Children’s Development Accounts (Children's Savings Accounts) (Children’s Savings Accounts)
- William Elliot IIIWilliam Elliot IIIAssociate Professor, Director of the Assets and Education Initiative, School of Social Welfare, University of Kansas
- and Melinda LewisMelinda LewisMelinda Lewis, LMSW, received her Master of Social Work degree from Washington University in St. Louis, MO. She worked as a nonprofit policy advocate, grassroots organizer, and community researcher for several years and now teaches social policy, organizational theory, global poverty, and community practice courses in the School of Social Welfare at the University of Kansas. She also brings her more than a decade of policy analysis, applied research, and advocacy experience to nonprofit organizations throughout the state of Kansas through her consulting practice—Melinda K. Lewis, LLC—where her work focuses on advocacy capacity-building for social service organizations, advocacy evaluation, and strategies to integrate advocacy into direct services. She also serves as a public policy consultant to nonprofit organizations in the areas of immigrant rights, anti-poverty, economic equity, and human services, monitoring legislative developments and advising nonprofit executives in advocacy strategies and messaging. She is a consultant to a social work policy textbook series and provides advocacy expertise to a university-affiliated research initiative. She also blogs actively about nonprofit organizations and advocacy issues at www.melindaklewis.com and can be found on Twitter @melindaklewis. Her areas of scholarly interest and practice include strategies for effective policy advocacy by nonprofit organizations, advocacy evaluation, and advocacy capacity-building for individuals and social service organizations.
Children’s Development Accounts (CDAs) are a policy vehicle for allocating intellectual and financial resources to low- and moderate-income children. Unlike basic savings accounts, CDAs leverage investments by individuals, families, and, sometimes, third parties. By giving families savings incentives and building universal and progressive vehicles for saving, CDAs may improve the financial health of low-income families and the educational outcomes of their children, reducing or even eliminating asset advantages currently enjoyed by wealthier families.
- Child and Adolescent Social Work
- Social Policy and Advocacy
From Individual Development Accounts to Children’s Development Accounts
New directions for theory, research, and policy on addressing poverty emerged with the publication of Michael Sherraden’s (1991) book, Assets and the Poor, which distinguished assets from income in terms of their impact on well-being, introducing the concept of asset-based social policies. The introduction of asset building into the applied social sciences initiated policy demonstrations and research over the next 20 years, leading to documentation of promising effects of assets in the lives of low-income Americans and enactment of asset-building programs.
Initially, much of this theory and evidence focused on families’ and households’ asset building and well-being, treating children as dependents with little or no agency of their own. The American Dream Demonstration (ADD) began in 1997, initiated by the Corporation for Enterprise Development, to test whether lower-income families and households could build assets in matched savings accounts, referred to as Individual Development Accounts (IDAs). The five-year ADD demonstration concluded with promising results that produced insights that have informed the design of other asset building interventions (Richards & Thyer, 2011). During that same year, the Assets for Independence (AFI) Act was passed into law, which established a federal grant program to provide nonprofits and government agencies with funds to offer IDAs to lower-income families and households. Currently, there are over 200 AFI-supported IDA programs nationwide (U.S. Department of Health and Human Services, 2012). Shifts in thinking about poverty and asset building, catalyzed in part through the realization of positive outcomes in asset-building programs, have led to integrating asset approaches throughout U.S. social policy, in arenas such as subsidized housing, child support enforcement, and refugee resettlement.
IDAs were originally proposed as accounts that would be automatically available to every citizen in the United States, accrue earnings, and be restricted to preapproved uses such as home ownership, education, or small business. Account holders whose annual incomes fell below certain thresholds would be eligible for subsidies to incentivize their saving and build assets. Sherraden initially proposed that IDAs would be opened early in life—ideally, at birth—to promote asset building and well-being across the life span. Sherraden writes, “Because asset-based welfare is a long-term concept, some of the best applications of IDAs would be for young people. Young people would be given specific information about their IDAs from a very early age, would be encouraged to participate in investment decisions for the accounts, and would begin planning for use of the accounts in the years ahead” (Sherraden, 1991, p. 222). As implemented, however, in part due to funding constraints and the need to produce demonstrable outcomes on timelines acceptable to philanthropic and government investors, IDAs have continued as short-term programs to assist families and households in achieving home ownership, education, enterprise, or other development goals.
