Dan Lips, visiting fellow with the Foundation for Research on Equal Opportunity, joins us to talk about his recent paper, “Reducing Inequality in Outside-of-School Learning.”
Jason Bedrick: Hello, and welcome back to EdChoice chats. I’m your host, Jason Bedrick director of policy at EdChoice. And this is another edition of our big ideas series today. I’m delighted to be joined by Dan Lips, a visiting fellow with the Foundation for Research on Equal Opportunity, who is the author of a new working paper, “Reducing Inequality in Outside-of-School Learning,” which is the subject of today’s conversation. Dan, welcome to the podcast.
Dan Lips: Thanks for having me. Great to be with you.
Jason Bedrick: Great to have you. So look, our listeners are used to us talking all the time about education savings accounts, which I have said for a long time are really unfortunately named because they are very often confused with higher education savings accounts like Coverdell and 529s. Today we’ll actually be talking about 529s. And we know that there have been some recent changes to 529 plans that have actually made them a vehicle for K-12 education, which they never really were before, in addition to higher ed. So perhaps just to set the stage, you could explain what 529 plans are and then walk our listeners through those recent changes and their implications.
Dan Lips: Sure. So since the late 1990s Americans have been able to save for college, tax-free using 529 accounts. In general, the states across the country manage these savings accounts, offering a range of investments that ultimately can be used for certain education expenses, including college tuition. Over time that has been expanded in 2017, congress expanded the allowable uses of 529 funds to also include K-12 tuition costs and also job training expenses.
Jason Bedrick: And these are in every single state except Wyoming, if I’m not mistaken?
Dan Lips: That’s correct.
Jason Bedrick: So federal policymakers have been increasing the utilities of the funds for K-12. How does that work? How do families open these accounts? How do they access them and use them for K-12 expenses?
Dan Lips: Well, the families can invest in a 529 even ahead of a child’s birth. And many states more than 30 states offer a certain state tax advantages for making a contribution to a 529 account. Many States have deductions essentially, or in some cases credits which encourage parents or their family members to make that investment. And the idea is that over time, those investments start early, a family could choose to use them on K-12 tuition when a child is in elementary or secondary school rather than during college. However, my view is that we should be looking a lot bigger in how we are funding these accounts. And there’s exciting programs around the country that are you making other investments into children’s 529.
Jason Bedrick: Yeah. And I want to hear more about those, but before we do in your paper, you argue that with some further reforms, 529s could be a vehicle to reduce the achievement gap and really the opportunity gap between kids from rich and poor homes. So let’s start by summarizing the problem as you note, it’s not district school funding anymore. That gap has mostly been closed. You even note in your paper that in a majority of states, high poverty districts now spend more per pupil than lower poverty districts. So where is the gap?
Dan Lips: One of the big remaining areas of inequality in American education is outside of school learning opportunities. For decades, researchers have looked at the summer learning slide or the amount of learning losses that occur while children are out of school during summer vacation in general, all children fall a little bit behind during summer break, but children from disadvantaged families they fall further and further behind.
And some researchers have argued that the compounding effects of the summer learning slide is one of the big factors in the cumulative achievement gap that grows by high school, basically over time, the months of loss learning year after year, your results in big differences in the learning opportunities for disadvantaged kids and their affluent peers. And there’s many reasons for this family background is one difference in children’s outside of school learning opportunities.
But one huge factor is family income. There’s national data that shows that the children from upper income families are the top 20%. Their parents spend around $9,000 annually on their educational enrichment expenses, kids from the lowest quintile or the bottom 20%, their families spend about a thousand dollars. And over time, this amounts to a massive spending gap on children’s learning. You all we’ve made great progress in narrowing resource gaps during the school day in school year. It is vast gap in outside of school learning investment.
Jason Bedrick: So we’re talking here about afterschool programs, trips to museums and science centers. And also, especially as you noted programming over the summer where there’s a rand study that you cite in your paper, which shows that students lose skills over the summer, especially in math, higher income kids actually gain over the summer in reading, whereas lower income kids show massive losses at the end of the summer, that as you know, accumulate year after year and have major implications. This actually brings me to one of the reasons that I’ve been skeptical of 529 plans. When Congress a few years ago was considering these changes. I thought, yeah, it’s welcome that they could use 529 plans for K-12 education in addition to higher ed. But I had two major objections. I’ll start with the first one, which is this issue.
