By Noah Lightman, Manager of Children’s Savings Account Initiatives, ScholarShare Investment Board
June 30, 2021
When I was in first grade, my teacher asked the class what we would do if magically we each had $1,000. While answers varied, I can assure you that no one wanted to put their imaginary money in a college savings account.
Although the concept of children’s savings accounts (CSA) is relatively new, its effects are significant. Two recent studies by the Center for Social Development at Washington University in St. Louis presented findings from the SEED for Oklahoma Kids experiment which launched in 2007. The study follows families from different backgrounds, half of whom were given $1,000 designated for their newborn child in a state-owned 529 college savings account. When the children were around 12 years of age, researchers discovered the following:
- The initial $1,000 seed deposit almost doubled in the state-owned 529 account.
- The percentage of low-income children and children of color with 529 assets grew significantly.
- The accounts led to new 529 parent savers while also increasing the diversity of savers.
- Parents were over five times more likely to open an individual 529 account for their child.
- Families were more likely to plan for the overall costs of higher education.
The SEED for Oklahoma Kids experiment set the stage for a national CSA movement. Leaders in the public and private sector embraced the positive impact of these investments while also acknowledging that desired expectations may take years to unfold.
As a result, at least six states and numerous local governments have begun the development or implementation of their own CSA program within the last decade. Although these programs may differ by enrollment structures and program deposit amounts, many share common characteristics, including restricting withdrawals for higher education expenses; using a centralized financial platform such as a 529 plan; offering financial incentives for engaging with the program, including greater deposits for low-income households; and, presenting to families the investment growth potential of money placed in their CSA.
Each CSA program may not be able to provide every child with $1,000 at the onset, but academics have found that children with even $500 or less designated for college savings are three times more likely to enroll in college and nearly four times more likely to graduate than children with no savings.
While participation in a CSA program is no guarantee that students won’t have debt when they graduate college, CSA programs can encourage families to develop strategies to make higher education more affordable. This is particularly important for the middle-class who often do not qualify for financial aid. Likewise, CSAs create lifelong lessons by introducing the principles of savings, finance, and compound growth.
Unfortunately, social policy for marginalized households sometimes focuses on short-term solutions while neglecting asset-building for long-term goals, such as college savings. As we examine policies to recover from the economic consequences of the COVID-19 pandemic, CSA programs across the country are working to correct this deficiency by providing families a starting point to build assets and develop a pattern of saving early, instilling confidence that affording higher education is within reach.
So while $1,000 may not have been enough to fully finance my desired first grade trip to outer space (why not dream big?), saving for higher education can certainly help anyone shoot for the moon. With uncertain economic times ahead, CSAs will assist families with their liftoff to higher education.
About the Author
Noah Lightman is the Manager of Children’s Savings Account Initiatives with the ScholarShare Investment Board, the state agency that administers California’s ScholarShare 529 college savings plan, and oversees the development of its upcoming statewide CSA program, the California Kids Investment and Development Savings Program (CalKIDS).