Small-dollar children's savings accounts and children's college outcomes by income level

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Abstract

This is paper two of four in the small-dollar children's savings account series in this issue that examines the relationship between children's small-dollar savings accounts and college enrollment and graduation. This series of papers uses different subsamples to examine three important research questions: (a) Are children with savings of their own more likely to attend or graduate from college; (b) Does dose (no account, only basic savings, savings designated for school of less than $1, $1 to $499, or $500 or more) matter; and (c) Is designating savings for school more predictive than having basic savings alone. Using propensity score weighted data from the Panel Study of Income Dynamics and its supplements we created multi-treatment doses of savings accounts and amounts to answer these questions separately for children from low- and moderate-income (below $50,000; n = 512) and high income ($50,000 or above; n = 345) households. We find that low- and moderate-income children may be more likely to enroll in and graduate from college when they have small-dollar savings accounts with money designated for school. A low- and moderate-income child who has school savings of $1 to $499 prior to reaching college age is over three times more likely to enroll in college and four times more likely to graduate from college than a child with no savings account. These findings lead to policy implications that are also discussed.

Highlights

► Is a child with savings more likely to attend and/or graduate from college? ► A high-income child is more likely to enroll and graduate from college. ► A lower income child is more likely to enroll and graduate from college.

Introduction

This is the second paper in a series of four papers in this issue on the relationship between children's small-dollar savings accounts, college enrollment and graduation: (a) paper one examines a full nationally representative sample of children, (b) the current paper examines how findings vary by income level, (c) paper three examines findings by race, and (d) paper four examines whether wilt occurs among children who expect to graduate from college while in high school.3 The way that children's savings has been operationalized in previous studies using Panel Study of Income Dynamics (PSID) data has not allowed researchers to answer the question of whether small-dollar accounts are significant predictors of children's college outcomes.

This question has become more relevant with the announcement by the U.S. Department of Education of a Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) research demonstration project, the first large-scale test of college savings accounts incorporating a college savings and financial education component into GEAR UP. Over the course of the project, children will be able to save up to $1600. During question and answer at the announcement a reporter asked whether or not $1600 dollars would be enough to make a meaningful difference in a child's life (i.e. Do small-dollar accounts matter?). Given this, it is important to test the potential effects of the GEAR UP demonstration and its small-dollar accounts in advance, using any available empirical data.

Since the 1980s, the United States has failed to produce college graduates at a fast enough pace to keep up with demand for skilled workers (Carnevale & Rose, 2011). Researchers at the Center on Education and the Workforce at Georgetown University forecast that by 2018, 63% of all jobs will require at least some college and that there will be a shortfall of 300,000 college graduates per year through 2018 (Carnevale, Smith, & Strohl, 2010). America formerly led all developed countries in producing college graduates, but by 2008 had dropped to seventh place (Carnevale & Rose, 2011). The percentage decline of college graduates as a portion of America's working age population represents a loss of potential earning power for individuals, families, and the country as a whole. At the macro level, education has been linked to increased tax revenues, greater productivity, increased consumption, increased workforce flexibility, and decreased reliance on government assistance (Institute for Higher Education Policy [IHEP], 2005; also see Baum, Ma, & Payea, 2010). A shortage of college graduates is not only a loss to the U.S. economy but represents a real loss of earning power for individuals and families. On average, individuals with a bachelor's degree earn 74% more than individuals with only a high school diploma (Carnevale & Rose, 2011).

If college is important to both the individual and society it would seem that both society and the individual have a responsibility to help pay for college but the trend in financial aid policy has been to shift more of the responsibility on the individual. Since the late 1970s, the federal government has attempted to solve the problem of prohibitive college costs by adopting policies that make college loans more accessible through programs such as federal Stafford subsidized and unsubsidized loan programs. For example, the Middle Income Student Assistance Act (1978) brought college loans to the middle class by removing the income limit for participation in federal aid programs (Hansen, 1983). The Higher Education Act (1992) made unsubsidized loans available, and the Omnibus Budget Reconciliation Act (1993) included provisions for the Federal Direct Loan Program. More recently, Congress raised the ceiling on the amount of individual federal Stafford loans students can borrow through the Ensuring Continued Access to Student Loans Act, 2008. As these policy changes have made loans more accessible, the proportion of federal grants to federal loans has plummeted. For example, the proportion of federal grants to federal loans in 1976 was about even (Archibald, 2002). However, by 1985, the ratio had shifted to 27% grants and 70% loans, and by 1998 to 17% grants and 82% loans (Archibald, 2002; also see Heller & Rogers, 2006 for more information on how this shift has taken place).