It’s the equity issue, the benefits accrue primarily to those who can afford to put money into a 529 plan. And that doesn’t do very much for a lower income families. I mean, that the tax benefits are, yeah, well, they’re on the savings. So you’ve got to put up the principal, right? And you even know there’s a 2015 federal reserve study that shows only 0.3% of households with incomes below the bottom half of the income percentiles as of 2013, have a 529 plan, right? So how’s this going to help lower income families?
Dan Lips: Absolutely. And frankly, this is my reason for writing this at FREOPP our focus is on advancing policies that will help families living below median income or median wealth. And in my view programs that seed early investments in disadvantaged children’s 529 accounts can address goals that have been longstanding goals for both the left and the right. On the left, there’s this concern about wealth inequality and addressing from an early age, the resources available to children for preschool K-12 and post-secondary learning. And for many on the right, the idea of educational choice is this standing value that has been viewed as a way to address inequality.
There’s a growing interest, particularly among thought leaders on the left to advance programs and invest funds in children’s savings accounts. There’s a number of programs that already exist at the state and city level where the government makes investments into children’s savings accounts at an early age. And sometimes this is done by nonprofit organizations other times directly by the government. A good example is in Maine where every child in the state receives a $500 early investment in their child’s 529 account, thanks to a non-profit organization called the Alfond Scholarship Fund. These programs have been shown by academic researchers to lift families expectations and even children’s social emotional capability in during their early years.
Jason Bedrick: So that actually leads to my second objection, which was that these truly are savings plans, right? And so the benefits really accrue the longer you keep those investments in the account. So it seems that they’re most useful for college. They’re still somewhat useful for high school because especially if you invest early right around when the child is born or even as you know could do it before the child is born. But each year earlier that you take the money out, the benefit has actually been reduced. So they’re much less useful for K-12. Is that right? Or what am I missing?
Dan Lips: My view is that giving families these investments and control over greater education funding and the flexibility to use them when they feel they’re most necessary is a great way to expand opportunity. If we were able to successfully begin investing in children’s accounts at an early age, and having those funds grow over time, putting the decision to the family of whether to use those funds in elementary school, or perhaps for a tutor along their educational journey through K-12 before high school is one important way to address outside of school learning inequalities or this family resource gap.
I should say that part of the advantage of these accounts and this type of strategy for addressing wealth inequality while expanding parental choice, is that it would actually achieve both the goals of the left and the right, as I mentioned, there’s a great interest among many to try and address wealth inequality and to promote college savings. As we know, there’s also a strong interest and demonstrated value of promoting equal opportunity by expanding parental choice. In this case, vesting funds in children’s savings accounts from early age and making ongoing investments is in my view, a promising way to advance you both of these values, addressing wealth inequality, and promoting greater parental choice in a way that may appeal to policymakers, particularly across the political spectrum, that more direct a state education savings accounts may not.
Jason Bedrick: That brings us to the evidence. So your paper actually, as you noted, there are a bunch of states that have already started to do this kind of thing. And there’s actually some research on it. So why don’t you walk us through some of the research on how effective these programs are at actually expanding opportunity for lower income families?
Dan Lips: There’s one very promising research study that was conducted by university of Washington researchers who created an experiment where about 1300 children received early investments in children’s savings accounts while a control group of the same amount of children did not. And they studied how that affected their parents, their families, their savings, and children’s social and emotional capabilities through preschool.
And what they found was that not surprisingly making these investments really helped in terms of financial savings for the children, but also improve their social and emotional capabilities at preschool. The researchers found that these benefits were on par with Headstart, which is a $11,000 a year program. And these were just thousand dollar investments that the researchers were making into children’s accounts. It’s really, in my view, a proof of concept of how these types of programs investing in children’s savings accounts in 529s can benefit families by lifting their expectations, helping them plan for college and even giving kids an actual benefit and confidence in the classroom.
Jason Bedrick: The study that you cited showed that the children who received the 529 plan, and this was in Oklahoma, were 30 times more likely than the control group to actually have that 529 plan later on. And that the total amount of savings was six times more than the control group, which means that some of the families, they just, okay, they probably didn’t add, or didn’t add much to that initial investment, but it still, it grew over time. It was there, it was available, but it seemed that for some families, they were actually encouraged to put money into it over time, more so than if they hadn’t been participating in the program at all. So it actually, it seemed to incentivize savings.
