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Limitations and Opportunities of Child Savings Accounts (CSAs) from a Behavioral Finance Perspective
San Francisco’s Kindergarten to College (K2C) Program as a Case Study for Policy Makers and Practitioners
In 2010, then Mayor (now California Governor) Gavin Newsom and San Francisco Treasurer José Cisneros launched Kindergarten to College (K2C), the first and largest municipally led college savings initiative of its kind in the country. In collaboration with the San Francisco Unified School District (SFUSD), K2C automatically opens a child savings account (CSA) at Citibank with a $50 seed deposit for every public school student from Kindergarten to 12th grade. To date, K2C maintains 52,000+ accounts that have helped participants save over $15M - two-thirds of which come from participants' own contributions, while a third comes from a mix of public and private incentives. The program has also evolved to allow participants to save with K2C alongside a 529.
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K2C’s first class of participants are now graduating seniors, but what impact will the program have on these students? More than the total saved or average balance, the program’s success will be examined in large part on whether it has increased students' (particularly those from low-income households and communities underrepresented in college) propensity to continue their education after high school and ultimately, whether they are more likely to graduate college. It will also be evaluated on how well it has led to financial inclusion.
Considering there are now over 125+ CSAs around the country, educators and policy makers are paying close attention. Currently, every CSA is unique, but as state-wide initiatives like CalKIDS have rolled out and federal proposals for related “Baby Bonds” gain steam, it seems opportune to examine the practical aspects of what works when it comes to implementation. While a program evaluation is forthcoming, behavioral finance can inform the field’s understanding of the K2C’s short-comings and outcomes, particularly with respect to how to establish, operationalize and promote such accounts. As attitudes about the economic utility of college shift, behaviorally informed strategies must be tailored to encourage saving and engagement with accounts.
Existing Academic Research on Child Savings Accounts (CSAs)
K2C recently contracted with Summit Labs Consulting, which includes University of Michigan Professor Willie Elliot, whose research was the foundation for the program’s start. Previous studies have shown that students are more likely to go to college by having a college savings account in their name. In addition, having savings up to $500, increases that likelihood to 3 times, with the biggest differences for low-income students. Not only are students more likely to go to college, they are also 4 times more likely to graduate.
Surprisingly, considering $500 may only be enough to buy a laptop and much less cover the combined costs of tuition, books or fees, these outcomes can be explained in part because having a child savings account fosters a “future orientation.”When opened at a young age, having an account in a student’s name coupled with the acts of engaging (e.g. saving, viewing their balance, rewards for participation) with the program helps create a “college going identity”. In other words, setting the expectation that one will go to college and having supportive conversations that reinforce this multiple times over a student’s career, can be influential.
Federal and State Policy Related to College Savings
Having a college degree is seen as leading to more professional opportunities and higher paying jobs, so much so that education has long been considered a potential equalizer for inequality in the United States. Although a college degree, particularly for communities underrepresented in higher education, does help narrow the racial wealth divide, “the focus on individual achievement via education and financial literacy is insufficient to fully address entrenched racial disparities.Confronting the legacy of discrimination in our country requires solutions that are also structural and systemic, while also examining who is not served by current policies.
Tax advantaged 529 college savings accounts provide significant financial benefits when funds are used for qualified educational expenses, but are underutilized. The Government Accountability Office found, “A small percentage of U.S. families saved in 529 plans in 2010, and those who did tended to be wealthier than others.” Low-income families want their child to pursue college too and see savings as important - but participation levels can be explained by their ability to save, exposure to 529s and the complexity of choosing an investment portfolio.
