasses all of Arkansas and parts of Illinois,
contact the
Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Illinois Department of Commerce
and Economic Opporbeen provided to entrepreMemphis Groups Offer
tunity at its Springfield office at
neurs, homebuyers and com“Pizza with Planners”
217-782-7500 or at its Chicago
munity development projects
Neighborhood leaders and
office at 312-814-7179. For
in the Delta.
residents in the Memphis,
information on becoming a
For more information, conTenn., area can enjoy pizza
CDE or on the U.S. Treasury’s
tact HOPE Community Credit
while learning about their comNew Markets Tax Credits proUnion at 501-490-0646.
munity’s inner workings in a
gram, visit the CDFI Fund web
series of workshops presented
site at www.cdfifund.gov.
Grant to Help Kentucky
by the Coalition for Livable
with Foreclosure Prevention
Communities.
ECD/HOPE Strengthens
The Kentucky Homeowner“Pizza with Planners: A
Presence in Arkansas
ship Protection Center will
Citizen’s Guide to How Your
After serving residents and
receive a grant in excess of $1.5
City Works” provides residents
businesses in the greater Little
million from NeighborWorks
with the tools to improve
Rock area for more than 40
America as part of the federal
their neighborhoods and the
years, College Station ComHousing and Economic Recovopportunity to be active in the
munity Federal Credit Union
ery Act of 2008. Included in
planning process.
merged with Enterprise Corpothe grant is funding for legal
Recent topics included inforration of the Delta/Hope Comservices, training and staffing
mation on how planning works
munity Credit Union (ECD/
for partner agencies that will
on a neighborhood level and a
HOPE) in November 2008.
provide foreclosure intervenreview of Memphis’ long-range
ECD/HOPE and College Station and default counseling.
transportation plan.
tion have long been rooted in
Since its creation last August,
“Pizza with Planners” is
a commitment to community
more than 2,100 Kentuckians
sponsored by the Community
development. The merger will
have reached out to the KenDevelopment Council of
broaden access to ECD/HOPE’s
tucky Homeownership ProGreater Memphis, the Comservices in Central Arkansas
tection Center for foreclosure
munity Foundation of Greater
while continuing to serve Colprevention help. The grant
Memphis, and the Memphis
lege Station members.
will help an additional 2,200
and Shelby County Office of
ECD/HOPE is a financial
Kentuckians who are in danger
Planning and Development.
institution, intermediary and
of foreclosure receive counselThe Coalition of Livable Compolicy center dedicated to
ing and assistance.
munities represents a diverse
strengthening communities,
Each homeowner who
group of local stakeholders.
building assets and improving
contacts the center through
For more information about
lives in economically distressed the web site, www.Protect
“Pizza with Planners,” conareas in Arkansas, Louisiana,
MyKyHome.org, or through the
tact Sarah Newstok at sarah@
Mississippi and Tennessee.
toll-free number, 1-866-830livablememphis.org.
Through its efforts, more than
7868, will be referred to a
$1 billion in financing has
counseling agency.

LINKIN G

LENDERS

0

AND

C OMMUNI T IES

Have you

Heard
Tax Credit Available
To First-Time Homebuyers
First-time homebuyers can receive up
to $8,000 under the American Economic
Recovery and Reinvestment Act, which
was signed into law on Feb. 17, 2009.
This is a refundable tax credit, which
means it can be claimed in excess of any
federal income tax liability.
To be eligible for the tax credit, home
buyers must have purchased the home
as a primary residence between Jan. 1,
2009, and Nov. 30, 2009; must not have
owned a home in the past three years;
and must live in the home for at least
three years. If they sell it before three
years, they must repay the credit. The
home can be a new or resale home, a
co-op, condo or manufactured home.
The credit is 10 percent of the purchase price or up to $8,000.
Homebuyers can claim the credit on
their 2008 tax return if they buy a home
in 2009 by requesting an extension
from the IRS or filing an amended 2008
tax return.
For more information, visit
www.federalhousingtaxcredit.com.

Financing “Green” Projects
Goal of National Initiative
The Council of Development Finance
Agencies (CDFA) has announced the
formation of the new Sustainable Public
Finance Coalition. This is a major national
initiative focused on financing economic
development that adheres to “green”
principles and alternative energy.
The coalition also will offer industry
leaders and innovators education, networking and research to promote these
new practices.
The Sustainable Public Finance Coalition offers an open invitation to anyone
actively engaged in financing green
development, alternative energy and
infrastructure in a sustainable manner.
For details, contact CDFA at 216920-3073.

Loan Program Provides
Money, Technical Assistance
ShoreBank, a community development
financial institution, has developed a new
loan product to help nonprofit organizations stabilize their finances.
The Capacity Plus Loan Program
addresses problems caused by the
uneven revenue streams nonprofits
experience due to sporadic income
sources, such as government contracts,
grants and donations. The uncertainty
of the funding stream is cause for alarm

because many nonprofits lack the
expertise or sufficient collateral to secure
a loan during a long dry spell. Capacity
Plus will help nonprofits strengthen collateral and gain the expertise they need
to use credit as part of their financial
management strategy.
The program gives charitable foundations an opportunity to provide cash security for bank loans to qualified nonprofit
organizations through FDIC-insured CD
deposits. Foundations may also elect
to guarantee the loan without moving
cash assets into a new deposit account
at ShoreBank. As an additional bonus
to foundations, the CD investment that
secures loans to nonprofits may also
qualify as a Program Related Investment.
Once nonprofit borrowers have
cash security, they can partner with
ShoreBank to take advantage of technical assistance programs that will help
them build capacity, skills and expertise
in cash management and financial and
infrastructure development.
For more information, interested
parties can contact the appropriate
ShoreBank representative:
Debbie Kobak, foundation market
strategist, 773-420-5133 or Deborah_
Kobak@SBK.com; or Joe Uttech, nonprofit market strategist, 773-420-5134
or Joseph_Uttech@SBK.com.

