- What is a Children's Savings Account (CSA)?
A CSA is a long-term savings or investment account that provides incentives to help children (ages 0-18)—especially low-income children—build savings for their future. Children receive incentives from third parties (e.g. government or nonprofits) to help accounts grow—such as initial deposits to start accounts and matches for families’ deposits—as well as contributions from family, friends and the children themselves.
Savings are usually used to pay for postsecondary education, though some programs may allow other asset purchases, such as a home or a small business. Account funds are restricted and can only be withdrawn for designated asset purchases. The goals of most CSA programs are to build children’s expectations for their future, help provide the financial means to attend postsecondary education and increase enrollment in and completion of postsecondary education.
- $100 or $500 won't pay for college, so why do CSAs matter?
With the high cost of college, we would not expect a low-income family to save nearly enough to cover the full cost of postsecondary education. However, even small amounts of money saved can make a difference in whether a child eventually ends up attending and graduating from college. Research indicates that children from low-income households with savings for college of just $1-499 are three times more likely to attend college and four times more likely to graduate. Having savings for college helps build children’s expectations and fosters a college-bound identity, in which children see themselves as someone who will go to college. And research shows that children and young adult’s expectations have a strong impact on whether they in fact attend college.
The money saved in a CSA can help address critical gaps that financial aid may not cover, such as books, transportation or living expenses. These relatively small costs can loom large for students from low-income families, so having savings to cover them can make a big difference in whether students are able to complete college.
- 529s already help people save for college, so how is a CSA different?
529 plans are tax-advantaged investment accounts designed to save for postsecondary education. Families can open a 529 account and put money away for their child’s education. The main distinction between a CSA and an ordinary 529 account is that a CSA provides incentives to help participants build savings more quickly, such as an initial seed deposit or matching participant’s savings. This is particularly important for helping low- and moderate-income families increase savings. CSA programs may choose to use 529 accounts as a vehicle for holding participants’ savings (or they may choose to use a savings account at a bank or credit union). Regardless, the CSA program will still be distinct from an ordinary 529 plan because of the incentives.
- Can low-income families really save for their children?
Both theory and practice indicate that, with the right opportunity and appropriate savings vehicles, (such as CSAs) low-income families can and will save for their children. Research from demonstration programs such as SEED (Saving for Education, Entrepreneurship, and Downpayment) suggests that, on average, lower-income families in CSA programs save approximately $10 per month.
Indeed, there is evidence that low-income savers contribute, on average, a higher percentage of their incomes than higher-income savers. For example, a report by Sallie Mae shows that low-income families with college savings can save double the proportion of their income compared to middle- and high-income families, despite the fact that the tradeoff between saving and providing for their daily needs is sharper for low-income families. Some CSA initiatives have shown remarkable savings participation, as well. In the SEED demonstration, 57% of low-income savers made positive net contributions to their account over a three-year savings period.
- If a family saves regularly, how much money will the child have in his/her CSA by age 18?
CSAs established at birth with a modest initial deposit and incented with savings matches can be expected to produce significant account balances by age 18. For example, an account with a $50 initial deposit and participant contributions of $100 per year that are matched dollar for dollar would grow to more than $4,700 by age 18, assuming a 3% average annual return. With higher initial deposits, greater participant contributions and/or a greater average annual return, the account balance could grow to more than $5,000.
- Are CSAs effective? What does research say about their impact?
CSA strategies were first tested in the 10-year national SEED (Savings for Education, Entrepreneurship and Downpayment) demonstration project. SEED showed the promise of CSAs to not only promote financial security for children in low- and moderate-income families, but also to raise the hopes and aspirations for the future for both children and adults. Since then, the research base has been bolstered by dozens of academic articles, pilot programs and research initiatives throughout the country. Some of the key findings in support of CSAs from the research include:
- Children with college savings of as little as $1-499 are three times more likely to attend college and four times more likely to graduate.
- Children with college savings have greater college expectations and see themselves as college-bound.
In addition, rigorous research from the SEED for Oklahoma Kids randomized control trial demonstrates that CSAs have several positive impacts on young children and their families, including improving parents’ educational expectations for their children, increasing college savings behavior, reducing symptoms of depression in mothers, and improving children’s early socioemotional development. More CSA research is available on the Campaign for Every Kid’s Future resource page.
- Where can I find more information on CSA programs and how to start one?
The Children's Savings Program Directory on Prosperity Now's website provides information on CSA programs. A good resource for designing a CSA program is Investing in Dreams: A Blueprint for Designing Children's Savings Account Programs. This interactive guide walks you step-by-step through all of the key decisions you need to make in designing a CSA program. More information on CSA programs, research and policy is available on the resource section of the Campaign for Every Kid's Future website.