Often tax policies and financial services inadequately address the needs of low-wealth households, but there are growing alternatives. In the 1990s, Brown University’s Michael Sherraden’s research and congressional testimony championed “individual development accounts,” which provided a more accessible vehicle for building assets including small-dollar matches for savings tied to education, homeownership and small businesses.Most recently, “Baby Bonds,” as theorized by New School economist Professor Derrick Hamilton, goes further to promote asset accumulation through large capital investments ($50,000) at an early age. Less sizeable federal proposals, including that sponsored by Senator Cory Booker, would include a $1,000 seed deposited into an interest bearing account at birth while providing flexibility in how funds are used.
Last year, Governor Newsom announced CalKIDS, providing newborns in California up to $100 and low-income public school students $500-$1,500.Modeled in part off of K2C’s custodial model where the City and County of San Francisco owns the account and designates a student as a beneficiary, CalKIDS touts 1.9B in assets held in pooled 529 ScholarShare accounts for 3.4M+ young people. Although the largest baby-bond like initiative of any state, few Californians have yet to view their balance online or withdraw money for college.
CONNECTION TO BEHAVIORAL FINANCE
#1 Economic Utility of College
Classical economic utility theory suggests that between two alternatives, people choose the one with higher expected utility. In addition, rational actors always act in their own economic best interests to maximize the benefits or minimize losses.Furthermore, “people have all the information they need to make a choice, have the capacity to evaluate all necessary information, always have the correct information and always use all the information given.”
Considering the cost of college may seem increasingly out of reach and having a degree is becoming less of a prerequisite for many employers, the value (perceived economic utility) of higher education has likely decreased. College enrollement was declining before COVID-19, but the pandemic accelerated this trend. Frustration with remote instruction, the ire of school closures, learning outcomes and mental health - all contribute to preferences to enter the workforce or pursue a degree. More recently, the existential, whether real or perceived threat of A.I. replacing jobs from the creative (artists, actors, writers) to the technical (accountants, lawyers, healthcare), creates uncertainty for established as well as emergent career paths.
Due to conditions of risk and uncertainty, Daniel Kahneman and Amos Tversky’s “Prospect theory”may be a better model to explain the perceived economic utility of higher education and decision-making when pursuing a college degree. The probability of outcomes (e.g. is the education necessary for X job) and future benefits (e.g. higher pay, career growth) as well as costs are abstract or not fully known (high student debt, rising tuition). Likewise, financial instability may lead households to not save, even when awarded savings and behavior-related incentives. For this reason, some college savings initiatives, including K2C and Pennsylvania 529 College and Career Savings Program (PA 529), allow participants to withdraw funds in case of a financial emergency without any penalty.
# 2 Why Having So Little Means So Much
In their book “Scarcity,” Sendhil Mullainathan and Eldar Shafir explain the distinct psychology of those struggling to manage with less than what they need. Stressors take up mental energy and cognitive load, impacting the brain’s ability to process information and make decisions. In other words, “Scarcity directly reduces bandwidth – not a person’s inherent capacity, but how much of that capacity is currently available for use.” One study revealed, “simply raising monetary concerns for the poor erodes cognitive performance even more than being seriously sleep deprived.”Rather than being short-comings of personal failure, scarcity helps understand how environmental conditions lead to financial decision-making.
Time, money and mental bandwidth are scarce resources. Low-income families juggle irregular work schedules, ever increasing costs for goods and services, housing instability and child care deserts - to name a few acute ones in San Francisco. An immigrant parent in the Mission District, new to the financial system in the United States, may struggle to open and navigate the nuances of 529 investment choices. A Black parent in the Bayview, without access to mainstream financial services in their neighborhood, may distrust banks and prefer to use check cashing services over a checking account that requires a minimum balance.
#3 Debunking Public v Private Sector Myths
Efficient market believers see markets as self-regulating. Therefore, government intervention is generally disfavored. Yet economist Mariana Mazzacutoin argues governments not only help fix market failures, but help create and shape markets. Examples include the Defense Department’s investment in ARPA, giving rise to the internet and leading to innovations like the iPhone, to tax breaks propelling consumer demand for solar and electrical cars. Likewise, San Francisco’s collaboration with a mainstream bank addresses the unmet needs of a community operating outside the financial mainstream. For Citibank, they can satisfy Community Reinvestment Act requirements while building a positive corporate brand with customers and investors.
