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Saving money for college can have wide-ranging benefits for young people and families. Savings help pay for college expenses, which assists students stay in college and complete their education. Just as importantly, savings can have an important motivational effect in setting expectations that children can and will attend higher education, encouraging them to study harder and boosting educational attainment.
Oklahoma encourages and supports college savings through the Oklahoma College Savings Plan (OCSP), the state’s 529 Plan, which allows families to make contributions to an account for a wide range of educational expenses at any accredited higher education institution. Earnings in a 529 Plan grow tax-free, and Oklahoma allows a state income tax deduction for contributions up to $20,000 per year for couples filing jointly ($10,000 for individuals). However, participation in Oklahoma’s 529 Plan, like most private savings programs, is very limited among low- and moderate-income households. Data from the Oklahoma Tax Commission shows that less than one out of every eight households claiming a deduction for a state 529 contribution in 2005 had income below $50,000, even though almost three-quarters of all households were in this income category (see the Chart on page 6 of this issue brief).
A major ongoing national study, known as the SEED for Oklahoma Kids Experiment, is testing the potential of expanding college savings opportunities for all Oklahoma children. In 2007, approximately 2,700 newborns from across Oklahoma were randomly selected to participate in the SEED OK research study. Of these newborns, half – the treatment group – received $1,000 in a special SEED OK account in the Oklahoma College Savings Plan. The other half – the control group – did not receive an account.
A new research report by the Center for Social Development at Washington University in St. Louis provides some preliminary findings on the SEED for Oklahoma Kids Experiment (You can read a short research brief or the full report). The report presents two main findings. First, among the 1,361 families that agreed to participate in the study and were assigned to the treatment group, accounts were automatically opened for all participants (one family declined the account). This result “demonstrates that near universal enrollment is possible, if it is automatic.” By contrast, few members of the control group, just 2.3%, opened an account . This finding confirms the growing research emphasizing the importance of automatic or default enrollment for boosting participation in savings programs, especially among low-income populations.
The second main finding concerns college savings beyond the initial deposit into the account opened automatically. The study found that about 16 percent of treatment participants opened their own OCSP account, taking advantage of a $100 account opening incentive deposit and the possibility of matches. About 7 percent of treatment group participants made deposits into their accounts. By comparison, among the control group, only 1 percent opened an account and made a deposit. The average deposit , excluding SEED OK incentives, is $47 for treatment participants and $13 for control participants. According to the report:
The impacts of SEED OK on account opening and savings are statistically significant, but the proportion of participants opening accounts and the amounts of savings are modest.
Despite the modest effects on encouraging private savings, the researchers conclude on an optimistic note:
The initial impacts are clear and essentially positive. The experiment has a solid methodological foundation, and we will be able to determine whether SEED OK contributes to later increases in savings and the level of asset accumulation, parents’ aspirations, home environment and parenting practices, and child development.
Further waves of research on the OK SEED participants are planned for 2011 and 2014, and the researchers hope to be able to continue to follow the participants through the college and adults years.
While this important research continues, Oklahoma policymakers could be taking steps to help more Oklahoma families build up the savings that will allow more children to attend and complete college. The boldest step, proposed by a 2006 legislatively-created Task Force, would mirror the OK SEED project by providing publicly-funded deposits at birth into a 529 account for all children in families below the state median household income. In this blog post, we considered some other options the state could explore, including lowering the deposit thresholds in the 529 Plan and converting the state tax deduction to a (smaller) refundable credit. All of these would make Oklahoma’s 529 plan a more effective tool in building opportunity for all Oklahoma families, encouraging saving, and expanding our educational attainment and economy.
