How Children’s Savings Accounts Catapult Kids to College

Jonathan Cabrera working on the Computer Numerical Control machine. Photo courtesy Rochester Institute of Technology/National Technical for the Deaf.

When 20-year-old Jonathan Cabrera began his studies at Rochester Institute of Technology last fall, he didn’t have to worry about finding the money to rent the expensive textbooks he needed for his engineering classes.

That’s because for three years prior, Cabrera’s father had set aside $720 per year for college through an after-school program that included a dollar-for-dollar match through Children’s Savings Accounts, or CSAs.

Even though Jonathan was awarded a scholarship to cover the first year of college and is poised to win additional scholarship money, the $4,320 that Jonathan and his family had put aside through Jonathan’s CSA proved quite useful.

 “And it still does,” said Jonathan’s father, George Cabrera, a machinist in Lynn, Mass., where his son was a participant in La Vida Scholars, a three-year after-school program that serves area Hispanic immigrant families.

“He still has some of that [money left], and he plans to use it this year” for George Cabrera said of his son’s CSA, which he plans to use to rent or buy the other books he needs for the remainder of his college career

The La Vida Scholars program is run in partnership with Boston-based Families United in Educational Leadership (FUEL), which recruits Boston-area families to set up CSAs through area youth-serving agencies, such as local Boys & Girls Clubs.  FUEL is a nonprofit that helps prepare families for higher education.

FUEL’s CSA program is currently in its fourth year, and all 56 participants who graduated from high school last spring are headed to college this fall, officials say.

A Financial Aid Alternative 

As college costs continue to rise —  up to 42 percent in the last 10 years, according to the National Center for Education Statistics — and more students struggle to pay back their student loans, CSAs are emerging as a potentially more viable alternative to the loan-based financial aid system. 

They are also becoming a more common feature among governmental and other agencies that provide services to young people and their families, particularly those without the economic and social capital to help their children realize their college dreams.

For instance, this fall in Albuquerque, N.M., an asset-building nonprofit called Prosperity Works has teamed up with other organizations to set up CSAs for 600 pre-school-aged children from families in zip code 87105, one of the poorest areas in Albuquerque.

If all goes as planned, the children will have between $6,000 and $10,000 for college by the time they graduate from high school, according to Ona Porter, president and CEO of Prosperity Works.

Porter said the initiative is part of a test phase for a larger plan that involves setting up CSAs for every child in New Mexico, which is the third poorest state in the nation, according to the U.S. Census Bureau.

“We think to change that future, it means investing in our children and doing that now,” Porter said.

The Albuquerque initiative is one of at least 17 CSA initiatives nationwide, . For instance, the San Francisco mayor’s office runs the Kindergarten to College Program, which makes college savings accounts seeded with $50 available to every kindergartner in the San Francisco school district. 

In recent years, Congress has considered the America Saving for Personal Investment, Retirement, and Education Act , or the ASPIRE Act, which would essentially make CSAs universal for every newborn in the United States.

Each account would be endowed with an initial one-time $500, and children living in households below the national median would be eligible for an additional $500 and the opportunity to earn matching funds for future amounts saved.

“The concept still has support but a bill has not yet been reintroduced in this Congress,” said Reid Cramer, director of the Asset Building Program at the New America Foundation. “There is bipartisan engagement among several congressional offices, and I expect that a revised bill will be developed and introduced later this year.” 


Higher Expectations

Beyond the financial benefits of saving money for college, researchers say CSAs help foster something more important – a “college-bound identity,” something even more crucial for young people whose parents who have low levels of income and have not gone to college.

A growing body of research shows that merely saving for college – even small amounts – has the potential to get more children from socioeconomically disadvantaged backgrounds to see themselves as destined for college.

Perhaps more importantly, a July 2013 report titled “Building Expectations, Delivering Results: Asset-Based Financial Aid and the Future of Higher Education.” shows that young people with college savings are more likely to complete college. 

One study cited in the report found that low- and moderate-income children who have school savings of modest amounts — even $1 to $499 — before they reached college age are about four times more likely to graduate from college than a child without a savings account.

William Elliott III, a University of Kansas School of Social Welfare professor and a co-author of the “Building Expectations” report, says saving for college changes a young people’s beliefs about their ability afford and go to college.

 “One of the things that makes savings accounts so important is they not only deliver a financial benefit, but really it’s the power they give you over your own life by changing your own expectation about what’s possible,” said Elliott, director of the Assets and Education Initiative and a senior fellow at the New America Foundation, a policy and research organization based in Washington, D.C.

“It’s another way of telling the child, or recommending to the child that college is not that far off, and that it’s something you have to start acting on now, because sometimes it seems so far away,” Elliott said.

