The "Assets Effect"

New research shows that having even a small nest egg of their own helps kids from modest backgrounds work harder to get to ahead.
July 11, 2012 |
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Willie Elliott grew up in Beaver Falls, Pennsylvania, just as the steel mills were shutting down. His father, a train conductor and engineer, was frequently laid off; his mother worked as a waitress and in warehouses to help make ends meet. The family experienced several bouts of homelessness.

During his senior year, Elliott became a born-again Christian and dropped out of high school to launch a mission serving alcoholics. After two exhausting years, he decided to earn his GED and was accepted at Geneva College, a small Christian school where he studied philosophy and graduated. But from there his educational path and career faltered again. His parents told him they would help pay for him to attend law school, but they were evicted from their home shortly after he enrolled. Elliott ended up withdrawing from school and joining the military. By the time he earned his Master of Social Work and PhD from Washington University in St. Louis, he was nearly forty years old.

Today Elliott tests theories about what could make it more likely that kids coming up the hard way will succeed. One finding he and other academic researchers have confirmed may surprise you. When kids have even a small savings account in their name, it increases the chance they will persevere and do what it takes to get through college. Among kids who expect to graduate from college, the income of their parents makes little difference in the chances that they will actually enroll. But whether or not they have a savings account in their own name makes an enormous difference. Those who have an account are about seven times more likely to attend college than similar youth who did not have an account. A savings account also increases the chance that they will persevere and do what it takes to get through college. Those with a savings account opened for them as children are about twice as likely as their peers without savings to have graduated or to be on course to graduate from a two- or four-year college by age twenty-three.

This correlation is particularly strong among young adults whose families earn less than $50,000. According to an upcoming paper by Elliott, Monique Constance-Huggins, and Hyun-a Song in the Journal of Family and Economic Issues, these students are three times more likely to be on course to graduate than their low- and moderate-income peers without any savings. Partly in response to such findings, in May the Department of Education announced the College Savings Account Demonstration project. Ten thousand low-income high school students participating in the GEAR UP federal college-readiness program will be given a savings account, and their educational outcomes compared to 10,000 GEAR UP participants without an account.

Elliott posits that having some savings earmarked for college creates what he calls a “virtuous circle.” The money in the account may be miniscule compared to the cost of a college education, but it nonetheless has a powerful aspirational effect.

In a child’s mind, having money set aside for college seems to reinforce the message that he or she is expected to go to college. This, in turn, makes them more likely to work hard for good grades and to strategize practical ways to fund their education—for example, through loans, scholarships, or getting a campus job.

The sense of empowerment that comes with even very modest savings is also important. As Elliott explains, poor people “have a lot of experiences in life where the parent says, ‘For Christmas I’ll get you a computer,’ and when the time comes, they end up not getting it.” In contrast, “when children have savings of their own,” he observes, “it gives them a sense that they have control of their destiny in a way they would not have otherwise.” Even though having a savings account may reduce the amount of financial aid for which a student qualifies, Elliott believes this economic disincentive is trumped by the psychological benefits of having a few assets in one’s own name.

This conclusion is consistent with recent social science research on the psychological dimensions of having a nest egg. It shows that for people generally, holding assets promotes a sense of personal control and future orientation that elicits positive attitudes and behaviors, collectively known as “asset effects.”

For twenty-three-year-old Marsha Jackson, gaining that sense of control has been crucial. She grew up in a chaotic household. When she was fourteen, she ran away from home after a fight with her father threatened to turn violent, and spent the rest of her high school years living at a residential treatment center. She entered a four-year college, but felt directionless and soon found herself in debt and dropped out. But Jackson later enrolled in a pilot program called Youth Financial Empowerment. As part of the program, which serves 450 sixteen- to twenty-one-year-olds aging out of the foster care system, she attended six financial literacy workshops and received a savings account, in which she was eligible for $2 of matching funds for every $1 she saved, up to $1,000.

The amount of money Jackson was able to save through the program might seem incidental. But it was just enough for her to purchase a Mac laptop and a digital SLR camera, which was crucial to her developing and pursuing her interest in graphic design. Today she’s enrolled in Brooklyn Manhattan Community College. “I couldn’t see myself saving up $1,500 on my own,” she says. Jackson now plans on transferring to New York City College of Technology (known informally as CUNY CityTech), and launching her own business.

Around the county there are many new projects similar to the one that helped Jackson. One example is San Francisco’s “Kindergarten to College” (K2C) program. It provides savings accounts seeded with $50 to 1,200 five-year-olds at eighteen city schools; the program is expected to eventually expand citywide. KIPP, the highly regarded national charter school network, also launched its own pilot college savings program last year. More than 6,500 current and former KIPP students have been given a savings account in their own name, seeded with a $100 investment financed by the Citi Foundation. Contributions from students or their families are matched dollar for dollar up to $250 per year.

Though such efforts now seem cutting edge, previous generations of Americans would find them familiar. Until the 1960s, school banks were still common. In 1924, more than 1.6 million American children had bank accounts set up for them in their schools, where (in today’s money) they did $4.5 million in business every Tuesday morning and held deposits totaling $14 million. Importantly, progressives in that era combined school banking with financial education, including both moral and practical instruction on the importance of thrift. In an age of credit cards, payday lenders, and exploding student loans, that kind of practical education would be more valuable than ever.

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