By Margaret M. Clancy
Unsurprisingly, low-income families are much less likely than high-income families to reap the tax benefits of 529 college savings plans. From the start, the vision for Child Development Accounts (CDAs) has been for a universal and progressive policy aimed at long-term asset building for all. Including all children and providing greater benefits to those most in need can achieve full inclusion in asset building.
A new Center for Social Development at Washington University in St. Louis brief aims to advance CDA policy by identifying 10 elements for universal and progressive CDAs at scale. All 10 design elements are modeled in SEED for Oklahoma Kids (SEED OK), a CDA policy experiment created to demonstrate and test the policy idea of universal and progressive accounts from birth.
A significant initial deposit into a 529 college savings plan may trigger changes in education-related attitudes and behaviors from the beginning. Substantial early deposits can also jumpstart asset accumulation through investment growth. For example, the $1,000 initial SEED OK deposit, which was invested in the Oklahoma 529 plan, increased by more than 70% over about 10 years—even though the investment endured a sharp drop during the Great Recession. Without automatic deposits, very few low-income children will have any college savings.
The CDA in SEED OK and the four statewide CDAs—Baby Scholars in Connecticut, the Harold Alfond College Challenge in Maine, College Kick Start in Nevada, and CollegeBoundbaby in Rhode Island—use 529 college savings plans. These CDAs take advantage of the existing 529 plan policies that subsidize asset accumulation for middle- and especially high-income families through the federal income tax system, and modify the offering in ways that can serve all families.
The 10 policy design elements identified in this brief are informed by theory, research, and experience. At present, 529 college savings plans are the CDA policy structure of choice at scale. In short, no existing financial platform other than 529 plans provides a comparable combination of features required for a cost-efficient, sustainable, and progressive CDA policy that reaches all children nationwide.
Margaret M. Clancy is the policy director and College Savings Initiative director at the Center for Social Development at Washington University in St. Louis. She is responsible for design and leadership of large-scale policy demonstrations, including the SEED for Oklahoma Kids (SEED OK) research experiment.