CSAs as a Catalyst

The Cabrera family in Lynn, Mass., represents a prime example of how CSAs can be instrumental encouraging young people to go to college — something that research has consistently shown to substantially increase a person’s lifetime earnings by hundreds of thousands of dollars, and in some cases $1 million or more, in comparison to those who do not graduate from college.

“We never thought about him going to college until he got into (La Vida Scholars), and we were seeing how good (college) is, how (college) makes your life better, you get a better job and all that,” George Cabrera said. “Then we started looking at college.”

The son of Guatemalan immigrants who brought him to the United States at age 2, George Cabrera, 43, earns a middle-class salary as a machinist who helps make G.E. parts are used in aircraft. Still, no one in his family has ever gone to college.

That might have remained the case were it not for La Vida Scholars, FUEL and the CSAs. The younger Cabrera said it was the program and its emphasis on saving for college that moved him to go to college.

 “The impact it had on me, I was very motivated, like I believe I can do it,” said Jonathan Cabrera, who is hard of hearing and recently learned sign language at Rochester Institute of Technology. “So I just followed my dream.”

Not Saving Carries Consequences

Elliott, the KU researcher, says it’s important not to view CSAs as a panacea when it comes to helping families and their children realize their college dreams. “I don’t think you should portray this as a silver bullet,” Elliott advised. “It can be part of a larger system.”

At the same time, Elliott said, there can be negative consequences for not doing more to emphasize the importance of saving for college. Those consequences include an “overreliance” on student loans, which he said are often complicated for borrowers to understand and carry “hidden” consequences for nonpayment.

 “By not focusing more on savings, we’ll see a continuing increase in dependence on student loans as we’ve seen for the last several years, and that’s something bad for everybody long term,” Elliott said.

Data from the New America Foundation show that student loan default rates have been steadily increasing in recent years. In 2006, the national two-year cohort default rate was 5.2 percent. The figure rose 7 percent and then 9.1 percent in 2008 and 2010, respectively, according to NAF.

At a New America Foundation conference on CSAs earlier this year, Elliott noted that research has shown student debt levels that exceed $10,000 can potentially “depress graduation rates and harm post-college financial security.”

Since the average student debt now exceeds $26,000, children should save about $16,000 in order for their savings to work optimally within the framework of the current student loan system, Elliott said.

In practical terms, these figures mean that — assuming a one-to-one match on contributions and 5 percent interest — families would need to save about $23 per month, starting at birth, to achieve $16,000 in savings by the time the child reaches 18, according to Elliott.

Savings Circles Informs Families 

Elliott and others in the field say it’s important to be strategic about the manner in which CSAs are set up for families.

For instance, CSAs should be offered in conjunction with information about the process of applying to and getting admitted to college.

That’s how it’s done at FUEL in the Boston area, where participating families go through an eight-session curriculum each year.

“We call them ‘Savings Circles,’” said Gene Miller, president and CEO of FUEL. “They’re all about teaching families how to scale the higher education process.”

FUEL’s sessions touch on topics that range from understanding the difference between different types of colleges and universities — such as public versus private and nonprofit versus for-profit — to filling out federal financial aid forms and decoding award letters.

“The whole intention is to provide families with both financial incentives as well as information, which in our case is the real prize, because our families come out very much informed consumers of higher education,” Miller said.

Attention must also be paid to how CSAs are structured.

With Kindergarten to College, the CSA program from San Francisco’s mayor’s office, program rules clarify that funds cannot be withdrawn until the beneficiary graduates from high school and then only for tuition for college or other postsecondary training, as well as books and other education-related expenses.

Elliott also recommends automatic enrollment in order to reach families in need.

“If you can automatically enroll them into the program, it assures the people you need and want have access to the program,” Elliott said of the benefits of using an “opt-out” approach instead of having families sign up for the program.

It’s also important to develop messages that resonate with parents, Jade Shipman Bevans, senior research associate at EARN, a California-based provider of “microsavings,” wrote in a CSA practitioners’ guide for San Francisco’s program.

Bevans noted that by setting up savings accounts for children in kindergarten, families essentially get a “12-year head start on tuition.”

“Starting early and saving what you can, when you can, will help your child achieve the dream of attending college if he or she chooses,” Bevans wrote.

Although specialists recommend starting early – even at birth – based on the Cabrera family’s experience, later is still better than never.

Cabrera, said his daughter, Vanessa, 16, is now in the La Vida Scholars program with a CSA, and his youngest son, Michael, 11, will likely be in the program when he becomes a sophomore — the first year for which participants are eligible.

As a father of three, Cabrera’s enthusiasm for the program is perhaps its best endorsement. “If you’re offered this program, take advantage of it,” Cabrera said. n


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