Dan Lips: Absolutely. Academics have looked at this and other programs that are seeding investments in children’s 529s. And a common story that’s told is that once families have these accounts, they start thinking about college. They started imagining their kids going to college. And the idea of making another investment become something that they really consider doing. In Maine, for example, I mentioned the Alfond Scholarship Program, families are also encouraged with an extra a hundred dollars contribution. If they make a $25 contribution after their child’s account is opened. So there’s ways to structure these accounts that begin to give families greater incentive, to save, and also greater ownership of their children’s educational funding.
Jason Bedrick: So then what advice do you have for federal and state level policy makers who would like to use 529 as a vehicle to expand opportunity?
Dan Lips: The federal level? I think there’s important work to be done, to further expand these counts, to make them more valuable to parents. Right now, we’re seeing from the pandemic that many families are struggling to provide their children with basic learning opportunities. And if families had greater control over a share of their child’s education funding, or over control of a funded 529 account, they could be hiring tutors.
They could be accessing online educational services and they could be forming pandemic pods like families from upper income backgrounds are doing. My strong recommendation for Congress would be looking at ways to expand the allowable uses to include other K-12 outside of school learning expenses like tutoring, like homeschooling, like pandemic pods, and also to be looking at how the federal tax code can be allowed to clarify, to encourage that families and others can make… into disadvantaged kids 529s. Promising work to be done, to begin to create both incentives and funding streams to go into children’s 529 accounts. States could follow the method of estate scholarship tax credit programs by offering enhanced income tax or corporate income tax credits for contributions into these accounts.
They could also be modifying school funding formulas to steer a portion of a child’s fund into a 529. Imagine if parents were wrapping between two public schools, and one of the public schools was able to say, in addition to attending our school, we will reserve a thousand dollars of your child’s per pupil expenditure to go into a 529 account. You can use next summer for tutoring. If your child needs that or save for college to defer those future costs. At FREOPP we’re focused on finding new policies that promote equal opportunity and benefit children from low income families. I’ve been working on education choice policies for the past 20 years, I was involved in the early work of developing education savings accounts, or state funded education savings accounts as a new and better vehicle to promote parental choice, then vouchers and tax credits, which were the key vehicles that were used at the time.
In 2005, I proposed that idea as a new way to try and expand choice. In my view, allowing families to have access to greater funds through children’s savings accounts over their entire lives. You beginning at birth and extending through to college. And lifelong learning is the natural evolution of the school choice movement, moving from an effort to try and give families choices between schools, but to give families and parents and ultimately students control of over their education resources over the course of their life.
In the past, we’ve been thinking about giving parents control over where their child goes to school. What I think we need to be looking at is not just where they go to school, but how their funds are spent and when their funds are spent over the course of their life. By investing in children’s savings accounts and giving all families access to 529s, we’re no longer just trying to help kids, you choose between schools, we’re allowing families to plan ahead over the course of their child’s life and early adolescents, how to best educate that child.
I think it’s a promising option for expanding equal opportunity addressing these really challenging circumstances we’ve seen in vast disparities and outside of school learning, which have been exposed by the pandemic and truly addressing the achievement gap over time. My view over the next few months, we’re likely to see a big shift in the national political outlook. And as the national school choice movement begins to think about how to continue to advance choice in a period. When we made me see a much bluer national political map, my recommendation is that investing in children’s 529s and both of getting at this problem for the left of addressing wealth inequality for a low-income children while continuing to expand parental choice may be the best way to advance the interests of school choice over the next decade. Thanks so much for having me, and I really appreciate what you do at EdChoice and the opportunity to be with you and your listeners today.
Jason Bedrick: Well, Dan, thank you for joining us. Our guest today has been Dan Lips, visiting fellow with FREOPP, the Foundation for Research on Equal Opportunity. And again, the paper we discussed today was ,“Reducing Inequality in Outside-of-School Learning.” Dan, thank you so much for joining the podcast.
Dan Lips: Thank you so much, Jason.
Jason Bedrick: This has been another edition of EdChoice chats. If you have any ideas for authors, you’d like us to interview for the big idea series, please send them to email@example.com, and please be sure to subscribe to our podcast, follow us on social media at EdChoice. And don’t forget to sign up for emails on our website edchoice.org. Thank you. We’ll catch you next time.