This gap between IDA proposals as designed and their pragmatically-constrained implementation created an opening for another savings vehicle that young people could access—Children’s Development Accounts (CDAs). In research and policy discussions CDA is used synonymously with Children’s Savings Account (CSA). According to Loke and Sherraden (2009), an advantage of asset-based policies targeting children is that they “may have a multiplier effect by engaging the larger family in the asset-accumulation process. In addition to children saving and learning about saving, members of the extended family may learn from this process, and parental expectations for children may also be positively affected” (p. 119). CDAs have been proposed as a promising strategy that promotes low-income children’s savings, asset accumulation, and development of financial, social, and human capital (Boshara, 2003; Goldberg, 2005).
Growing interest in CDAs in the early 2000s led to the first national test of CDAs through the Saving for Education, Entrepreneurship, and Down payment (SEED) initiative. Beginning in 2003, SEED was a 4-year demonstration project, in which over 1,300 low-income children and youth in 12 locations across the country received matched savings accounts and financial education. The SEED for Oklahoma Kids (SEED OK) research experiment tests the effects of CDAs opened at birth in a full population. In the first U.S. rigorous research on the principles of universal CDA access and automatic account opening, the SEED OK experimental sample was drawn randomly from birth records provided by the Oklahoma State Department of Health for all infants born during certain periods in 2007. By combining random selection from a full population of births, random assignment, and longitudinal data collection, SEED OK is well-positioned to answer key questions about effectiveness of universal and progressive CDAs for a general population (Nam, Kim, Clancy, Zager, & Sherraden, 2013).
CDA Design and Implementation
CDAs are savings vehicles, most commonly designed for higher education savings, that often incorporate specific incentives and explicit structures to encourage savings by disadvantaged youth and families who otherwise may not have equitable access to financial institutions. While they have specifically designed features for encouraging saving among disadvantaged youth and families, they are meant to be universal programs that serve all young people. CDAs usually allow deposits from children, their parents and other relatives, as well as third parties, such as scholarship programs. Ideally these investments are leveraged with an initial deposit and/or matching funds adding public or philanthropic funds to families’ savings, usually on a ratio ranging from 1:1 to 5:1, to extend meaningful incentives for saving and support for building balances to low-income savers that are already available to higher-income households through tax benefits.
Conceivably, CDAs could be held in traditional banks, credit unions, or as part of investment products such as education IRAs. However, researchers studying assets and education suggest that individual instruments in the market place do not provide a policy structure that would enable CDAs to be universal and progressive at scale. Savings plans, such as state-sponsored college savings (529) plans, allow for universal outreach and enrollment, progressive features, and the efficiency of a centralized accounting system (Clancy, Orszag, & Sherraden, 2004). 529 plans provide a policy structure that enables small dollar and high dollar accounts to be pooled, reducing the cost associated with carrying small dollar accounts. They also have the potential for providing all children at birth with an account because the accounting is overseen by the state, which makes it possible to identify who has joined and who has not (Clancy et al).
Centralized accounting in state-sponsored 529 plans also allows states to offer a match or incentives to low- and moderate-income participants. Many states have instituted features of CDAs into their state-sponsored 529 plans. As the largest state-wide CDA program, Maine’s Harold Alfond College Challenge has the nation’s most expansive incentive policy, with no income restriction for initial $500 grants, available to start 529 plans before a child’s first birthday, and matches for lower-income families’ contributions dollar-for-dollar (Harold Alfond Foundation, 2013). In other states, subsidies are targeted towards lower-income savers (College Savings Plan Network, n.d.), in part as an effort to parallel asset-building subsidies provided through the tax code to wealthier savers (Boshara, 2003). The states have been very generative in introducing inclusive 529 policy features. These innovations inform the development of universal and progressive approaches.
States can also leverage opportunities to align children’s savings initiatives with other public policies, including taxation, financial aid for higher education, and child support and public assistance, increasing capacity to deliver asset accumulation approaches within the current policy footprint.