- What types of organizations run CSA programs?
A variety of organizations can serve as CSA program coordinators, such as state and local government agencies (e.g., the Nevada Treasurer’s Office for College Kick Start and the San Francisco Office of Financial Empowerment for Kindergarten to College), nonprofit organizations (e.g., Springboard to Opportunities) and local housing agencies (e.g., Tacoma Housing Authority). Though a variety of organizations can run CSA programs, the key attributes program coordinators need to have include the capacity and experience to manage a complex program, the resources needed to support and sustain a program over the long-term and mission alignment between the organization and the goals of the CSA program.
- What are the costs associated with running a CSA program?
The two main cost categories for CSA programs are program delivery costs and savings incentives expenses. Program delivery costs (also known as operating costs) are the expenses incurred in managing, operating and marketing the CSA program. Key program delivery expenses include personnel, consulting/contracting fees to retain key partners (such as providers of financial education training), account fees (if your financial institution partner is charging fees to your program for providing the accounts), data collection/evaluation, supplies/materials, marketing and local travel. Program delivery costs can vary significantly between programs depending on several factors, such as the size and complexity of the program, the level of outreach needed to reach the target population and the salaries of program staff.
Savings incentives expenses refers to the monetary incentives used to help build account balances and encourage families to save, such as initial seed deposits and savings matches. The overall cost of savings incentives depends on the number of children in the program, the amount of the incentives and the number of years in which children are eligible to receive incentives. For more information on budgeting for a CSA program, see Chapter 9 in Investing in Dreams.
- What are the sources of funding for CSA programs?
CSA programs receive direct funding and in-kind support from a variety of sources, including the public sector, philanthropy, the corporate sector and individuals. The public sector—at the city, county and state levels—is well-positioned to fund initial deposits and underwrite operations. (Note that the federal government currently does not provide funding for CSA programs.) Nearly all existing large programs, such as San Francisco’s Kindergarten to College (K2C) and Nevada’s College Kick Start, receive some funding from the public sector. The origins of these public funds vary. For example, K2C uses funds from the city’s general appropriations, while College Kick Start uses fees paid to the State Treasurer’s Office by the state’s 529 program manager.
Philanthropic support is particularly important for launching programs, as corporate and individual donors do not tend to provide start-up money for new programs. In addition, foundations are more likely than individual or corporate donors to provide operating funding for programs. CSA programs most commonly use corporate donations to fund matching incentives. Finally, individual donors may be particularly attracted to the idea of providing match funding to support the aspirations of children in their own community.
For more information on fundraising for a CSA program, see Chapter 10 in Investing in Dreams.
- What kinds of incentives do programs use to build account balances?
Commonly used incentives include initial deposits, savings matches and benchmark incentives. Initial deposits, often called “seed” deposits, are generally deposited by the CSA program automatically into participants’ accounts upon account opening. Initial deposits serve a number of purposes, including ensuring that all participants have at least some funding in their accounts regardless of their families’ ability to make contributions, encouraging participants and their families to make additional deposits, and fostering a college-bound identity in participants by setting aside money earmarked for postsecondary education.
Savings matches are used to match deposits made by participating children and their families to the accounts. Matches are often made on a dollar-for-dollar basis, though programs can choose to provide other amounts, such as $.50 or $2 in match for every dollar saved. Savings matches encourage families to maximize their deposits and help account balances grow more quickly.
Benchmark incentives are extra third-party contributions that participating children and their families can earn for reaching milestones or achieving goals such as completion of financial education, attainment of certain grades or making consistent deposits. In addition to the three commonly used types of incentives already described, CSA programs have used other creative means to encourage savings, such as prize-linked savings in which participants earn entries into raffle drawings by making deposits.
For more information on incentives, see Chapter 6 in Investing in Dreams.
- How can you ensure that the funds in a CSA are used for the intended use? Won't parents be tempted to withdraw the money early?
In CSA programs, access to accounts is restricted so that incentive funds provided by programs can only be used for the designated purpose, generally postsecondary education. Programs use different methods to safeguard savings. Many CSA programs use custodial or omnibus accounts, in which funds are held by the CSA program or a third-party custodian on behalf of the children.
For example, in San Francisco’s Kindergarten to College program (K2C), savings are held on behalf of children in a pooled account owned by the City and County of San Francisco. Families may make emergency withdrawals of the money they deposit into their children’s subaccount with authorization from the K2C program. However, they cannot withdraw incentive funds, such as the initial deposit or savings match provided by the K2C program. In other programs, the parents own and can therefore withdraw money from the accounts into which they make deposits, but the incentive funds provided by the program are held in a separate account that families cannot access.
