The COVID-19 pandemic and its economic fallout have likely put saving for the future on the back burner for millions of Americans. But more than a decade of research in Oklahoma has shown that state-owned college savings accounts can have a positive impact, especially for financially distressed families, even in hard times.
“It makes me feel like I have some hope for at least one of my kids,” said Sherry, a 24-year-old mother of two whose husband lost his job in the Great Recession of 2008-09. She was one of more than 1,300 mothers of Oklahoma newborns who automatically received a $1,000 Child Development Account (CDA) in 2007, opened in Oklahoma’s 529 college savings plan as part of an ongoing experiment to study the benefits of asset building.
Led by the Center for Social Development (CSD) at Washington University in St. Louis, funded by the Ford Foundation and administered by the Oklahoma State Treasurer’s office, the research experiment—SEED for Oklahoma Kids, or SEED OK—has produced positive financial and family results, according to a new report from CSD. The report summarizes findings and recommendations from CDA research to inform policymakers and practitioners operating or considering CDAs in the midst of the COVID-19 health and economic crisis.
“Long-term asset building can help prepare families for crises like the COVID-19 pandemic, and buffer psychological hardship during such crises,” writes Michael Sherraden, Founding Director of CSD and a co-author of the report. The study is being overseen by Margaret M. Clancy, another co-author and the Center’s Policy Director.
The authors cite SEED OK evidence from rigorous studies published in several peer-reviewed journals, which show that CDAs:
- Substantially increase asset building for postsecondary education.
- Improve the social development of young children.
- Improve the mental health, parenting practices and educational expectations of mothers.
- Have positive effects whether or not families saved in a 529 account themselves.
- Are especially valuable for TANF and Head Start families.
During the recession of 2008-09, the initial $1,000 investment in the Oklahoma 529 plan declined to just below $700; however, the CDA grew to about $1,900 by the end of 2019 because it was restricted for long-term postsecondary education use and the money could not be withdrawn.
CDAs were rigorously tested during the Great Recession and produced positive results. Likewise, CDAs can be positive in the COVID-19 health and economic crisis. “An important policy lesson from this research is that CDAs focus on long-term development more than short-term consumption,” the report authors say. And positive effects occur long before the money is spent on postsecondary education. Other advice for policymakers includes:
- Adopt a universal CDA policy and automatically deposit funds at the time of a child’s birth.
- Include additional targeted deposits and other incentives, particularly for low-income children to create a progressive policy structure.
- Focus first on building assets for all children, and second on improving individual savings.
- Integrate CDAs with other services for the most vulnerable families during the COVID economic downturn.
Evidence from SEED OK has been cited by several states that have adopted universal, automatic CDA policies. In Missouri, legislation creating a statewide CDA policy for all newborns advanced this year in the General Assembly but stopped short of passage due to COVID-19. Interest remains very strong for the next legislative session.
“Though COVID-19 has diverted state legislators’ attention, massive federal policy actions to counteract the virus’s effects also present opportunities,” the authors say. “The positive experience with CDAs suggests that universal and lifelong asset building for all can become a U.S. policy innovation. In the near term, CDAs can be viewed as a solid first step toward that fundamental social investment.”
Some of the most moving evidence of SEED OK’s impact was gathered by researchers who interviewed 60 mothers whose children are enrolled in the study. The interviews were conducted in the wake of the 2008-09 recession.
A large majority spoke very favorably about their CDA, suggesting that it gave them hope in their child’s future. Several noted that the account offers them “security,” “ease” or “relief.” Many said they could not finance college on their own and were grateful that someone other than family members showed real interest in their child’s future.
Having the account “gives me something to look forward to,” said Jasmine. “It gives me a better outlook.”
“It gives me a sense of relief,” said Beth. “It just says this state is being proactive in trying to encourage parents to save for college or start something.”
Another mother, Tamara, agreed. “There’s other people that do care about what happens with our kids,” she said. “They’re not just my kids, they’re everybody’s kids.”