Withdrawals from CDAs are normally permitted for higher education expenses after children turn 18 and, post-college graduation, for other asset investments or retirement savings. CDA programs generally also include financial education, to build human capital alongside financial deposits. Financial education is widely regarded as a component of economic security, and CDAs provide a vehicle with which to engage children in their financial decisions (Cramer & Newville, 2009). To facilitate the development of this financial capability while supporting attainment of positive educational outcomes, some scholars suggest a tiered structure for CDAs, wherein children could access some of their savings before college enrollment for educational investments such as computers, school activities, and supplemental coursework.
CDAs and Education
While CDAs are meant to promote asset accumulation for homeownership, retirement, and capitalizing a business venture, there are also important reasons for focusing CDAs on higher education. Of 801 registered voters surveyed a few years ago, 40% believed that making education more affordable should be the top priority of government. No other priority garnered favor from a larger proportion of study participants (Goldberg, Friedman, & Boshara, 2010). Similarly, 58% of registered voters in the study thought that the most effective use for CDAs would be to help families save for college. Policymaker interest in CDAs, similarly, is largely tied to growing concern about outcomes within higher education today, particularly the effective return on investment given the rising cost of college and increasing reliance on student debt.
Given these findings, and open questions about how to structure CDAs for the greatest return on investment, some practitioners have suggested CDAs as complements to the current financial aid system, rather than wholesale replacements of current policies (AEDI, 2013). Over the long term, CDAs have the potential to leverage existing policy structures for greater asset equity, while potentially realizing positive educational and financial outcomes for disadvantaged children.
How All Students Can Have Accounts
Identifying or constructing a system capable of delivering universal account access is essential, particularly in light of research that suggests that, even absent significant balances, account ownership may be associated with positive educational outcomes—including college enrollment and graduation—among disadvantaged students (Elliott, Song, & Nam, 2013). In the current financial services system, low-income households are clearly underserved, particularly as most incentives for asset accumulation—interest deductions for traditional mortgages, deductions for retirement savings in Individual Retirement Accounts and 401(k)s, and deductions for 529 deposits in many states—are primarily delivered through the tax code. Because few of these incentives are refundable, the vast majority of the benefits accrue to those with incomes high enough to trigger tax liabilities. While asset accumulation of wealthier individuals is helped in this way, low-income households face a savings disincentive in many means-tested public assistance programs, including need-based financial aid. CDA policy should include meaningful account access, align with tax and welfare policy, and rely on proven tools for facilitation of student saving, including automatic or opt-out account opening, minimal fees, and progressive subsidization through initial deposits and matches.
How CDAs May Positively Affect Children and Youth
Asset accumulation—through CDAs or other mechanisms, including parental wealth—is associated with greater academic achievement and preparation for college (for example, Campbell, 2006), higher college enrollment rates, more successful college completion (Zhan & Sherraden, 2011), and a more diversified asset portfolio in young adulthood (Friedline & Song, 2013). CDAs provide disadvantaged children and families, who otherwise may not have equitable access to asset accumulation vehicles, ways in which to build a minimum level of assets needed to negotiate with institutions in a capitalistic market designed to respond to assets.
CDAs have been shown in research to provide children with tangible financial assets with which to finance higher education, and also to affect educational outcomes. Some researchers theorize that these effects occur through a process known as institutional facilitation, whereby individuals’ attitudes, expectations, and behaviors are shaped through interactions with supportive institutions (AEDI, 2013). In this case, when children experience institutions that reinforce a normative expectation of college graduation (just about all children aspire to graduate from college), their orientation towards academic achievement is bolstered and they begin to act in ways congruent with their “college-bound” identity (Oyserman, 2013). In turn, this leads to more savings, which further bolsters expectations and achievement (AEDI, 2013). Conversely, when low-income students learn that their families, schools, neighborhoods, and our financial aid system are less-than-equipped to support their educational outcomes, their self-efficacy (“I can do” belief) may be compromised (Bandura, 1997), resulting in disengagement from school performance (Ogbu & Simons, 1998).
