10/28/2014 05:53 pm ET Updated Dec 28, 2014

Student Debt v. Student Savings

The government has stacked the financial aid system in favor of debt. You can get a 10-year term loan with a four-year grace at cut rates with no credit check. Oh, and much of the loan may be forgiven. It's the sweetest loan in America.

By comparison, saving money for college seems a sucker's game. Interest rates are close to zero. The government provides little incentive toward saving for college. Worse, your savings might end up working against you. Colleges determine what each student will pay through price discrimination. If they find out how much money you have in the bank, they may well raise the tuition it charges you.

Despite the attractiveness of student loan terms, they have dangerous long-term effects. A loan is other people's money that you are legally obligated to return. The inability of millions of graduates to repay what they owe on time ends up burdening their lives. Pollsters find that it delays marriage, child bearing, home buying and more as debt collectors chase graduates all over the country, confiscating salaries, cars, and any asset not tied down. Economists claim that debt burden is a drag on national growth. Sociologists and psychologists warn about its effect on the entire millennial generation. They also worry that it is leading to more inequality as low-income students drop out of school with heavy debt.

By contrast, your savings are your own. You face no penalty for accruing or using them. Researchers have found that saving money works wonders on students. It increases students' aspirations and academic performance and helps keep students in college. In fact, a student with just $500 in their college savings account is three times more likely to go to college and four times more likely to graduate than a child without those savings.

Low-income families are highly motivated to save for college. Savings rates are in reverse proportion to income, meaning the poorer you are, the more you want to save. The motivation to attend college is strong as well: 95 percent of low-income students aspire to go college.

But aren't low-income families too poor to save? Surprisingly there are a lot of indicators that show these families possess disposable income after paying for necessities. Let's look at two of these indicators: remittances and the lottery. Last year, immigrants sent $130 billion back to their home countries while the poor in general accounted for much of the $60 billion in lottery ticket purchases. With effective incentives, low-income families could save some of this money towards their children's college costs.

So, borrow or save? With tuition so high, most of us have to do both. Save as much as we can and borrow as little as we must. But first we have to learn. To figure out the true cost of college, we have to go tuition shopping, and not just for the sticker price, but also for the discounts that colleges give in order to fill their desks. To figure out how to pay for college, we need to learn about scholarships, grants, work study programs, and private and public loans. And we need to do all of this while saving our money and figuring out how to make our savings grow. To accomplish this, people are starting to save earlier and earlier in college savings accounts that they open for their children at birth.

Tough as this all is, it's better than having to learn the bankruptcy code for debtors.

States With Highest Average Student Debt - TICAS - Class Of 2012