A financial aid system that is overly dependent on loans requires students and their families to bear a heavy burden to pay for college. This is because the majority of loans have to be paid back, along with accrued interest, regardless of how low interest rates drop or how long repayment terms extend. Placing most of the financial burden onto students due to the increased availability of college loans may be making the American Dream less attainable. From academic years 2007–08 to 2008–09, total education borrowing increased by 5% or $4 billion (Steele & Baum, 2009).4 Among students who received educational loans and graduated from a four-year public university in 2007–08, the median debt was $17,700, which was up 5% from the educational debt of similar students in 2003–04 (Steele & Baum, 2009). Moreover, 10% of students who received educational loans and graduated in 2007–08 have more than $40,000 of debt (Steele & Baum, 2009). At a four-year private college the median loan debt of those holding undergraduate college degrees was $22,375 in 2007–08, which is a 4% increase from 2003 to 04. Among undergraduates who hold a degree at a four-year private college, 22% have more than $40,000 in debt (Steele & Baum, 2009).

Mounting student debt may weaken the belief in education as a path to the American Dream (American Student Assistance, 2010). This dream of working hard to build a better life—a central driver in the history and life of our nation—is associated with the constitutional right of all citizens to the “pursuit of happiness.” In its simplest form, the American Dream is the belief that effort and ability explain why one person succeeds in life and another does not. The belief in the American Dream is essential to maintaining a motivated work force, and the support of citizens as a whole for the country and its rules and regulations. Few institutions have been more important in sustaining the American Dream than public educational institutions, including colleges and universities. Education in America has been called the “great equalizer,” evoking the widespread belief that disparities among groups of people can be narrowed through effort in school and the pursuit of higher education. As such, the entire nation has a stake in making sure that all citizens continue to view college attendance and graduation as a viable way to achieve the American Dream. Today, the opportunity to succeed in life is increasingly dependent on real access to college. In turn, real access to a college degree depends on having enough money to prepare for college, enroll, and continue until graduation.

The increasing reliance on college loans and mounting college debt has caused some policymakers and researchers to question whether funding college attendance and completion through debt accumulation is a wise policy decision (e.g., Baum, 1996). This doubt, coupled with the current economic crisis and additional focus on debt, may make children's savings policies a more appealing alternative to expanding access to college loans or promoting investment in them at such high rates. Financial aid policies that promote asset accumulation among children and their families are a way for the federal government to help restore balance in the financial aid system. Unlike student loans, asset accumulation tools such as Children's Development Accounts (CDAs) leverage investments by individuals and their families with investments from the federal government (e.g., initial deposits, incentives, matches).

An example of a policy supporting specially designed CDAs offered at birth is the proposed America Saving for Personal Investment Retirement and Education Act (ASPIRE) (2010). This act would seed CDAs with initial contributions of $500 or more for the most disadvantaged, and provide opportunities for financial education and incentives for additional savings. 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.

While the ASPIRE Act has not been passed into law, similar noteworthy efforts to create a more accessible savings infrastructure for children are underway. State 529 college savings plans are tax-advantaged savings vehicles offered in 49 states and the District of Columbia. Savings in 529 college savings plans grow free from federal taxation and state taxes in many cases. However, 529 college savings plans offer limited benefits to low- and moderate-income families, though some states have implemented savings match programs and other benefits for those savers.5 Knowledge gained by states through their collective 529 college savings plan experience, will provide extensive opportunity to learn more about the relationship between savings and educational outcomes and eventually may pave the way toward adoption of a national CDA policy.

Section snippets

Research review

Given that paper one, this issue, in the series of papers on small-dollar accounts provides a more extensive review of research on children's savings and children's college outcomes, for the sake of space and to reduce redundancy, we provide only a brief review of research here (see Elliott, submitted for publication). Further, readers are invited to examine Elliott, Destin, and Friedline (2011) for a more comprehensive review of this research and Elliott, Constance-Huggins, and Song (2012) for

Research questions

As stated in the Introduction, this study is part of a series of four papers that provide some evidence for whether the GEAR UP demonstration is likely to encourage higher rates of college enrollment and graduation despite allowing for relatively small amounts of saving. This particular paper focuses on findings by income level. Based on this, we ask the same three research questions asked by Elliott (submitted for publication) but separately for low- and moderate-income and high-income

Data

This study used longitudinal data from the PSID and its supplements, the Child Development Supplement (CDS) and the Transition into Adulthood supplement (TA). The PSID is a nationally representative longitudinal survey of U.S. individuals and families that began in 1968. The PSID collected data on employment, income, and assets. The CDS was administered to 3563 PSID respondents in 1997 to collect a wide range of data on parents and their children, aged birth to 12 years. It focused on a broad

Results

In the first part of this section, characteristics of low- and moderate-income (LMI) and high-income (HI) children and findings from the covariate balance checks are discussed. Then logistic regression results by income level are reported for college enrollment and college graduation. Because of selection effects in observational data, propensity score analysis is a more rigorous statistical strategy to estimate effects than a conventional regression or regression-type model. For this reason,

Discussion

In our examination of college enrollment, we find that for LMI children and HI children designating small amounts of money for school ($1 to $499 and less than $1, respectively) can increase the odds that both groups of children ever enroll in college. Results on HI children are in contrast to Elliott et al.'s (2012) findings that HI children's school savings is not a significant predictor of their college progress. This might be because of the way savings is measured. In their paper school

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