While these restrictions ensure incentives are not withdrawn early, research also indicates that even with less restrictions, parents are unlikely to withdraw funds early. One study of accountholders in the SEED demonstration found that though the accounts were more accessible than in most current CSA programs, only 4% of parents withdrew money, and most of those withdrawals were due to emergency situations, such as a job loss or medical condition.
- Does a CSA affect the amount of federal financial aid a student may receive?
In general, if a CSA is owned by a parent or child, it is considered an asset for calculating financial aid. On the other hand, if the CSA is owned by a third-party, such as a custodian, it is not considered a family asset; however, it may be counted in financial aid calculations in the year that the money is withdrawn by the student from the CSA. In either case, the impact of CSA funds on financial aid calculations for low- and moderate-income students is likely to be little to none.
Under federal financial aid rules, for most low-and moderate-income students whose household income is less than $50,000, all assets are excluded in the financial aid calculation of the Expected Family Contribution (EFC) toward paying for postsecondary education. This means that the savings in a CSA is not taken into consideration in calculating federal financial aid for most students whose families earn less than $50,000.
Even in cases where assets are considered, if the CSA funds are held in a 529 account, the savings would be considered a parent-owned asset, in which case only up to 5.6% of the value of the 529 is considered in calculating the EFC. Note that while the information given here provides some good rules of thumb, financial aid rules are complicated and aid determinations can vary based on individual circumstances.
- Can a CSA affect families' eligibility for public benefits?
Many public benefit programs, such as TANF and SNAP, impose limits on the amount of assets families can have to qualify for benefits. The question of whether savings in a CSA impacts asset calculations for benefits eligibility depends on the structure of the account used by the CSA program. Many CSA programs use custodial or omnibus accounts in which the savings are held by a third party, such as a city government or nonprofit organization, on behalf of participating children.
Since those funds are not held by the children or their families, they do not count as family assets for the purpose of calculating public benefit eligibility. If a CSA program does not use a custodial or omnibus structure and the accounts are held by parents, the savings in the account will count as family assets. Note that asset limits for many benefits differ by state, and some states, such as Colorado and Alabama, have removed asset limits to allow families to build assets that help them move towards financial stability. More information on whether and how various types of CSA accounts count toward asset limits is in Chapter 5 of Investing in Dreams.
- What arguments are effective in persuading policymakers to support a CSA program?
Several of the challenges addressed by CSAs are prominent in the current political discourse, including the wide disparity in postsecondary educational attainment between low-income and wealthier young adults, the high cost of college, student debt and the gaps in Americans’ financial knowledge and capability. As a result, CSAs may appeal to policymakers across the political spectrum who are concerned about these issues. Specific arguments that can be used to advocate for a CSA program include:
- Raising children’s and parents’ educational expectations – Parents whose children have a CSA have higher expectations for whether their child will go to college. CSAs also foster the development of a college-bound identity in children, in which they see themselves as someone who will go to college. And research shows that children’s expectations have a strong impact on whether they in fact attend college.
- Increasing college enrollment and completion – Research indicates that children with college savings of as little as $1-499 are three times more likely to attend college and four times more likely to graduate.
- Promoting child and family financial capability – By encouraging savings and providing financial education and other financial capability services to children and parents, CSA programs can help participating children and their families build savings habits and increase their capacity to manage their financial resources effectively.
- What states and cities currently have publicly-supported CSA programs, and how do those programs work?
Publicly-supported CSA programs have been expanding over the past several years, and more new programs are being discussed in a number of states and cities. Currently, several states have CSA programs, including:
- Maine – The Harold Alfond College Challenge provides every baby born as a Maine resident with $500 invested in a 529 account.
- Nevada College Kick Start invests $50 in a 529 account for every child entering public school kindergarten in the state.
- Rhode Island – The CollegeBoundbaby program is virtually automatic, with parents simply required to check a box on their child’s birth certificate form to receive $100 invested into a 529 account on behalf of their newborn.
In addition, several cities have programs including:
- San Francisco, CA – Kindergarten to College automatically provides every kindergartner in San Francisco public schools with a $50 initial deposit in a savings account, along with other opportunities to build savings through deposits and incentives.
- St. Louis, MO – College Kids automatically opens a savings account seeded with $50 for every kindergartner in St. Louis public and charter schools, with opportunities to build savings through deposits and incentives.
- Oakland, CA – As part of the larger Oakland Promise Initiative, Oakland’s Kindergarten to College program automatically provides a seeded account for every Oakland kindergartner, and Brilliant Baby invests $500 in an account for high-need babies.