In a November 2019 report, the Center for Social Development (CSD) at Brown School at Washington University takes a look at, “Child Development Accounts at Scale: Sample State Legislation.”
Oklahoma was the first state to implement statewide Child Development Accounts (CDAs), which provide assets and encourage saving for postsecondary endeavors through deposits into investment accounts. The report presents examples from Pennsylvania,
Nebraska, Illinois, and California. (Note: the report uses CDA, which is the same thing as a CSA, or children’s savings account.)
Now, what makes this impressive is that the CDAs are delivered “at scale," meaning all newborns, regardless of their families’ socioeconomic and geographic status, receive this benefit. In order to do this in a financially sound manner, you need solid
policy structure.
According to the report, there are 10 policy design elements that must be present in order to deliver CDAs at scale:
Universal eligibility – Every newborn in the state is included, across the socioeconomic and geographic spectrum.
Illinois’s CDA policy, the Illinois Higher Education Savings Program, creates a 529 account owned by the treasurer, and directs the treasurer to deposit a $50 seed for all children born to or adopted by a state resident. The legislation was passed in 2019, with scheduled implementation for this year.
Centralized savings plan – All kids automatically benefit from the CDA. There’s no action required by the parents! However, parents can elect for children not participate.
Automatic enrollment – All CDAs are issued through a state policy and operate within the same financial platform. For example, 49 of the 50 U.S. states use the 529 platform, named for the section of IRS code.
Investment growth potential – Basically, assets held in statewide CDAs have the potential for market growth and investment earnings.
At-birth start – Exactly what it sounds like! The CDA account is opened at or shortly after a child’s birth. This maximizes the CDA’s growth potential because the account will grow for at least 18 years.
The Pennsylvania Keystone Scholars Program is the nation’s first universal, at-birth CDA policy, which provides college savings for all Pennsylvania newborns with a $100 starter deposit. The funds can be used for any qualified higher education expense at any qualified school or vocational program, both in or outside of Pennsylvania.
Pennsylvania State Treasurer Joe Torsella’s decision to purse CDA policy was a strategic move – he wanted the effort to be seen as a coalition, not a single-issue policy that would propel him to his next office. As a result, the Keystone Scholars CDA policy meets nine of the 10 key factors for CDAs at scale.
Targeted investment options – Investment options made available through the CDA program are targeted to the needs of families investing for postsecondary education. Simply put, the CDA can handle high risk early on (with stocks and bonds), but
the closer the child gets to college-age, you can decrease risk and invest more conservatively.
Automatic initial deposit – The state will provide a “seed” or initial investment to kick-start investing. Even if parents themselves don’t make another contribution, a seed investment of $500 or even $1,000 will grow over 18 years! And while $1,000
may not cover tuition or room/board, $1,000 can cover textbooks for a semester.
Restricted withdrawals – There are limits on how and when the assets may be used. Notably, CDAs are only for postsecondary educational expenses.
Nebraska’s CDA policy was introduced and approved unanimously in 2019. Central to Nebraska’s CDA policy is the Meadowlark Program, which states that residents born on or after Jan. 1, 2020 will be automatically enrolled in the NEST 529 College Savings. The first seed deposits will be made into a NEST 529 account by March 1, 2021. If the funds are not used by the beneficiary’s 30th birthday, the funds will be used for future children.
One legislative compromise? The funds must be used for a college or trade school in Nebraska. On the upside, Nebraska will reimburse 25% of employer contributions to the 529 accounts of employees or their dependents. And starting this year, 529 contributions are exempt from an employee’s taxable income and from the income considered to determine eligibility for public benefits. “We understood that employers are going to be a big part of the solution ensuring that every kid as a 529 account and some college savings dollars,” said Nebraska State Treasurer John Murante.
Automatic progressive subsidy – Deposits and incentives are structured to direct more funds to children who are most in need. For CDAs, this is the most important factor to promote equitable policy structure.
Means-tested public benefit exclusions – This refers to “policy provisions that exclude assets in CDAs from means tests,” which may be used to determine if someone is eligible for public benefits. The good news is, some kinds of assets (including
529 savings), may be excluded.
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