A Cool New Way For the Poor in South Africa To Save For College

A key goal of New America's Asset Building Program is to encourage governments and other entities to offer each child born in the United States - and around the world - a savings account at birth. We believe doing this is the first step toward ensuring that all children have a stock of financial assets at the start of their adult lives.

With this in mind, we see the "529" college savings account in the United States as potentially an excellent platform for enabling parents to save for their children's education. This type of investment account - established by Congress in 2001 and named after a section of the tax code - allows parents to save money and withdraw the funds tax-free when their children head off to college. Every state, as well as the District of Columbia, offers 529s. Yet, right now, it is primarily mid-to-high-income parents who are taking advantage of them. We believe that making 529s "progressive" (i.e. having the government offer incentives such "seed" funding and/or matches to the accounts of less well-off families) is an excellent way to put these savings vehicles to work for children who come from families of more modest means.

As such, I was intrigued by a new college savings plan in South Africa I came across earlier this week. The Association of Collective Investments, an industry association for investment funds in South Africa, recently launched the Fundisa Fund as a three-year pilot project. The gist of the plan is that family and friends of a learner (or others) make contributions to an investment account opened by the parents at a bank.

Then, when the learner is ready to attend college or university in South Africa, the money accumulated in the account - plus bonus money offered as an incentive by the Fundisa Fund - is transferred to the college or university as payment for tuition.

What is intriguing to me about the plan is the large bonus - as much 25% of the money put into the account each year (with a cap of 600 South African rand, or about US$79). According to an email I received from the Association of Collective Investment's chief executive, the plan is aimed at South Africa's poor.

Another interesting feature of the Fundisa Fund is: the apparent requirement that family/friends/others need to contribute at least 40 rand (about US$5) per month into the learner's account.

The money saved in the Fundisa Fund is invested in a relatively conservative way (in government bonds and bank deposits), as opposed to more aggressively (such as in stocks, which is an option among 529 plans in the United States).

After an initial glance at basic details of the Fundisa on its website, a few questions my colleague Rourke O'Brien and I have about the program include:

• are there any penalties for withdrawing money from the account in addition to losing the 25% bonus that learners would have received?;
• is all money going into these accounts post-tax, and are the accounts tax-advantaged?;
• and is there a progressive element to the plan?

South Africa is unique in that it has one foot in the developed world and the other in the developing world. As such, the design of the Fundisa Fund could be useful study fodder for the providers of 529 plans in the United States, as well as governments and banks in developing countries. We hope to learn more details about the Fundisa Fund, so stay tuned for perhaps another blog post on this development.