College Savings Plans And Individual Development Accounts How to reach an underserved segment of soc

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College Savings PlansAndIndividual Development
AccountsHow to reach an underserved segment of
society
College Savings Plans Network Biloxi,
Mississippi May 18, 2002

• Michael Parker
• Executive Director, Oregon College Savings Plan
  
• 503-378-4329
• michael.j.parker_at_state.or.us

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Policy Discussion

• 529 College Savings Plans should be actively
  marketed to all economic segments of society.
  (state and federal benefits)
• States should develop creative ways, through
  legislation or policy, to reach non-traditional
  investors.
• Use 529 as a gateway to reach into the poorer
  communities to provide financial literacy.

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Why a Policy Change is Needed

• Sixty years of income subsidy programs and a "War
  on Poverty" have not materially reduced the
  national poverty level.
• The median family net financial assets in 1995
  was about 1000 the lowest 30 of families had
  no assets the lowest 20 of families had
  negative assets.
• Problem of poverty is more complex than simply a
  lack of income (lack of education and proper
  financial tools).
• The poor can, and will, save (just like the rest
  of us) when presented with appropriate
  incentives.
• IDAs will become linked to programs like 529 and
  financial education and will provide knowledge of
  how to save.

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Moving Toward a Solution

• A New Tool Individual Development Accounts
  (IDAs)
• Matched savings accounts for low-income families
  to build assets and enter the financial
  mainstream.
• Typical uses of IDA savings
• Purchase a home
• Start a small business
• Obtain post-secondary education/training

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Linking IDAs to 529

• Encourages families to save.
• Supports the concept of asset building.
• Provides a much needed asset and will help to
  break the cycle of poverty within a family.
• Provides a savings tool to a large, underserved
  segment of our population.

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How It Works in Oregon

• Setting up the IDA within a 529 account
• Private donors receive a tax credit of 75 of the
  donated amount.
• A recognized nonprofit organization must manage
  an IDA program.
• If the recipient of an IDA establishes a 529
  account, the recognized nonprofit can establish
  an additional account on behalf of the same
  designated beneficiary.
• (The nonprofit is the account owner of the second
  account.)
• Money is then matched in the second account
  depending on the match parameters of the IDA
  (typically 11 can be as high as 31).

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How It Works in Oregon

• Distributing the IDA within a 529 account
• The nonprofit account owner can make a qualified
  withdrawal only at the direction of the
  designated beneficiary and only after the account
  established by the IDA recipient has reached zero
  through qualified withdrawals.
• If a nonqualified withdrawal is made from the
  nonprofit account, the money must be used for IDA
  purposes only.

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Why It Will be Successful

• 350 IDA programs operating across the country
  100 more in development.
• 10,000 low-income participants actively saving
  through IDAs.
• IDA participants typically save 35 to 75 per
  month, matched by public/private funds, typically
  11 up to 31 for each dollar saved.
• The average IDA participant saves 67 percent of
  the monthly savings target.
• The average IDA participant makes a deposit in 7
  of 12 months.
• With an average match rate of 21, participants
  accumulate about 900 per year in IDAs.

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Summary

• Partnerships
• Native-American tribes.
• State agencies that serve low-income families.
• Nonprofit organizations that manage IDA programs.
• Build on the concept of IDAs and get people to
  understand them and use them.
• Build partnerships with private sector donors.
• Develop IDA scholarship programs.