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Funding the Future: What Parents Should Know About Child Development Accounts

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Updated on May 28, 2014

Estimates say that the average cost of a four-year degree from a public college will cost roughly $92,900 by 2028. Experts urge parents of today’s newborns to start saving for those babies’ college education now.

For new parents struggling to pay for diapers and formula puréed carrots, the idea of setting aside money for something 20 years away might seem out of touch and more importantly, out of reach. But pilot programs and research across the country are working toward the goal of having a college savings account for each and every American baby set up at birth.

The idea, referred to as a “child development account,” came from Michael Sherraden, founder of the Center for Social Development at Washington University in St. Louis. While most discussion focuses on using that savings for college, the accounts could also help children buy a home or start a business when they reach adulthood. Parents would be able to add money to the accounts and governments or charities could match those contributions.

Margaret Clancy, college savings initiative director at the Center for Social Development, says research shows that these kinds of accounts positively impact the children who have them. She says, “these kids are seven times more likely to attend college than their counterparts without accounts.” And kids with development accounts are more motivated to do well in school, better preparing them for higher education.

Tax incentives are available for setting aside money for your child’s higher education—or anyone else’s education, for that matter—through an investment account known as a Section 529 plan. States offer many of these plans year round.

But unlike these state plans and tax incentives, child development accounts could ostensibly be used for more than college expenses and would be available to everyone. “529s may be one way of introducing child development accounts, but right now 529s are mostly held by upper- and middle-income families,” Clancy says.

Countries such as Canada, Singapore and the United Kingdom already have child development accounts in place for their nations’ children. In the United States, these accounts or similar programs exist in some communities, but there’s no general infrastructure in place to get the ball rolling and the accounts work differently in different areas. Moreover, there’s no easy way for parents to learn more about how to actually set one of these accounts up for their newborn. Proposals for child development accounts or similar programs have been introduced and re-introduced in Congress over the past several years, but nothing yet has seemingly stuck.

Harold Alfond College Challenge

Clancy says Maine offers this country’s closest thing to a child development account. As part of the Harold Alfond College Challenge, each child born to state residents, or adopted by Maine parents, is eligible for a $500 grant from a foundation set up by the late philanthropist Harold Alfond. To get the money, a Maine Section 529 plan must be opened in the child’s name before the infant’s first birthday.

Beth Bordowitz, chief executive officer of the Finance Authority of Maine, says the program has been successful. About 5,000 babies have been born in Maine in the 18 months since the statewide program started, and 40 percent of them have accounts. The idea is to encourage parents to set aside more money for their children in addition to the $500 seed money. So far, 27 percent of the accounts have received extra contributions, and for every four accounts opened with the grant, an account has been opened for a baby’s sibling, says Elizabeth Vanderweide, manager of the grant program. These are positive trends and many hope that Maine’s initial and continued success with the accounts will inspire other states to try something similar.

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