Center on Assets, Education, and Inclusion

In the last few decades, children's savings accounts (CSAs) have emerged as a strategy for preparing children for their educational and financial futures, especially for those from low- to moderate-income households. This means a savings account is opened early in life and any accumulated savings can be used toward children's future expenses like college tuition or small business entrepreneurship. One question regarding CSA design is whether ownership over accounts should reside with children or parents. In other words, do children benefit educationally and financially when CSAs are in their names, or is it sufficient for parents to save on their children's behalf? This brief presents findings of the effects on children's financial futures when savings accounts are opened in their names. Findings validate the design of many existing CSAs and point to the need to reexamine policies that may discourage families from establishing accounts in children’s names.

CSAs should include every child of a given age—ideally, at birth, although there are certainly reasons to tie additional incentives to accomplishment of specific academic or life milestones. Including everyone in CSAs underscores the stake we all have in each other’s prosperity, which is particularly true when it comes to global competitiveness and the educational outcomes CSAs can deliver. Universality also means inclusiveness, or meaningful access to asset accumulation by low-income individuals who otherwise may not have truly equitable opportunities.1 This speaks to the need for features such as automatic enrollment (opt-out), concerted outreach and education strategies, and special incentives for lower-income households, in order to avoid a ‘universal’ CDA policy turning into another asset development investment that disproportionately benefits those already advantaged.

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Minority and low-income children have many of the same aspirations for college as more advantaged children, but their enrollment and completion rates lag. This contradiction between high expectations and constrained achievement provides one of the more vivid illustrations of failure of the education path to act as the great equalizer. Addressing the educational challenges facing disadvantaged children will require innovations that can create greater equality of opportunity, such that their innate talents and academic effort translate into meaningful access to college. Evidence points to differences in asset accumulation as part of the key to explaining educational gaps. Children’s savings for school, even at very low levels, may empower low-income high school graduates to enter and succeed in college. Some of these effects may be a result of children’s changed engagement with institutions, which they see as supportive of their aspirations and consistent with their normative expectations. Children’s Savings Accounts (CSAs) can be a step toward changing the educational trajectories of disadvantaged, but talented, children in the U.S.

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Student debt is understood as an investment in expanding access to higher education, but there is some evidence that debt may work at cross-purposes by impairing or, at least, failing to support, educational outcomes.

For some students, the prospect of high-dollar student debt may discourage enrollment.

Low-income students who are loan-averse may actually decide not to enroll in college at all in order to avoid debt.

Debt over a certain amount (about $10,000) may depress graduation rates and harm post-college financial security, especially for those in the bottom 75% of the income distribution.

As the student debt threshold level increases so too does the dropout level, particularly for poor and minority students.

Higher student loan debt in the first year of college may be associated with lower probabilities of graduating from college among low-income and black students.

Studies suggest that a $1,000 increase in student debt is associated with a 3% increase in students dropping out of college.

Student debt is an ineffective tool with which to tackle the U.S.’ greatest educational challenge: helping students prepare to succeed academically in college. Unlike college savings programs, the prospect of costly student debt does not motivate students to prepare for college.

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Traditional theories of savings would lead observers to believe that low-income children are unlikely to accumulate any assets, given their limited incomes and their parents’ limited ability to transmit financial knowledge and skills. However, empirical evidence and institutional theory suggest that low-income children can indeed save and that crafting structures that can facilitate their saving—including Children’s Savings Accounts (CSAs)—may help savings to serve as a pathway to economic mobility for these disadvantaged youth.

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From a Debt-Dependent to an Asset-Based Financial Aid Model Institutional Facilitation and CSA Effects CSAs As An Early Commitment Financial Aid Strategy From Disadvantaged Student to College Graduates: The Role of CSAs Designing for Success Investing In Our Future Children’s Savings Accounts and a 21st Century Financial Aid System Executive Summary

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In addition to helping children finance college, much of the interest in creating asset-building policies for children is based on their potential for changing how children think and act. An institutional facilitation theory can help explain how assets may influence children’s expectations for college and in turn, their educational outcomes. This theoretical understanding can also guide CSA policy, to maximize the potential for positive impact on children’s educations.