# 4 Libertarian Paternalism
The City and County of San Francisco opens a college savings account with a $50 seed for every public school student. Both universal and automatic - Kindergarten to College (K2C) is what is known as an opt-out program. This design is intentional. Rather than assess who is deserving (e.g. low-income criteria) or condition enrollment on completing a form, new students are mailed a welcome kit with their K2C account number. Activity statements, detailing their balance, are mailed each semester. Students are encouraged to make personal contributions and earn incentives - but there is no obligation to do so. Currently, about 1 out 3 students have engaged with K2C by saving their own money, viewing their balance online or participating in related activities.
Professor Cass Sunstein and Richard Thaler’s examination of behavioral economics and public policy with respect to employer’s automatic enrollment in 401(K) plans provides a suitable comparison for K2C. They support what they call libertarian paternalism - “an approach that preserves freedom of choice but that authorize private and public institutions to steer people in directions that will promote their welfare”.For immigrant communities who may not have a social security number as well as recipients of public benefits that face asset-limit tests, opening a bank account and saving is not a matter of individual choice or perseverance, but structural barriers. Since the City and County of San Francisco opens the account and serves as a custodian, such impediments are avoided, increasing access and participation for those who most benefit.
#5 Equity Incentive Campaign and Insights from Behavioral Design Firm Ideas42
In March of 2020, Kindergarten to College (K2C) launched an equity incentive campaign that provided eligible participants an additional $150 (beyond the initial $50 seed) as well as the opportunity to earn up to $300 by making two deposits of at least $5. The equity incentive was offered to students at elementary schools in the Bayview and Mission neighborhood, where there is opportunity and achievement gap, particularly for Black male students. Coincidentally, this initiative launched right at the outset of the COVID-19 pandemic.
K2C sent care kits during shelter-in-place that included school supplies, mailed multilingual welcome letters and activity reports that encouraged savings, and outreached in-person with the support of trusted community-based partners as school reopened. Initially, saving and engagement rates stayed the same. The process of creating K2C’s conversational style text messaging campaign helped move the needle.
Through an ongoing collaboration with behavioral design firm ideas42, K2C engaged in focus groups, A/B testing and statistical analysis with a treatment and comparison group that showed a text-based intervention helped participants overcome the barrier of an initial deposit. In fact, overall savings and engagement rates at the equity incentive eligible schools exceeded those of students across the district as a whole. This upended biased explanations that these parents do not care about education. It also challenged assumptions that households are simply cash-strapped. Instead, it pinpointed concerns and conditions that could be directly solved (e.g. the cost of college was abstract, a lack of feedback about balances, mental models paying for college are complex) as well as those that will take longer to address (e.g. deposit channels, distrust of banks).
Kindergarten to College (K2C) is a case study of public (City and County of San Francisco, San Francisco Unified School District) and private partnership (Citibank) that encourages financial inclusion and college access. However, behavioral finance can inform policy makers and practitioners understanding of how to establish, operationalize and promote child savings accounts. While leveraging additional incentives and staff time embodies principles of equity - having a process to solicit input from the users themselves and iteratively test solutions, can more effectively diagnose points of friction and deliver impactful results. Ultimately, success is measured not just by how much people save, but whether programs like K2C spark a future orientation and foster a college going culture, particularly those underrepresented in higher education. As attitudes about the value of college shift, new initiatives also deserve exploration (e.g. Baby Bonds) and evaluation (e.g. CalKIDS).
This post was adapted from a paper submitted for a UC Berkeley Extension course about Behavioral Finance taught by Professor Richard Lehman. Visit www.K2CSF.org for more information about K2C and follow Mohan Kanungo on Substack and LinkedIn. Email email@example.com.
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