Financial Incentive and Program Participation of 529 College Savings Plans: Evidence From a Statewide Randomized Experiment

Background: 529 College Savings Plan is an asset-building program created by the federal government and operated by the state government to encourage families to save for college. A number of states have developed financial incentives, such as account opening incentive and savings match, to increase 529 program participation. However, few studies evaluate the impacts of these financial incentives. This study uses a unique dataset from SEED for Oklahoma Kids (SEED OK) to examine the impact of these two financial incentives on 529 program participation.

Methods: SEED OK is a statewide randomized experiment in Oklahoma (treatment n=1358, control n=1346) to encourage families to accumulate assets for children’s future using the existing Oklahoma 529 College Savings Plan (the OK 529). It drew a probability sample from all infants born in two three-month periods in Oklahoma (April through June, 2007, and August through October, 2007), and randomly assigned them into the treatment and control groups. Treatment participants received three financial incentives in SEED OK: (1) a $1,000 initial deposit saved in a state-owned account automatically opened for participants, (2) a time-limited $100 account opening incentive to encourage participants to open their own 529 accounts, and (3) savings match to the contributions in 529 accounts made by income-eligible participants (e.g., low- to moderate-income households). The focus of the study is the impacts of the second and third financial incentives.

The study uses a difference-in-difference specification in a hazard model to estimate the impacts of two incentives. The effect of account opening incentive is estimated by comparing the difference in 529 program participation between treatment and control groups within the period eligible for the incentive to the difference between two groups beyond the time limit. Similarly, the impact of savings match is estimated by comparing the difference in 529 program participation between participants eligible and ineligible to the savings match in the treatment group with that in the control group.

Results: The results show that account opening incentive and savings match increase 529 program participation. The hazard of opening a 529 account for the treatment group is 42 times that of the control group in the time period when the account opening incentive is available. In addition, after controlling for the impact of account opening incentive, the hazard of account opening for those eligible for the savings match in the treatment group is about 8 times that of the control group. 

Conclusions: The study has important policy implications for designing asset-building programs. Financial incentives can be used as an effective strategy to promote program participation of asset-building programs.