Financial Knowledge and Child Development Account Policy: A Test of Financial Capability

Abstract This study examines how study participants' financial knowledge and participation in a Child Development Account intervention affects 529 College Savings Plan account holding among caregivers of infants. The study uses data from the SEED for Oklahoma Kids (N = 2,651), a statewide randomized experiment using a probability sample of infants selected from birth records. Results of logit regression show that participants' financial knowledge is positively related to account holding in the treatment group but not in the control group. The interactive effects between financial knowledge and treatment status are statistically significant. This finding implies that the effect of financial knowledge on financial decisions related to college savings is moderated by institutional features, such as incentives, information and access. Results of this study support the propositions of financial capability and suggest that expanding financial capability requires both improved individual financial knowledge and supportive policy. Awareness of the importance of financial capability in optimal financial decision making and financial well-being is growing (Johnson and Sherraden 2007; Sherraden in press). To be financially capable, families must have not only financial knowledge and skills but also access to appropriate financial products and services. Among low-income and low-education families, financial capability is especially important because financial literacy tends to be lower (Mandell 2008) in a context of more acute financial challenges and lower access to financial services (Bucks et al. 2009). The concept of financial capability has three key propositions: (1) financial knowledge and skills are important determinants of an individual's financial ability and well-being, (2) individuals require access to financial institutions, and (3) there are interactive effects between the two. An individual's financial ability is influenced by the institutional setting that creates (or constrains) certain opportunities to apply financial knowledge and skills. The institutional setting is part of what Martha Nussbaum refers to as a person's "external conditions" (2000, 85). Together, individual ability and institutional setting shape a person's financial capability and well-being. This study tests the three propositions regarding financial capability using data from the SEED for Oklahoma Kids (SEED OK). SEED OK is a statewide randomized social experiment to test a Child Development Account (CDA) program that encourages families to accumulate assets for their children's future using the existing 529 College Savings Plan in Oklahoma (Oklahoma College Savings Plan or OK 529 plan). CDAs are savings accounts for children that provide a structured opportunity to save and accumulate assets by providing incentives, information and access (Cramer and Newville 2009; Sherraden 1991). 529 College Savings Plans are tax-advantaged savings programs designed by the federal government and operated by state governments to encourage saving specifically for future college costs (Clancy 2003; U.S. Department of Treasury 2009). The SEED OK experiment offers various college savings options to participants, which provides a unique opportunity to examine the interaction between individual ability and policy environments. Specifically, this study uses 529 account-holding status as an outcome measure, and investigates three research questions: (1) Does financial knowledge increase an individual's chance of holding a 529 account for a child's future? (2) Does a CDA intervention (i.e., the SEED OK experiment) increase an individual's likelihood of 529 account holding regardless of level of financial knowledge? (3) Are there any interactive effects between an individual's financial knowledge and the CDA intervention? That is, does financial knowledge have a different impact on the probability of holding a 529 account for the SEED OK participants in the treatment and control groups? …