Further, CDAs may empower children, particularly low-income children, to build a minimum level of assets required for negotiating with, influencing, controlling, and holding accountable institutions in their lives, including the higher education institutions that hold the greatest promise for facilitating students’ future economic mobility. They do this by providing low-income children with a set of incentives and structures that work for them. In contrast, savings accounts found at your local bank rely on a narrow incentive—interest paid on assets saved—that serve to benefit those who start off with more assets. Therefore, CDAs can be thought of as a policy vehicle for allocating intellectual (primarily financial knowledge) and material resources to low- and moderate-income children to change the distributional consequences of savings policies so that low-income children can successfully participate.
Research suggests that, by providing children with a strategy to pay for college, CDAs can interrupt these expectations. The experience of saving in a CDA may send a new signal to disadvantaged children—college is near (thus requiring action now) and within the realm of their future possibilities. Fostering this identity, in turn, results in improved educational outcomes on a variety of measures prior to, during, and after college (AEDI, 2013).
Assets build children’s and parents expectations about college and influence children’s engagement with school and their parents’ savings behavior and academic support (AEDI, 2013). These effects may help to reduce the achievement gap between wealthy and disadvantaged students by increasing the likelihood that all students are qualified to enroll in college and academically prepared to succeed in college courses.
Asset holdings may influence the likelihood that a student enrolls in college (Jez, 2008) immediately following high school graduation (Zhan & Sherraden, 2011) and shapes institution choice (Charles, Roscigno, & Torres, 2007), itself a factor in subsequent college graduation.
Low- and moderate-income (below $50,000) children who have even a small amount of savings ($1 to $499) designated for school are over four and half times more likely to graduate from college than low- and moderate-income children with no savings account (Elliott et al., 2013).
Post-College Financial Health
Students who graduate college with a savings history are more likely to continue accumulating assets as they age into young adulthood, particularly if they have been able to avoid high-dollar student loans through the use of their assets (Hiltonsmith, 2013; Friedline & Song, 2013). Conversely, when students graduate with high levels of student debt, research suggests that they may delay financial milestones, including car purchase and home ownership (Stone, Van Horn, & Zukin, 2012). Because these big-ticket purchases are often financed, young adults may have to wait longer to build assets if their balance sheets are impacted by outstanding student loans credit (Oliver & Shapiro, 2006). For example, the average single student debtor would have to pay almost 50% of monthly income toward student loans and mortgage payments (Mishory & O’Sullivan, 2012).
Ascent of CDA’s as a Policy Tool
CDAs are relevant in today’s policy landscape and appear to align well with the ideal of personal responsibility—which is, today, the overwhelming narrative in education financing—because they require students and their families to help pay for college by saving.
However, beyond the more immediate benefits of securing savings with which to finance college, much of the interest in creating CDA policies is based on their potential to change how children think and act. This is supported by research that shows that even small amounts of savings are related to increases in children’s education outcomes (Elliott, et al., 2013). Thus, CDAs may have effects that go beyond saving and asset accumulation, making them qualitatively different from mere savings vehicles. CDAs are not just about the money.
In the past, education research has given considerable attention to income and excluded assets as a key variable in making use of economic capital (for example, Axinn, Duncan, & Thornton, 1997; Brooks-Gunn & Duncan, 1997; Duncan, Brooks-Gunn, & Smith, 1998). However, in the last several years, the education and policy fields have shown increased interest in the possibilities of using assets to improve children’s educational outcomes.
This growing interest is reflected, for example, in the U.S. Department of Education’s (ED) increasing interest in using children’s savings as a way to improve college outcomes, particularly among low-income and minority children. In November 2010, ED, the Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA) established a new federal partnership to encourage schools, financial institutions, federal grantees, and other stakeholders to work together to increase financial literacy, access to federally insured bank accounts, and savings among students and families across the country (ACSFA, 2006).
The next year ED announced an invitational priority as part of the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP). This invitational priority reflected Secretary of Education Arne Duncan’s interest in financial literacy and savings as part of ED’s plan for ensuring secondary school completion and postsecondary education enrollment of GEAR UP students. Out of the 68 grants awarded in 2011, 42 included some aspect of financial literacy or savings in their grant application.
In May 2012, ED announced a new college savings account research demonstration project, which was to be implemented within the GEAR UP program. Ultimately, this program was canceled when administrative challenges prohibited programs from initiating projects. Regardless, the interest shown by ED in savings as a way to improve educational outcomes sparked additional momentum among many cities and states regarding the potential of asset initiatives to address educational disparities and signaled that federal agencies with the capacity to take CDAs to scale could be engaged in the task of facilitating account access.
