Kansas’ Experiment in Encouraging College Savings

Editor’s Note: This post is the final part of a series of four exploring research on the relationship between assets and children’s educational outcomes. Read parts one, two, and three. Senior Research Fellow Willie Elliott is an Assistant Professor at the University of Kansas and Director of the Assets and Education Initiative (AEDI) at the School of Social Welfare.

The Kansas Investments Developing Scholars (K.I.D.S.) program, part of Kansas’ 529 plan, provides matching deposits (up to $600 annually) for households below 200 percent of the federal poverty level who are saving for their children’s higher education. Since the program began in 2006, just over $1.2 million has been contributed to accounts for 1412 students. Importantly, K.I.D.S. appears to encourage low-income families to save even beyond the amounts eligible for the matching grant, demonstrating how saving can become a habit and how modest public investments can lead to larger benefits. K.I.D.S. families have accumulated $3,300,393 in accounts not eligible for the matching grant.

One of the significant contributions of state programs like K.I.D.S. is their insertion of greater equity into the 529 plan structure. Earnings in a 529 account grow tax deferred and can be withdrawn tax free when used for qualified higher education expenses. Kansas taxpayers also receive a deduction on their Kansas tax return for contributions of up to $3,000 for single filers or $6,000 for joint filers for each beneficiary. Because the low-income individuals who are eligible for K.I.D.S. are less likely to have tax liabilities than higher-earning households, the direct match available through K.I.D.S. creates a parallel structure of state subsidy, similar to that provided through the tax code, for these savers. This equity is further enhanced by new rules that allow families to receive a $600 matching grant for each of their children, just as tax benefits are extended to each beneficiary for higher-earning households.

There is increasing evidence that assets make a difference. Research from the Assets and Education Initiative (AEDI) at the School of Social Welfare at the University of Kansas and the Center for Social Development (CSD) at Washington University in St. Louis has found that assets, and the process of savings, can increase the likelihood that students enroll in college and help them persevere through to college graduation; students with designated school accounts are twice as likely to be ‘on course’ for college completion as students without these dedicated assets.

These educational outcomes suggest that an initiative like K.I.D.S. may be a very wise investment for states interested in promoting higher education through a relatively affordable vehicle. State economies need highly-educated workforces to compete, and assets can help students get to college, by increasing educational engagement and shaping expectations, as well as helping to finance college once they arrive.

When Kansas initially proposed this matched savings programs, skeptics in the Kansas Legislature questioned whether such small dollar amounts would really have a significant impact on students’ college outcomes and families’ overall economic well-being. Evolving research today from AEDI and CSD suggests that, indeed, having school savings with even $1 or less increases the odds of college enrollment. Obviously, these small amounts do not make a huge difference in students’ actual college financing, but they help students see themselves as people who go to college. Opening an account and designated some of that money for college turns college into an important, not an impossible, goal, with a clear strategy for how to overcome the barrier of high costs. And assets may affect the entire family. When families save money for college, it may reinforce a college-bound identity.  When parents save for their children’s schooling, the presence of such resources may bolster expectations, influencing interactions with their children and shaping children’s academic behaviors.

Several features of K.I.D.S. are key elements of college savings plans, but advocates also have an agenda to make further enhancements that increase the extent to which 529 plans can serve as vehicles for college savings. Significantly, K.I.D.S. allows for unlimited family deposits, which give households a place to save for their children’s college. Kansas also allows third-party contributions, which converts social capital—relationships with other family members and supportive institutions—into financial capital and stretches families’ savings further. Finally, research suggests that holding assets in a designated education account, as K.I.D.S. does, may increase their effects on students’ attitudes and college-bound identity.