Income inequality is a vicious cycle.
Cities and states with with significant income inequality often have low rates of social mobility. Recently, the Brookings Institution released “Income Inequality, Social Mobility, and the Decision to Drop Out Of High School,” a paper by researchers Melissa Kearney and Phillip Levine that examines this correlation, and ultimately suggests that it is due in part to the decision by poor students to drop out of high school.
Why? According to the study, poor youth—boys in particular—who grow up in geographic areas with a large gap between the bottom- and middle-class are much more likely to drop out of high school than poor youth from areas with less income inequality. For example, in high inequality states, such as Louisiana, Mississippi, Georgia, and the District of Columbia, over one-quarter of students fail to graduate in four years. In comparison, low inequality states, including Vermont, Wisconsin, North Dakota, and Nebraska, only fail to graduate 10 percent of students in four years. The authors of the study took into account a range of factors, including differences in educational inputs, poverty rates, demographic composition, and concluded that lower graduation rates were linked to the students’ belief that they are unlikely to ever enter the middle-class, a perception that researchers coined “economic despair.”
Unfortunately, perception breeds reality, as the median earnings for young adults without high school diplomas were $23,900 in 2013, compared to $30,000 for those who finished high school and $48,500 for those with a bachelor's degree. Students drop out of school because they don’t think they’ll ever reach the middle class, and it becomes much harder for them to reach the middle class once they’ve dropped out of school. This vicious cycle, then, can only be broken when families, communities, and policymakers work together to change perception and reality alike.
To stimulate social mobility, Kearney and Levine argue that interventions must address this “economic despair” among poor youth. They recommend youth empowerment initiatives to promote a “college-going-type” self-perception. This intervention includes mentoring programs that pair young people with successful adults in the community and early-childhood parenting education programs that seek to help parents create a more nurturing home environment.
While youth empowerment programs are certainly worthwhile, they do not resolve all of the material barriers that can result in low levels of educational attainment. Perception, in other words, is not everything. For example, a survey of seventh graders who receive free and reduced price school lunches found that perceiving financial circumstances as a barrier to college can result in decreased aspirations and effort. More direct interventions could help, specifically, providing low-income children with children’s savings accounts (CSAs) could offset these students’ perceptions by changing their realities.
CSAs, which are currently offered in a number of states and cities across the United States have various designs but typically provide children with a savings vehicle at an early age—ideally from birth. Generally, the accounts are seeded with an initial deposit, creating a vehicle for parents, children, philanthropies and government to invest in a child’s future. Many programs provide incentives for additional contributions, a dollar-for-dollar match for instance.
Research suggests that CSAs have significant potential when it comes to getting young people into and through college. In fact, low-income students with just $500 in college savings are three times more likely to enroll in college and four times more likely to graduate. Dr. William Elliott III, Associate Professor at the University of Kansas and Senior Fellow at New America, who has written extensively on the potential of CSAs to facilitate the development of college-bound identities in young people, has noted, “It appears that when the financing of college is perceived as being under children's own control, college attendance may become more of a reality.”
Moreover, owning a CSA over a period of time may raise parents’ expectations that their children will attend college. Evidence from SEED for Oklahoma Kids (SEED OK), a state-wide test of automatic, progressive CSAs, supports this theory. Over the course of four years, guardians of children with SEED OK CSAs were more likely to maintain or raise their educational expectations for their children. According to researchers from the Center of Social Development at Washington University in St. Louis, “If these changes in attitude persist, parents may engage with their children in ways that improve educational outcomes.”
There are many options for scaling such local programs and ultimately incorporating them into a national CSA system. The Asset Building Program at New America, for which I am an analyst, has long advanced the idea of leveraging the robust college savings infrastructure that is already in operation. Currently, every state manages a system of tax-advantaged college savings accounts, named 529s for the section of the tax code that established them. But only three percent of families have 529s, and those that do tend to be much wealthier than those that do not. According to the Government Accountability Office, 529 college savings account holders have median financial assets of almost $415,000, about 25 times the median financial assets of families without accounts. Essentially, the 529 college savings system provides the most benefits to the families that need them the least.
Nevertheless, there are strategies that could expand enrollment and savings among households at the lower rungs of the economic ladder. Concerned about income-based disparities in educational attainment and low participation in the Indiana’s 529 system, the Wabash County YMCA developed a model for transforming 529s into progressive CSAs. Now called Promise Indiana, the program streamlined the enrollment process for 529s through school registration and provided financial incentives—an initial seed deposit and a match—for participation. Further, it encourages families and community leaders to champion children’s educational aspirations. In Wabash County, where Promise Indiana began, 529 account ownership increased from 6 percent to 70 percent, and one-quarter of low-income families reported saving for college in 2015.
There are also many ways to pay for progressive CSAs without adding to federal expenditures. In the book The Real College Debt Crisis, Elliott III and his colleague Melinda Lewis recommend redirecting a portion of the Pell Grants or American Opportunity Tax Credit that low-income students would receive in the future into their CSAs in middle school to bolster college expectations among low-income parents and youth before they consider dropping out.
To truly address the lack of economic mobility in high inequality cities and states, we must target the issues that are systemic, not symptomatic. High school dropout rates may be the result of perception, but that perception is borne out of a very real economic deficit. Progressive CSAs can rein in inequality and provide those with the lowest incomes something they desperately need: enough economic promise to let them break the vicious cycle. To let them see what they might one day be.