State and Local Experience with CDAs
As states and localities experience the widening achievement gap in educational attainment, witness the college affordability crisis and its effects on achievement, and struggle to provide disadvantaged children with equitable access to higher education, some have crafted their own CDA policies in the absence of federal action. For example, San Francisco, CA, has a Kindergarten-to-College initiative, which provides CDAs—and a $50 initial deposit—to any kindergartener in the public school system. Cuyahoga County, OH, announced a similar program early in 2013, and State Treasurer Kate Marshall is launching the Nevada college Kick Start pilot program in 2013 that sets up 529 college savings accounts for 3,000 kindergartners in 13 rural counties, with plans to expand statewide. Students will receive an initial deposit of $50 in their account. Other cities, states, and private initiatives have already been implemented or are in the planning process for starting up accounts in 2014. Moreover, CDA-like proposals, with varying details regarding account eligibility, match structure, and accompanying financial education, have also been proposed by elected officials, education leaders, and candidates in jurisdictions around the country, foreshadowing likely continued CDA development in the years to come.
Enactment of CDA Policies Faces a Number of Challenges
CDAs face practical challenges to their adoption as part of the financial aid system in America. For example, coming out of the Great Recession, there are limited public funds available for developing CDA programs at the local, state, or national levels. However, while developing a national CDA program requires concerted policy commitment, it does not necessarily require a tremendous infusion of additional resources. It is possible, for example, to fund dedicated accounts for all U.S. children at birth for $3.25 billion in the first year (Cramer, 2006). In comparison, the federal cost of student loans (the subsidy provided within Stafford Loans, GradPLUS, and ParentPLUS programs) is expected to be $36.5 billion in 2013 (Congressional Budget Office, 2012). Therefore, if even a small amount of funds already being spent on student loans were diverted to funding CDAs, no new funding may be needed.
Inadequate public resources are only one of the challenges in moving CDAs from pilot programs to universal asset-building opportunities, however. There is also a lack of account products, apart from state sponsored 529s, that work for facilitating universal access, and 529s would need to be modified in significant ways if they are to work equitably for disadvantaged students and families.
Beyond the practical challenge of how to fund CDA programs there are also ideological challenges. For example, some educators and policymakers fear any criticism of student loans could be a ruse for decreasing access to financial aid and, thus, to higher education. Others argue that the amount that most low-income children would be able to accumulate in a CDA is insufficient to truly affect students’ educational trajectories, or that the net improvement in welfare would be negligible given disincentives for savings in current means-based assistance. While there is significant bipartisan support for CDAs, there are also criticisms on the political left and the political right (Hahn & Price, 2008). Some on the left view asset-based financial aid approaches as placing too much of the burden of financial preparation for college on the backs of low-income students and their families and as a distraction from other needed reforms, including direct investments in early childhood education and stronger public schools (Hahn & Price, 2008). There are concerns that low wages, declining public assistance, and other strains on low-income families make it too difficult for families to save even meager amounts from their limited incomes. Some voices on the right argue that the government should not subsidize education and that CDAs represent a potentially significant new entitlement program.
CDAs Around the World
While CDA demonstrations are proliferating in the United States, CDA policy is more established in many countries outside the United States, although, around the world, CDAs are primarily viewed as anti-poverty policy, rather than investments in educational achievement (Goldberg et al., 2010; Meyer, Masa, & Zimmerman, 2010). Canada, Singapore, and the United Kingdom have instituted national CDA policies (Cheung & Delavega, 2012). 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% match, with an additional match for 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. Potentially important for informing CDA policy development in the United States, Canada has recently documented increasing participation and student success in using accumulated assets for higher education, although the Canadian government acknowledges challenges in working towards universal asset empowerment (2012 CESP Annual Statistical Review, 2013). Singapore provides an account to all children 0–6 years of age. Savings accumulated by age 6 are matched at a 1:1 ratio up to a match 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 account can be used for childcare, education-related expenses, and medical expenses; unused funds can be transferred to a college savings account when the child turns 7.
