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Banking on Small Payments to Help Induce NJ Kids to Pursue Higher Education

Studies show that savings accounts can put very young children on a path to college or other post-secondary education, but success remains to be seen

kindergarten graduate

Could giving kindergarteners $50 toward college expenses increase the likelihood that 13 years later they will go to college or complete some form of post-secondary education?

The Community Foundation of New Jersey and the Hudson Farm Club -- a private shooting club owned by Peter Kellogg, a former Wall Street executive and billionaire -- are betting it will. And they are not alone.

Across the country dozens of philanthropic organizations, municipalities, and states are hoping modest grants made into custodial accounts, known as child savings accounts, will encourage more children to stay in school once their secondary education is complete.

There are about three-dozen programs nationally, according to Shira Markoff, an associate director at the Corporation for Enterprise Developments (CFED), a Washington, D.C.- based not-for-profit organization. In 2015, five new programs began, including New Jersey’s initiative, and there are seven programs set to launch in 2016, including a statewide initiative in Vermont.

The programs are based on academic research suggesting that simply having a savings account, regardless of the amount it contains or who funds it, encourages people to prepare better for college academically. It even increases the likelihood of graduating from high school and college.

But New Jersey’s program and others like it are designed to be more than a one-time donation. They also aim to encourage people to routinely set aside their own money for post-secondary school through matching grants and financial education. But getting people to actively save is a notoriously difficult task.

And this is where these programs have stumbled.

For example, only about 15 percent of the accounts opened via San Francisco’s Kindergarten to College Program (the model for the New Jersey initiative) received additional contributions, according to the report from the New America Foundation published in July. That number is generally consistent with other programs around the country.

“Our goals are to increase college attendance and help families develop the habit of saving when a child is still very young,” said Hans Dekker, president of the Community Foundation of New Jersey, adding that he hopes the smaller size of the initial pilot program will facilitate a more hands-on approach. In September, the program began by giving 112 kindergarteners enrolled in Lake Hopatcong’s Hudson Maxim Elementary School $50 for college.

But the foundation has also secured funding to roll out the program in two other municipalities in 2016, including in a large urban area that is more similar to San Francisco than Lake Hopatcong.

“We had about 86 percent participation rate,” said Katherine McFadden, the principal at Hudson Maxim Elementary school, adding, “We were doing cartwheels and backflips.”

The $50 seed money was automatically deposited into a custodial account at Investors Bank. All the kindergarteners received the money unless their parents chose to opt out of the program.

Requiring people to opt out of an existing program, rather than have to sign up initially, tends to increase participation. Opt-out formats are frequently used by employer-sponsored 401(k) programs to overcome inertia and spur savings.

While $50 isn’t going to contribute much to a kindergartener’s college fund, research shows that the money creates what practitioners call a “college-going identity” in which a child believes from a very early age that post-secondary education is an achievable goal, said William Elliott III, an associate professor at the University of Kansas.

His research shows that children with a small amount of money (less than $500) saved for school are 2.6 times more likely to enroll in college than children with no college savings.

Another study found that by 4 years old, children who were automatically given $1,000 in a child savings account scored higher than the control group on standardized tests measuring social-emotional development -- the ability to self regulate, comply with directions, and interact with people, often seen as precursors to academic achievement.

“The intervention motivates mothers, especially those with disadvantaged backgrounds, to raise their expectations and increase support for their children’s education in the precollege years,” according to a report published in the journal American Medical Association Pediatrics describing the findings for SEED for Oklahoma Kids, which is structured as a large ongoing research project led by the Center for Social Development at Washington University in St. Louis.

Elliot expects child savings-account programs to help children (especially children from poorer households) reach early academic milestones, like reading fluently by third grade or achieving proficiency in middle-school math, which are widely seen as critical junctures on the road to college.

For the first five years, Lake Hopatcong parents receive an annual $100 matching grant if they deposit $100 or more into a college saving account set up by the foundation, so they are eligible to receive $550 if they actively participate in the program for five years.

McFadden said that many parents have called her and said they are interested in contributing to the accounts. However, none have made any contributions yet, said Dekker, explaining parents will receive information about how to make deposits in mid-December. Deposits can be made at a local branch, online, or via mail. If children do not go to college or participate in some form of post-secondary education by the time they are 25 years old, parents’ contributions are returned, but the initial grant and matching funds are forfeited. Parents and the foundation make investments into sub-accounts, so the money is kept separate.

Matching grants are often used as inducement to save, but they are not a surefire method. San Francisco’s Kindergarten to College program gives each child a seed $50 deposit (children eligible for free lunch or reduced price lunch receive an additional $50 contribution) and then matches the first $100. The program also gives $100 after six months of consecutive deposits of $10 or more.

When surveyed, the 85 percent of participants who did not save in the Kindergarten to College accounts cited financial hardship and inertia as the most frequent explanations, according to the New America report.

Reid Cramer, one of the authors of the New American report, believes matching grants along with conditional cash incentives may increase engagement and reduce account dormancy, citing as an example St. Louis’s College Kids program, which recently began awarding $1 for every week of perfect attendance and $50 for parents completing a financial education course in person or online. New Jersey and San Francisco are beginning to use similar incentives.

In December, San Francisco’s Kindergarten to College program began supplementing existing awards for student achievement. For example, it deposited $10 into the college saving account of the winner of the student of the month award at Dr. William L. Cobb Elementary School, said Amanda Kahn Fried, a policy expert at the San Francisco Treasurer’s Office. (The program is funded by the city.)

Kahn Fried said the program is also working closely with parent-teacher associations and school principals to promote the program at events like back-to-school nights or kindergarten graduation, where they are likely to engage parents. Additional matching grants are also under consideration.

In New Jersey, Dekker hopes to encourage local businesses to fund matching grants for student performance, including attendance. He also hopes to engage students and their parents by incorporating financial literacy and college savings into Lake Hopatcong’s Hudson Maxim Elementary School’s experience. Dekker anticipates field trips to local bank branches and college campuses.

Still, it remains to be seen if these efforts will actually encourage parents to save or just provide additional funds from outside sources. But, for Dekker, even a little bit of money, goes a long way.

“The account won’t pay full tuition at Princeton, but it can make a significant difference at a school where the tuition is a lot lower,” said Dekker, adding the money can also help pay for other college-related expenditures, like transportation, books, or computers -- or fill in the gap left by scholarship programs.

(Disclosure: NJ Spotlight is funded by the Community Foundation of New Jersey.)

Lisa Ward is a freelance writer based in New Jersey.

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