Financial Knowledge and Child Development Account Policy: A Test of Financial Capability
There is growing awareness of the importance of financial capability in optimal financial decision making and financial well-being. To be financially capable, families must have financial knowledge and skills, but also have access to appropriate financial products and services. That is, the concept of financial capability emphasizes the importance of the interaction between individual ability and external conditions on individual financial functioning. This study tests this proposition regarding financial capability using the data from the SEED for Oklahoma Kids experiment (SEED OK).
SEED OK is a statewide randomized social experiment to test a Child Development Accounts (CDAs) program that encourages families to accumulate assets for children’s future using the existing 529 College Savings Plan in Oklahoma. SEED OK draws study participants (N=2,651) from a probability sample of infants selected from birth records, and randomly assigns them into the treatment and control groups. SEED OK automatically opens a state-owned account with a $1,000 initial deposit for treatment participants, and encourages participants to open their own 529 accounts with a time-limited $100 account-opening incentive. The policy experiment, which creates different institutional settings for treatment and control participants to make financial decisions on college savings, provides a unique opportunity to examine the interaction between individual financial knowledge and policy environments. The dependent variable, holding status of participant-owned accounts (Yes/No), indicates whether SEED OK study participants retain a private 529 College Savings accounts after 21 months of experiment implementation. The main independent variables are participant’s financial knowledge (high-level/low-level) and SEED OK treatment status (Treatment/Control).
Results of logistic regression show that participants’ financial knowledge is positively related to the 529 account holding rate only in the treatment group, but not in the control group. This finding implies that the effect of financial knowledge on financial decision related to college savings is affected by the institutional context. In the treatment group, the odds of holding a participant-owned account for those with a high level of financial knowledge is 2.3 times that for those with a low level of financial knowledge. The SEED OK policy innovation has greater impacts on participants’ account holding than financial knowledge. The odds of 529 account holding in the treatment group is 33.5 times of that in the control group.
Supporting the proposition of financial capability that both the ability to act (knowledge) and opportunity to act (access) are necessary, the study’s findings show the interactive effects between financial knowledge and policy changes created by SEED OK. To expand financial capability requires both improved individual financial knowledge and supportive institutional settings. Using college savings as an example, the study also suggests the importance of financial capability for individuals and families to make optimal financial decisions and to achieve financial well-being.