The United Kingdom created the Child Trust Fund to provide 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 top-up of £250 (or £500 for lower-income children) was provided at age 7, but the UK’s program does not provide a savings match. With pressure from budget cuts, the United Kingdom ended contributions into the accounts in January 2011, and new accounts cannot be created. Junior Individual Savings Accounts (ISAs) are tax-advantaged savings accounts that were invented to replace the Child Trust Fund in 2011; however, Junior ISAs do not have automatic or universal enrollment, initial deposits, matched contributions, or restrictions on how savings can be used. Without these important incentives and explicit structures to encourage saving, Junior ISAs cannot truly be called CDAs and, instead, are not much different than other tax-advantaged savings accounts mostly accessible to and used by wealthy families.
Key Criteria for Establishing a National CDA Policy in the United States
No national CDA policy currently exists in the United States. However, there is broad consensus that, to realize the greatest likelihood of positive educational outcomes, Child Development Account policies should be universal, progressive, lifelong, and asset-building (Cramer & Newville, 2009). Universal accounts would include every child of a given age. Many envision this as an account opening at birth, although others argue that there are reasons to tie account initiation to other academic or life milestones. The rationale for universal account provision, which would increase the cost of a CDA policy and direct policymakers to specific options for account structure, is to ensure that all children have an account.
Universality also means inclusiveness, or meaningful access to asset accumulation by low-income individuals who otherwise may not have truly equitable opportunities (Loke & Sherraden, 2009). This speaks to the need for features such as automatic (opt-out) enrollment, concerted outreach and education strategies, and special incentives for lower-income households. While CDAs are most closely tied to higher education goals, because part of the intention of CDA policy is to create a system that is flexible and robust enough to carry individuals through their asset-building needs at various points in their development, CDA programs could keep individuals connected to financial institutions and facilitate their savings from birth to death (Cramer & Newville, 2009). Such a structure would capitalize accounts capable of being savings vehicles for young children, whose dominant asset need and priority is higher education, but also for homeownership and other asset purchases post-graduation, and for retirement savings and continuing education needs for oneself and one’s children. These evolving purposes are another point of distinction between CDAs as envisioned and currently available savings accounts. As policies that typically include matches and other incentives designed to increase asset accumulation by low-income children and families, CDAs are progressive.
To account for these realities, future CDA policy may focus on creating advantages for lower-income households to accumulate assets. There is ample evidence that low-income and people of color fare poorly, comparatively, in today’s asset policy structure, and that children in these households suffer educational disadvantages as a result (for example, Conley, 1999). Finally, CDAs are best understood as vehicles for development, not just to build habits of savings (Cramer, 2010).
When savings are used for development purposes—education, training home ownership, enterprise—positive outcomes may be greater. Also, political support for CDAs may be greater when the allowable uses are restricted to development purposes such as education, because this is viewed as a good public investment. Accordingly, current legislative proposals and emerging pilot programs often place some constraints on use of account balances.
While no national CDA policy has been adopted in America as of yet, a number of policies have been proposed. Some examples are the Young Saver’s Accounts, 401 Kids, Baby Bonds, and Plus Accounts. The most notable and the one that may have most of the desired features discussed above, however, is the America Saving for Personal Investment, Retirement, and Education (ASPIRE) Act. It was introduced in Congress in 2007 and reintroduced in 2010. ASPIRE would create “KIDS Accounts,” or a savings account for every newborn, with an initial $500 deposit, along with opportunities for financial education. Youth living in households with incomes below the national median would be eligible for an additional contribution of up to $500 at birth and a savings incentive of $500 per year in matching funds for amounts saved in accounts. When account holders turn 18, they would be permitted to make tax-free withdrawals for costs associated with post-secondary education, first-time home purchase, and retirement security.
Policy Options for Administering a National CDA System
As stated earlier, for a national CDA system to be universal and progressive, a savings plan policy structure is needed. Emerging research on the power of assets for shaping educational expectations and subsequent outcomes suggests real symbolic value in the creation of accounts available to every child, including the important message that college is a likelihood for all talented American students, and the development of a college-saver identity (which involves not only expectations, but also a strategy for paying for college) (AEDI, 2013).
