How savings accounts help students get to college

Credit: Alison Yin/EdSource

College savings accounts can help cover tuition costs, but some researchers say their real value is more nuanced. The very act of opening a college account for a young child can motivate that student to excel in school and aim for post-secondary education, they say.

“Child savings accounts set up these high expectations from a young age,” said Shira Markoff, director of children’s savings at Prosperity Now, a nonprofit focused on closing the racial wealth divide. “It’s a way of saying, ‘Our community believes in you, we’re investing in you, we have high expectations for you.’”

The idea of college savings accounts has been around for decades, and in the 1980s states began creating 529 plans that granted tax benefits to those who contributed money for a child’s college education.

In the late 2000s, Oklahoma became one of the first states to contribute public money to these accounts. Currently, 119 agencies representing states, cities and nonprofits have adopted similar programs, with nearly 1 million children enrolled. San Francisco’s plan, Kindergarten to College, was among the first city-run programs, and Oakland’s program, the Oakland Promise, has been hailed as one of the most innovative because it includes services for families and support that extends from birth through college graduation.

When California’s program, CalKids, opens later this year, it will be the nation’s largest, with an estimated 400,000 to 500,000 children a year enrolling. Under the program, the state will open college accounts for all newborns in California, with seed money of at least $25 per child. Parents will receive tax benefits for their contributions. The money is invested, and students can use their accounts to pay tuition, room and board, books, supplies and other college-related expenses.

Third-party contributions are the hallmark of these plans, but advocates hope that parents add money, as well, even if it’s just a few dollars on birthdays, holidays or as a reward for good grades.

In most of these savings plans, the money is earmarked for post-secondary education, but it can be used for other purposes if a child opts not to attend college. In that case, money contributed by the third party returns to the organization. Families can keep their contributions, although they must pay taxes on them.

Long-term research into the state- or city-sponsored programs’ effectiveness is scarce because most of the programs are new. But an ongoing 13-year study of Oklahoma’s college savings plan, conducted by social policy professor Michael Sherraden and his colleagues at Washington University in St. Louis, found that children enrolled fared better socio-emotionally than those not enrolled, and their mothers had lower rates of depression and higher expectations for their children. Low-income families who participated showed the same positive results as middle- and high-income families.

In other research, students with savings accounts were three to four times as likely to graduate from college than those without.

“For low-income households, that is extraordinary,” said Sherraden, director of the university’s Center for Social Development. “And in many instances, we’re seeing positive results before the money is even spent.”

Sherraden, who’s been studying the topic since the 1980s, choked up when he recalled interviewing a mother in Oklahoma about the impact of a college savings account on her family.

“She said, ‘The state of Oklahoma thinks my daughter should go to college,’” he said. “For the lowest-income families, life can be so difficult that just this one positive thing can make a difference.”