September 21, 2010
Starting a savings account for your child early in his or her life can help them build savings and pay for college, according to a Center for Social Development report (PDF) released Tuesday morning.
Child Development Accounts (CDAs) that were initially "seeded," or funded, by an external organization promoted savings toward college, home ownership or business initiatives even when given to low-income families. The report proposes a project called SEED be expanded to cover a nationwide footprint to help low-income Americans struggling with the ramifications of the down economy.
How Families Saved
The study, assisted by the University of Kansas, evaluated more than 1,100 children and their families in 12 states and communities. It found that no matter the location or income level of the family that started a savings account as part of SEED, the child tended to start building a college fund.
Kids in the study saved a seemingly modest $30 per quarter, but with interest, they ended up with about $1,500 over three years time. Though $1,500 might not sound like much, it would cover 60% of one year's tuition at a community college. Over the course of a child's participation in SEED, he or she would save an average of $6,000, which could pay for two years of community college tuition at today's current rates.
Given a place to deposit money (the CDA), low-income families and children got creative with money saving strategies.
"The findings suggest a pattern of attempting to make sacrifices and implement creative strategies to deposit money into children's savings accounts in the face of serious financial resource limitations," the report said.
Though it remained difficult for the poor families included in the study to save money, the fact that they were given institutional support in opening the CDAs at the start of their child's life gave them a framework to start saving modest amounts of money that could eventually add up to useful sums. Kids also gained self-esteem, fiscal prudence and the ability to look toward the future by participating in the program.
Potential for Expansion
The designers of the SEED program wrote that a "national system of CDAs structured as investment accounts is an opportunity to create an appropriate automatic investment structure that will mitigate market risk and serve as a means to deliver financial education on a meaningful scale."
The report proposes universal CDAs for all American children in an effort to bridge the growing gap between the nation's wealthy and poor. The report compared CDAs to the College 529 Savings Plans offered by the government to help families save for college. The main difference would be that the college plans are universally available but optional, while CDAs would ideally come with automatic enrollment for families. The study also stressed that CDAs could actually promote economic iniquity if they are not universally applied because the rich would be much more likely than the poor would be to adopt the accounts as valuable savings tools.
"As the United States emerges from financial and economic crisis, there is widespread recognition that the financial operations of households (as well as many businesses and governments) must rely less on credit and spending, and more on saving and building wealth," the report said. "CDAs are well positioned to contribute positively to this fundamental transition...it does not require very much imagination to see a universal system of CDAs -- leading to lifelong savings accounts -- as a cornerstone for more prudent, competent, stable, and productive financial lives for American families."