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Baby Bonds
Government sponsored child savings accounts could help families to pay for college

By David L. Kirp

IT’S HARDLY NEWS that tuition has spiraled out of sight. In 1980 the average private university tuition was 20 percent of median family income; today it’s 50 percent. The average public university tuition, four percent of median income in 1980, is now 11 percent. College has come to seem unaffordable to many, at precisely the time when the country’s need for a college-educated population has never been greater.

As ever, the least well-off are the hardest hit by the rising cost of college. It’s especially difficult for kids from poor families to envision the long-term benefits of going to college when, with nothing in the bank to fall back on, they are confronted with bills to pay and looming family obligations to meet. The result, lowered expectations, translates into truncated futures and wasted opportunities, both for these youngsters and for the rest of us.

The problem is all too familiar—but what’s the solution? A host of ideas are now on the table, among them simplifying the federal student aid system, bringing loan repayment in line with economic realities, and expanding initiatives like the “I Have A Dream” Foundation and the federal GEAR-UP program, which assure poor youngsters that if they graduate from high school their college bills will be covered.

Another proposal, which has attracted less attention, deserves a serious look: the child savings account. It’s variously called a baby bond, a child development account, a stakeholder account, a college access fund or a child trust fund; whatever the sobriquet, it’s a well-thought-out strategy that stimulates families as well as the government to invest in higher education.

Here’s how the plan works. The government opens an investment account for every baby. Each family decides whether to put those funds in safe money markets or to take a chance on stocks, and families are able to add to the account. Most versions of the trust fund specify that the government matches each dollar that a low-income family contributes, up to a specified annual maximum. Aunts and uncles, grandparents and godparents can also chip in. So can church groups, employers and anyone else with a commitment to a youngster’s success.

Thanks to the workings of compound interest, the trust fund swells mightily over time. When youngsters turn 18, they can use the money for college tuition or job training, and in some versions of the plan they may also spend it on a first home or invest in a retirement account. While the particulars of the proposals vary, there is broad agreement on the underlying principles: The child trust fund must be universal, progressive, simple and enduring.

The ASPIRE Act (America Saving for Personal Investment, Retirement and Education), which codifies this universal-and-progressive approach, has been introduced in Congress every year since 2004. The legislation, with an annual price tag of $3.8 billion, would create a $500 stakeholder account for every infant, $1,000 for families with below-median incomes. The government would match contributions made by the less well-off families on a one-to-one basis, up to $500 a year, and the trust fund would mature when the child became 18.

As with Social Security, the ASPIRE Act gives something to every family, and those on the lower rungs of the economic ladder get the most, an estimated 80-plus percent of the public largesse. It’s a politically attractive notion, and one whose appeal crosses party lines. Over the years, federal child savings account legislation has been backed by conservative stalwarts like South Carolina Senator Jim DeMint, former Pennsylvania Senator Rick Santorum and former House Speaker and presidential hopeful Newt Gingrich, who regard it as a way of turning supplicants into investors. It has also been embraced by Democrats like New York Senator Chuck Schumer, Secretary of State Hillary Clinton and former White House Chief of Staff Rahm Emanuel, who see it as an anti-poverty strategy. Last February, in a display of bipartisanship almost unheard-of these days, the ASPIRE Act was introduced in the House of Representatives by two Democrats and a Republican.

Elsewhere child savings accounts are up and running. There’s legislation on the books in Singapore and South Korea, with pilot projects around the globe, from Hong Kong to Uganda. (The Child Trust Fund was operating in Britain until last May, and although it was an undoubted success, it was among the casualties of the government’s massive budget cuts.) Every baby born in the state of Maine now receives a $500 trust fund as a kick-start for higher education.

This makes for good economics. It’s a way to nudge families into saving by vividly demonstrating how compound interest operates to build a nest-egg. If parents add nothing to the account, then the government’s $500 deposit would grow to $1,012 by the time their child turns 18, assuming that the account increases by four percent a year. But the big payoff comes when a family takes advantage of the dollar-for-dollar match. The family that puts in $500 each year sees the account swell to $27,684—enough money to pay the college bills for a couple of years, even if tuition doubles while the account is maturing.

What’s less obvious but just as important, owning something of value changes the dynamics of a family, making it more education-minded. Money in the bank, the research shows, prompts parents to save more and to think more carefully about their children’s future. The baby bond obliges them to play an active part in deciding how to invest the funds, and so they are drawn, out of self-interest, into the world of finance. Parents’ aspirations for their kids escalate when the savings account is opened, and more assets mean ever-higher parental expectations. In turn, those expectations have a demonstrable impact on youngsters’ grades as well as on how they assess their future chances.

Many of us regard kids as little hedonists who think only about the pleasures of the moment, yet with the right kind of encouragement they morph into little Puritans. In one study, 1,171 elementary, middle and high school students were offered a dollar-for-dollar match for money they saved. They accumulated more than $1.7 million over three years. That amounts to $1,518, nearly $50 a month, for each youth, with half of the money coming from their own savings and the rest from family members. What’s more, the fact of having an account boosted their self-esteem and made them wiser in the ways of money. The fourth-graders who had been given investment accounts were more likely to mention savings as one way to finance college—pretty savvy for a bunch of ten-year-olds—and they scored significantly higher on a financial literacy test. That stands to reason, since, with their own money to attend to, they had something to be literate about.

The prospect of greater financial literacy among the next generation has made apostles out of such influential economists as Peter Orszag, the former director of the Office of Management and Budget, and Gene Sperling, counselor to Treasury Secretary Timothy Geithner, who headed the National Economic Council during the Clinton Administration. The College Board, that arbiter of students’ fates, has also signed on. Its 2008 report, “Rethinking Student Aid,” endorses the child trust fund as one promising way to make college more affordable.

Polls show that voters react positively to the child development account. Mirroring the research, they believe that the incentive will encourage families to save more, that children’s ambitions will expand and that they will become more knowledgeable about money. But voters also appreciate that, by itself, the child trust fund isn’t enough. Good early education is necessary to improve opportunities for kids who otherwise don’t come to school ready to learn; and more financial aid is necessary to boost college enrollment.

The child trust fund isn’t a cure-all, as the voters recognize, but it can alter the arc of a youngster’s life. Not only does it help to bring higher education within financial reach, it also makes adolescents more inclined to think seriously about going to college. In short, it’s a promising response to the two biggest issues in higher education, affordability and access.

David L. Kirp, professor of public policy at the University of California, Berkeley, is the author of “Shakespeare, Einstein, and the Bottom Line: The Marketing of Higher Education.” This article is adapted from his forthcoming book, “Healthy, Wealthy and Wise: Five Big Ideas for Transforming Children’s Lives.”

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National CrossTalk December 2010



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