Revisiting the Community Reinvestment Act
The Federal Reserve Banks of
Boston and San Francisco have
announced the release of a new
publication on the Community
Reinvestment Act.
Revisiting the CRA: Perspectives
on the Future of the Community
Reinvestment Act offers facts and
opinions on the past and future of
CRA. The publication is intended
to foster a healthy debate on
the CRA and possible reforms.
Authors include academic
researchers, current and former

regulators, community development practitioners, and financial
services representatives.
In conjunction with the publication’s release, the Federal Reserve
recently convened a CRA discussion in Washington, D.C. Participants offered their views on how
best to update the CRA in light of
more than 30 years of changes in
the financial services industry. A
highlight of the discussion was a
speech by Federal Reserve Governor Elizabeth Duke who spoke

On

the

internet

at

extensively about the future of CRA
and its effectiveness. To read her
speech, go to www.federalreserve.
gov/newsevents/speech/
duke20090224a.htm.
Revisiting the CRA is available
for download from both the Boston and San Francisco web sites:
Boston web link: www.bos.frb.
org/commdev/cra/index.htm
San Francisco web link:
www.sf.frb.org/publications/
community/cra/index.html

#

www.stlouisfed.org

Bridges
Bridges is a publication of the Community Development Office of the Federal
Reserve Bank of St. Louis. It is intended
to inform bankers, community development organizations, representatives of
state and local government agencies and
others in the Eighth District about current issues and initiatives in community
and economic development. The Eighth
District includes the state of Arkansas
and parts of Illinois, Indiana, Kentucky,
Mississippi, Missouri and Tennessee.
Glenda Wilson
Assistant Vice President
and Managing Editor
314-444-8317
Yvonne Sparks
Senior Manager
314-444-8650
Linda Fischer
Editor
314-444-8979
Community Development staff
St. Louis:

Matthew Ashby
314-444-8891
Jean Morisseau-Kuni
314-444-8646
Eileen Wolfington
314-444-8308

Memphis:

Teresa Cheeks
901-579-4101
Kathy Moore Cowan
901-579-4103

Little Rock: Lyn Haralson
501-324-8240
Amy Simpkins
501-324-8268
Louisville:

Lisa Locke
502-568-9292
Faith Weekly
502-568-9216

The views expressed in Bridges are not
necessarily those of the Federal Reserve
Bank of St. Louis or the Federal Reserve
System. Material herein may be reprinted
or abstracted as long as Bridges is credited.
Please provide the editor with a copy of
any reprinted articles.
Free subscriptions and additional copies
are available by calling 314-444-8761 or
by e-mail to communitydevelopment@
stls.frb.org.

PRSRT STD
U.S. postage
paid
st. Louis, MO
permit No. 444

Post Office Box 442
St. Louis, MO 63166-0442

Calendar
APRIL
8
Community Colleges: A Route of Upward
Economic Mobility—Louisville, Ky.
Sponsor: Federal Reserve Bank of St. Louis—
Louisville Branch
502-568-9282
www.stlouisfed.org/community

16-17
Innovative Financial Services for the
Underserved—Washington, D.C.
Sponsor: Federal Reserve
www.kansascityfed.org/care2009

17
Promoting Economic Development in Rural
Areas and Small Towns During Tough Times:
Lessons from the Field—Memphis, Tenn.
Sponsors: University of Memphis and the
Federal Reserve Bank of St. Louis—
Memphis Branch
901-678-2161
www.memphis.edu/planning

17

Stabilizing Our Future—Memphis, Tenn.
Sponsors: Fair Housing Alliance of Greater
Memphis and the Federal Reserve Bank of
St. Louis—Memphis Branch
901-543-7393
http://spw-devel.com/fhagm/index.html

MAY
5-7
CDFA Development Finance Summit—
Pittsburgh, Pa.
Sponsor: Council of Development
Finance Agencies
216-920-3073
www.cdfa.net

12
Interagency CRA Workshop—Louisville, Ky.
Sponsor: Federal Reserve Bank of St. Louis—
Louisville Branch
502-568-9282
www.stlouisfed.org/community

JUNE

JULY

1-3

16-17

Reclaiming Vacant Properties—Louisville, Ky.
Sponsor: National Vacant Properties Campaign
http://reclaimingvacantproperties.org/
registration

The Fundamentals of Economic Development Finance Course—Washington, D.C.
Sponsor: Council of Development
Finance Agencies
www.cdfa.net

1-3
Underbanked Financial Services Forum—
Dallas, Texas
Sponsor: Center for Financial Services
Innovation
www.cfsinnovation.com/cfsi-producedevents.php

6
Creating Livable Communities—
Memphis, Tenn.
Sponsors: Coalition for Livable
Communities, Community Development
Council of Greater Memphis and the
Federal Reserve Bank of St. Louis—
Memphis Branch
901-725-8370

21-23
Housing Finance Institute—Chicago
Sponsor: Fannie Mae
www.efanniemae.com/lc/hfi/

26-29
Celebrating Community: Creating Hope in
Uncertain Times—Memphis, Tenn.
Sponsor: Community Development Society
www.comm-dev.org

AUGUST
3-7
Community Development Institute—
Conway, Ark.
Sponsor: Community Development
Institute Central
501-450-5372
www.uca.edu/cdi