Six years ago, the state of Oklahoma pumped $1,000 into each of 1,360 new college savings accounts for infants born to some low- and middle-income mothers there.
Today, as those children get ready to enter first grade, they do so with a good start toward saving some college money they won’t have to borrow when the time comes for their higher education. And, experts say, they and their parents are moving forward with the expectation that these kids are college-bound.
The SEED for Oklahoma Kids project is an experiment to prove that “children who have assets for college would be more likely to believe college is in their future,” said William Elliott III, associate professor of social welfare at the University of Kansas.
Elliott is an advocate for taking the plan national –– establishing automatic, state-supported, birth-to-college savings accounts for every child in the United States, regardless of family income.
He has released his own report proclaiming that these birth-to-college Children’s Savings Accounts (CSAs) are “the most common-sense solution to the student debt crisis.”
Elliott earned his doctorate at the Center for Social Development at Washington University in St. Louis, which launched the Oklahoma project, and worked closely with those St. Louis researchers.
Following the ongoing test in Oklahoma, 16 similar children’s savings account programs since 2010 have been launched in cities or are in the planning stages.
In San Francisco, for example, the city automatically opens a savings account for all children when they enter kindergarten. Children on free or reduced lunch start with a $100 deposit, other children with $50.
Families can add money to the account but can only withdraw funds for education-related reasons, such as textbooks and tuition. So far, more than 7,000 children there have city-sponsored college savings accounts.
Elliott said the city of Lawrence has plans to launch its own children’s savings account program in 2014.
Establishing CSAs as early as birth, Elliott said, would not only increase the likelihood that children would attend and complete college but also would reduce the amount students end up borrowing for college.
“That benefits the student, the economy and the nation,” Elliott said. “The American financial aid system is in crisis. We simply cannot continue to rely on borrowing.”
Since the Center for Social Development set the Oklahoma project in motion, student debt in the U.S. has risen 31 percent from 2007 to 2012.
A recent Fidelity Investments study reports that 70 percent of the class of 2013 is graduating with debt averaging $35,200, including federal, state and private loans plus debt owed to family and accumulated through credit card use.
Nationally, that debt — a record $986 billion — outpaces credit cards.
A report released earlier this month by Sallie Mae indicates that more than 25 percent of the money families are using to pay for college in 2013 is borrowed.
Something has to give, says Elliott and his colleagues at Washington University, and now is a good time.
Their push for universal adoption of birth-to-college children’s saving accounts comes when the student debt crisis is at the center of partisan debate in Washington, D.C., where politicians haggle over legislation that would lower interest rate payments on student loans. And the subject is common dinner-table conversation for millions across the nation as students and their families struggle to figure out how to pay the steadily rising cost of tuition.
Children’s savings accounts are the answer, Elliott said.
But, you’re probably asking, don’t we already have children’s savings plans in nearly every state? Isn’t that what 529 plans are?
“The 529 plans, like most tax-benefiting, asset-accumulating plans, benefit those people at the top-middle income and higher ladder,” said Michael Sherraden, founder and director of the Center for Social Development. “Most middle- and low-income families don’t participate.”
The plan that Center for Social Development researchers are advocating would be automatic, said Margaret Clancy, college savings initiative director at the center.
The state would start an account for every child at birth. Incentives for saving could vary from state to state.
Perhaps one state would design the plan to include a match for every dollar contributed up to a certain amount. Others might agree to contribute a certain amount to the account for every birthday on the condition that a particular amount of deposits have been made by the family into the account each year. Some states might do a combination of both.
Akin to 401(k) plans, a portion of the money could be borrowed with penalty, Clancy said.
In the Oklahoma project, even if parents add no money to those accounts, the initial deposit still grows.
A deposit of $1,000 at birth without additional deposits will be about $2,700 after 18 years, a little less than the average annual cost of tuition and fees at a public two-year college.
If $20 per month is saved in addition to the initial $1,000, that amount grows to about $10,000 by age 18, enough to cover the average annual cost of tuition and fees at a four-year public college.