Saving for post-secondary education in individual development accounts

Journal of Sociology and Social Welfare, Sept, 2005 by Min Zhan, Mark Schreiner

Low-income people have less access to opportunities for post-secondary education, and the welfare reform in 1996 further limited access for welfare recipients. Since welfare reform, there has been an increasing interest in strategies meant to enhance the well-being of low-income people through education and the development of human capital. In this study, we examine how low-income people saved for post-secondary education in Individual Development Accounts (IDAs) in a nationwide demonstration. IDAs provide matches for savings used primarily for home purchase, microenterprise, and post-secondary education. We examine how savings outcomes differed between participants who intended to use their savings for post-secondary education and other participants. We also look at how these differences in savings outcomes were associated with difference in participant characteristics and in IDA design across different programs in the demonstration.

Results indicate that the savings outcomes of "education savers" were different from other participants. Furthermore, savings for post-secondary education moderated some relationships between savings outcomes and other characteristics of participants and of IDA programs. Implications are discussed for policy and social-work practice for using IDAs to promote human-capital development by low-income people.

Keywords: post-secondary education, individual development accounts, assets building, welfare reform

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Both theory and empirical evidence suggest that education has a wide variety of positive economic and social effects on individuals, families and society as a whole (Becker, 1993; Beverly & Sherraden, 1997; Center for Women Policy Studies, 2002). Furthermore, the labor-market returns to education have increased since the early 1970s (Mishel, Bernstein & Schmitt, 1997; Mishel & Burtless, 1995), and the rise in earnings inequality during the past two decades is closely related to differences in educational attainment (Amott, 1994; Bernhardt & Dresser, 2002). In the meantime, despite the fact that the average level of education has increased over the years for both men and women, low-income people and other disadvantaged groups have faced decreasing access to opportunities for post-secondary education (Mortenson, 2000).

Among the many factors contributing to low access is inadequate financial resources (Boldt, 2000; Gittell, Gross, & Holdaway, 1993). In particular, the increasing costs of college and cuts in need-based financial aid have made post-secondary education less affordable for many low-income people (Choitz & Widom, 2003; Mortenson, 2000; Sherraden, 1991). The welfare reform of 1996 has focused on work requirements, further limiting access to post-secondary education for welfare recipients. Low-income people may need to put short-term needs ahead of investment in their long-term development of human capital, and it is important for social policy to help them save and invest for their future education.

Individual Development Accounts (IDAs) are an approach to help low-income people save and accumulate financial assets for post-secondary education. IDAs are targeted to low-income people and provide incentives and an institutional structure conductive to saving (Schreiner, et al., 2001). IDAs provide participants with matches for savings used for home purchase, microenterprise, and post-secondary education. This paper investigates the following questions: Do IDA participants who intend to use their savings for post-secondary education have different savings outcomes than other IDA participants? And if so, what demographic factors and program-design characteristics are associated with the differences? Answers to these questions may provide lessons that will help guide modifications to IDA policy and program design in ways that might improve savings outcomes for those intending to use their IDA for post-secondary education.

Background

Access to Post-Secondary Education for Low-Income People

The rising costs of college since the early 1980s have made post-secondary education less affordable for low-income households (Milano, 2003). Social investment in higher education for low-income people has also declined. Since the 1990s, the federal government and some states have moved from need-based financial aid to merit-based aid (Clancy, Cramer, & Parrish, 2005; Mortenson, 2000). In addition, the federal government has aggressively expanded educational loan programs in the past two decades, with more of the costs of these programs borne by borrowers instead of taxpayers. Unfortunately, students from low-income families are more likely to view loans as barriers; for example, many low-income students report being afraid of not being able to to pay back the loans (Choitz & Widom, 2003). Furthermore, state budget crises in recent years have forced many community colleges--traditionally a popular choice among low-income students--to raise tuition (Choitz & Widom, 2003).

These above factors made college less affordable for low-income people, especially considering that college aid previously had greater impact for the poor than for the non-poor (Dynarski, 2002). Related to these changes, gaps in educational attainment by income level started to widen in the 1980s and 1990s. For example, by the mid-1990s, a student from a family in the top income quartile was 10 to 12 times more likely than a student from the bottom quartile to have completed a bachelor's degree by age 24, but in 1970 and 1980, the gaps were only 6 and 4 times (Mortenson, 2000).