How Children’s Savings Accounts Can Help Narrow the Racial Wealth Divide

By:

Diana Goldsmith

August 29, 2024 - (6 min read)

The racial wealth gap has proven to be as pernicious as it is persistent. While the wealth gap is smaller than it was in the 19th century, it remains at approximately 6 to 1 between White and Black Americans. Systemic and sustained discrimination has prevented people of color from accessing opportunities and attaining greater wealth, and of the most prevalent disparate areas is educational attainment.

In the United States, education after high school is often seen as the obvious next step for anyone hoping to enter the workforce and make a living for themselves and their families. The U.S. Bureau of Labor Statistics reports that higher levels of education are generally associated with a greater likelihood of employment for all major races and ethnicity groups, and that individuals with higher levels of education are typically more likely to be employed in higher paying jobs. Yet the increasingly high cost of postsecondary education prevents many from pursuing a degree, and the financial burden of college is greatest for students of color. Whereas white families’ annual college costs equal 44 percent of their income, the cost burden for Black families is 63 percent and 53 percent for Hispanic families.

Children’s Savings Accounts (CSAs) are an emerging strategy that municipalities can employ to respond to these impediments, thereby narrowing the racial wealth divide in their communities, and strengthening their local workforce and enhancing their economic competitiveness at the same time. CSAs are long-term savings or investment accounts established for youth, either at birth or when the child enters kindergarten, designed to help them save for postsecondary education. CSAs vary in design but begin with an initial “seed” deposit from either a community organization, private institution, government or some combination.

CSAs often also offer incentive funds deposited into the accounts for certain activities or educational achievements made by the child. Once the child graduates from high school, they can access the funds for two- or four-year degrees, apprenticeships, certificates, trade skills or other career training options. In addition to financial support, CSAs are also associated with greater college aspirations for students who may not have otherwise expected to pursue postsecondary education.

Why CSAs?

CSAs are a particularly effective strategy for reducing racial wealth inequities because Black and Hispanic/Latino young adults disproportionately experience greater barriers to postsecondary education than their white peers. This is due to several factors, including a higher likelihood of being a first-generation college student, the opportunity costs of working to meet family financial needs and the limited resources available for families of color to support their children’s postsecondary education. College enrollment and, more importantly, completion rates differ significantly by race.

Additionally, students of color experience the highest rates of student loan debt. Black families, in particular, are highly impacted by student loan debt: 30 percent have outstanding loans, compared to 20 percent of white households, and the median value of unpaid student loan debt held by Black borrowers is about $7,000 greater than that of white borrowers. Students of color are also more likely to default on their loans—an analysis from the Washington Center for Equitable Growth matched data on student loan delinquencies by ZIP code with ZIP code demographics and found that delinquencies were highly concentrated in Black and Latino communities. Experiencing this level of debt stunts individuals’ and families’ ability to save and grow their wealth.

CSAs can help to diminish the disproportionate burden that families of color face in financing postsecondary education and can also provide additional support in addition to helping youth save for college. Access to mainstream banking systems is foundational for wealth building: CSAs can provide children with a bank account, which is a crucial step for households of color that are chronically underbanked. Many CSA programs also provide financial education to participants, taking advantage of the opportunity to engage parents and caregivers in larger discussions related to household finances and asset building. CSA programs leverage the support of local nonprofits and educational organizations, such as social service organizations and college promise programs, which may help families save more, prepare for college and access scholarships.

Effective CSA Strategy

Not all CSA programs are the same, however. To work toward narrowing the racial wealth divide, municipalities must take special care to ensure that their CSA program is equitable and reaches families of color. First, the CSA program should have universal enrollment (sometimes called “opt out”) so that every child within a program’s reach is automatically registered without requiring an application or other action to create an account. Simply making CSAs available to all eligible families does not guarantee that they will participate, and usually skews towards those with higher incomes and asset levels. Municipalities can target particular communities (by using proxies such as income or neighborhood) to direct resources without explicitly limiting them by race. CSA programs could also be strategically implemented in Title I schools, as Black students are notably overrepresented in high-poverty schools compared to white students. San Francisco’s Kindergarten to College program (K2C) has been effective in targeting their funding to priority communities by offering an equity incentive that contributes an additional $150 to students in select schools, and offers a further $300 if recipients make two contributions of at least $5.

Many CSA programs also provide program incentives or bonuses based on activities or reaching certain benchmarks. Evaluating the impact of these is essential to ensure incentives are accessible and avoid exacerbating inequities. These incentives should be evaluated to ensure that families of color are not unfairly prevented from receiving them. For instance, reading benchmarks could serve as a disadvantage for English Language Learners; incentives for logging into an account portal that is not mobile friendly could be difficult for families with limited internet access (who are disproportionately families of color); and rewards for perfect attendance do not take into account the challenges faced by some low-income parents in getting their children to school.

Instead, contributions can be assessed based on progress, such as improvement in reading over time rather than proficiency. In addition, bonus deposits based on reaching milestones such as birthdays or the end of a school year are both equitable for families and less administratively burdensome than incentives that require special documentation.

Wealth is inherently about assets minus liabilities — CSAs are designed to increase individuals’ assets to achieve higher educational attainment with less debt, allowing individuals to access better paying jobs and accumulate additional savings to put toward buying a home or accruing other assets. Certainly, greater educational achievement on its own will not close the racial wealth divide, but CSAs are a meaningful contribution that municipalities can make to invest in youth of color to set them up for success and support future wealth building.

Explore the Benefits of Children’s Savings Accounts

Want to know more about how municipalities can implement Children’s Savings Account programs? Explore NLC’s report, Advancing Hope at the Local Level, to discover how CSAs can help bridge the racial wealth divide and support youth education.

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