Want to get Paid to Save for College? Start a Children's Savings Account
Education levels have long been closely associated with economic outcomes; and a college degree, in particular, is seen as an indiscriminate vehicle of economic mobility. While the U.S. Census Bureau finds that a young adult working full time with a high school diploma makes more than an equivalent young adult working full time without a high school diploma ($30,000 per year vs. $25,000 per year, respectively), a young adult with a bachelor's degree will, on average, make $49,900 per year. This dramatic wage difference means that a typical American with a bachelor's degree will make 66 percent more in lifetime earnings than the typical American with only a high school diploma.
Unfortunately, ballooning costs of a college education have become a de facto gatekeeper, repelling children from low-to-moderate income families from accessing one of the most effective drivers of economic mobility. This discourages parents from disadvantaged backgrounds who gradually lose the expectation that their children will attend college. As a result, the parents less likely to put aside resources for their children’s education and less so are motivated to encourage their children scholastically.
Luckily, evidence suggests that children with a college savings account with as little as $500 or less are three times more likely to attend college and four times more likely to graduate when compared to their peers without a college savings account. These accounts have multiple benefits, including flexibility to spend the money on any post-secondary education, such as traditional colleges, community college, or trade schools, and for tuition, fees, books, supplies, room and board, and required equipment. In addition, investing in a children’s savings account, such as a 529 college savings plan, provides significant tax advantages, which can include state income tax deductions, tax-free growth, and tax-free withdrawals.
While low-to-moderate income families will admittedly need to work harder in order to send their children to college, simply having a college savings account creates a family culture with strong college expectations. By creating a shared family objective to send their children to college, parents instill into their children at an early age the importance of excelling academically in order to be accepted into college and obtain necessary scholarships. As a response, experts from the asset building, community economic development, and education fields have worked hard to promote programs that utilize children’s savings accounts in order to increase the access of secondary education to children from low-to-moderate income households.
One example is College Kids - a program of the City of St. Louis’ Treasurer's Office, which began automatically opening a children’s savings account for the roughly 3,200 kindergarteners enrolled in city public and charter schools. Each account was seeded with an initial investment of $50, paid for by the money collected from parking fines and parking meters within the city. However, contributions made by business and philanthropic communities within the city have funded an additional opportunity for participating children to earn more money for their college savings account including $1 for every week of perfect attendance during the first year, dollar-for-dollar matched deposits up to $100, and an additional $50 if parents and guardians complete financial education courses in-person, online, or through the College Kids official smartphone app.
Although College Kids uniquely funds its investment in children's savings accounts using money collected through parking meters and parking violations, cities and programs across the nation enroll students and offer a free initial investment into college savings accounts. Examples include Maine which invests $500 into a college savings account for every newborn, the Treasurer of San Francisco provides $50 for every kindergartner with an additional $50 if they are eligible for free or reduced lunch, and Beyond Housing offers a $500 529 college savings account to kindergarten students in St. Louis’ high poverty Normandy school district.
In Indiana, families have several options to choose from including Promise Indiana which seeds children’s 529 college savings accounts with $25 and will match an additional $75 raised by the child’s “champions” within the community. 21st Century Scholars will pay full tuition for low-to-moderate income Indiana students if they attend an Indiana public university or college and will provide equivalent financial aid for students attending an Indiana private university. Finally Hammond, Indiana’s College Bound Program awards all Hammond, Indiana children up to a yearly $10,500 scholarship depending on how many years the child spent living in a home in Hammond, Indiana.
Although these initial seed investments may not be able to fully finance the costs of college, the programs are designed to raise awareness of the economic advantages of saving in a college savings account, instill smart money saving habits, and most importantly, inspires hope into low-and-moderate income families that college education for their children is obtainable if they begin saving as early as possible.
For instance, in addition to Beyond Housing’s initial $500 investment into a child’s college savings account, high school students are incentivized to save for college with a 3:1 matched savings program - meaning that for every $1 a student saves, Beyond Housing will invest $3. Shatera Davis, a recent graduate from the University of Missouri-St. Louis and recent beneficiary of Beyond Housing, took full advantage of Beyond Housing’s 3:1 matching program while in high school. Shatera applied for scholarships and when she got a job at a movie theater her junior year, began saving $20 of every paycheck in her college savings account. By her senior year, Shatera had $3,000 in her college savings account, primarily due to Beyond Housing’s matched savings program. Because of Beyond Housing, Shatera developed smart money savings habits that will serve her for the rest of her life and cultivated her desire to attend college with every matched deposit. In describing Beyond Housing, Shatera stated that, “It gave me a goal to aspire to. I’m raising all this money, and I want to do something with it.”
Additional evidence of the benefits of college savings accounts were found by researchers at Washington University and St. Louis University while studying infants in Oklahoma. The study gave a $1,000 college savings account to 1,350 randomly selected Oklahoma infants and encouraged parents to start saving for college by offering to double any contributions made, up to a limit. Conversely, the researchers followed a control group made up of a nearly equal number of infants and provided them with nothing. Ultimately, the study found that 17 percent of families given money added additional funds to their child’s college savings account compared to only 1 percent in the control group. Psychological benefits were also found. Families who were given a college savings account with a seeded investment had a more optimistic outlook on themselves and their child's future, higher college expectations, were more gentle with their children, and the children developed better social skills. These findings also showed a clear trend where the lowest income families and the most disadvantaged kids experienced stronger positive outcomes.
As a college education continues to gain importance, it is crucial that families from all socioeconomic backgrounds understand that their children have the ability to obtain a college degree. It is the responsibility of the entire community - friends, family members, and neighbors - to raise awareness of the benefits of children’s savings accounts and other similar programs that provide an initial seed investment or match contributions. Although the high costs of a college degree can be daunting, contributing to a children’s savings account is critical for incorporating college expectations into a child’s environment and ultimately providing an opportunity for economic mobility.