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From a Debt-Dependent to an Asset-Based Financial Aid Model CSAs As An Early Commitment Financial Aid Strategy From Disadvantaged Student to College Graduates: The Role of CSAs How CSAs Facilitate Saving and Asset Accumulation Designing for Success Investing In Our Future Children’s Savings Accounts and a 21st Century Financial Aid System Executive Summary

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College Savings Accounts: More Degrees, Less Debt The Role of Institutional Facilitation in Academic Success Reports

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Part of the explanation for rising inequity in educational attainment between disadvantaged children and their wealthier peers may be found in the different access to capital development—human and financial—afforded to these groups of children, within U.S. policy structures. Where wealthy children benefit from their families’ ability to make college a likely part of their future, low-income children are more likely to perceive increasing college costs as insurmountable burdens. Where wealthy families receive considerable tax benefits from participating in state 529 college savings plans, low-income families participating in means-tested public assistance face strict penalties if they save money. These inequities are manifest, then, in lower college enrollment and graduation rates for disadvantaged children, and we collectively pay the price in lost productivity and a constrained ability to compete in the global economy.

To the extent to which evidence suggests that assets can alter these educational trajectories, CSA policy may be considered an investment in our shared future. CSAs would provide an alternative to current consumption-based welfare supports for low-income households and may help to close the gaps by using the lever of U.S. policy commitment to provide disadvantaged children with access to transformative asset development.

Related items: Briefs:

From a Debt-Dependent to an Asset-Based Financial Aid Model Institutional Facilitation and CSA Effects CSAs As An Early Commitment Financial Aid Strategy From Disadvantaged Student to College Graduates: The Role of CSAs How CSAs Facilitate Saving and Asset Accumulation Designing for Success Children’s Savings Accounts and a 21st Century Financial Aid System Executive Summary

Building Expectations, Delivering Results: Asset-Based Financial Aid and The Future of Higher Education Infographics

College Savings Accounts: More Degrees, Less Debt The Role of Institutional Facilitation in Academic Success Reports

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The financial aid system for low-income students mostly revolves around extending availability of student debt, while higher-income students benefit from asset-based investments, largely administered through the tax code. The result of this divide is seen in poorer educational outcomes for disadvantaged students and an erosion of the equalizing effects of higher education. Policy changes—in higher education and financing, taxation and public assistance, financial aid, and asset accumulation—can reset these respective paths, bringing greater equity and improved educational outcomes, particularly for currently-disadvantaged students.

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Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Infographics

Today: Two Paths To Higher Ed Student Loan Debt: Consequences Tomorrow . . . And For Years to Come Reports

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The purpose of higher education is, in large part, to position students for later economic success. While those with college degrees command higher lifetime salaries than less-educated Americans, there is reason to worry that beginning adulthood burdened with significant loan balances may compromise household economic security by tilting balance sheets decidedly toward liabilities.

About 18 percent of households in our sample have outstanding student debt. The average family in 2007 had about $26,018 in student debt, and this outstanding student debt can have a negative effect on household net worth. Specifically, median 2009 net worth for a household with no outstanding student debt is nearly three times higher than for a household with outstanding student debt.

The recession seemed to hit households with student debt harder than those without such liabilities. The change in net worth between 2007 and 2009 represents a higher percentage of total 2009 net worth for households with outstanding student debt than it does for households with no outstanding student debt.

A hypothetical household with exactly median 2007 net worth ($128,828) with outstanding student loans is associated with a loss of about 54% in 2009 net worth compared with a household with similar net worth but no student debt.

The increasing student debt burden on households may not be equally shared at different wealth levels. While households at the 15th percentile of net worth with outstanding student debt lost less net worth than similar households at the 50th percentile from 2007 to 2009, the loss for households at the 15th percentile represents 285% of their 2009 net worth but only 54% for households at the 50th percentile.

College graduation is not adequate protection against this loss of net worth. Living in a household with a four-year college graduate with outstanding student debt is associated with a net worth loss of $185,995.90 (about 63% less) compared with living in a household with a four-year college graduate with no outstanding debt.

Others have found that an average student debt burden for a dual-headed household with bachelors’ degrees from four-year universities leads to a lifetime wealth loss of nearly $208,000.1 Over time, then, students with outstanding student debt make up some of the wealth loss, likely through leveraging their increased human capital into earnings potential. However, it appears that they still end up far behind their peers without student debt.

Read the brief Related items: Briefs

Status Quo: Divergent Financial Aid Systems Yield Disparate Outcomes High-Dollar Student Debt May Compromise Educational Outcomes Before College: Building Expectations and Facilitating Achievement Executive Summary

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Infographics

Today: Two Paths To Higher Ed Student Loan Debt: Consequences Tomorrow . . . And For Years to Come Reports

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Unequal Outcomes: Student Loan Effects on Young Adults’ Net Worth Accumulation