Unlike individual market solutions (for example, education IRAs), savings plans allow for expression of public will, inclusion of the whole population, progressive funding features, and a centralized accounting system (Clancy et al., 2004). As such, state sponsored 529s provide the most likely vehicle for developing an inclusive national savings plan. To accomplish this, considerable changes would have to occur to many state sponsored 529 plans to be an appropriate savings vehicle for low-income children and families. Fortunately, states have already taken steps in this direction. In recent years, more inclusive 529 policy innovations have emerged in many states. These may inform other states and catalyze movement toward a national CDA policy.
At this juncture in the development of the CDA field, there are potential roles for other entities, too, including for schools, related to the provision of accompanying financial education, and for financial aid programs such as the Pell Grant, which could incorporate a savings component.
Potential Flows of Funds
Impressed by the potential for significant advances in attainment of educational outcomes, advocates and policymakers have proposed various policy measures to provide low-income children, in particular, with access to savings vehicles:
Federal grant programs (for example, ASPIRE)
Tax advantaged savings accounts (for example, 529 reform)
Refundable tax credit for individuals (for example, Saver’s Credit expansion)
Tax credits for financial institutions (for example, Savings for Working Families but re-geared for CSAs).
Savings-focused reforms to existing education aid programs (for example, Pell or American Opportunity Tax Credit)
Incorporation of savings into college-preparatory and/or scholarship programs (GEAR UP, local initiatives)
Incorporation of savings components into existing public assistance programs (such as Family Self-Sufficiency within HUD, child support enforcement)
401Kids—a Roth-style tax-preferred savings account for higher education
Financial Security Credit—a refundable tax credit for savings into eligible accounts, including higher education savings accounts
Lifelong Learning Accounts Act—a refundable tax credit for higher education savings
Others, such as the American Dream Accounts legislation, would create national structures for children’s savings, without matches or other incentives. These proposals reflect the ongoing debate about the best policy options through which to deliver a national CDA programs and the extent to which they should be CDAs, per se, instead of “just” savings accounts.
Several proposals look to amend existing federal savings or education policies to add support for CDAs. The Savings Enhancement for Education in College Act, for instance, would expand the existing retirement-only Saver’s Credit to make deposits into 529 accounts eligible for tax credit. In 2008, the Center for Social Development and the New America Foundation proposed several reforms to state sponsored 529 college saving accounts to make them more useful for low-income families. In 2013, the College Board recommended that Pell Grants be reimagined as an early commitment program to simulate the effects of a CDAs within the framework of a means-tested grant (ACSFA, 2008; Schwartz, 2008). Sparking interest in an additional possible source of funding for wide-scale reform, the Center for Law and Social Policy (CLASP) has proposed several improvements to the existing system of tax-based aid for higher education, which constitutes roughly a quarter of all federal student aid. CLASP has not explicitly recommended a child savings reform but has instead focused on front-loading the refundability of the largest higher education tax credit, the American Opportunity Tax Credit.
Research Questions to Guide Policy Development
Because CDAs are a still-evolving policy innovation within the dynamic field of financial aid, there are unresolved research questions that should be addressed as national implementation is approached. These include:
What policy structure will facilitate inclusive or perhaps even universal CDA enrollment and participation?
Which existing savings vehicles are best calibrated to facilitate real asset accumulation among low-income children, in particular?
What, precisely, are the savings amounts needed to realize positive outcomes, and how sensitive are these thresholds to increases in college costs?
With limited resources, should incentives be targeted to achievement of savings goals or educational milestones?
To reap maximum psychological and behavioral effects, do students need to manage their own accounts directly, or is it enough to have savings held in their names and restricted for college?
Do savings effects persist throughout students’ lives? Are they transmitted across generations?
To what extent can the tax system be used to deliver subsidies and incentives to low-income families?
How can asset research inform financial aid practices, which might be structured more as promise programs to aid in college preparation?
While questions remain, CDAs appear to be a promising policy innovation being discussed by social workers and others within the financial aid literature and more broadly within the poverty reduction literature in America today.
We would like to thank Michael Sherraden, Margaret Clancy, Reid Cramer, Rachel Black, Ida Rademacher, Shira Markoff, and Ezra Levin for their suggestions in writing this article.
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