While financial education is focused on knowledge and skill development, asset building goes further, seeking to build wealth for low-income and economically vulnerable individuals and families. While these two areas can and do intersect, as with asset building programs that include financial education requirements, they are separate fields.
After families learn the basics of financial management, asset-building programs take the next step of helping families use what they have learned to build wealth. Asset building efforts are focused on the goal of building wealth to alleviate poverty and economic hardship. A variety of asset-building strategies, programs, and initiatives currently exist, through the efforts of federal, state, and local governments as well as non-profits and community-based organizations.
One asset-building approach is the individual development account (IDA), a short-term, limited use; goal-oriented, matched savings account bundled with financial education and other services into a program. Participant savings are matched by the program. IDA programs generally have eligibility requirements that target lower income or other vulnerable populations.
Federal funding for IDA programs is available from two HHS programs, the Assets for Independence grant program and the Office of Refugee Resettlement IDA program. The larger of the two is the AFI program, established in 1998. The AFI program makes five year grants directly to community-based nonprofits and state, local, and tribal government agencies of up to $1,000,000. Currently, almost 400 AFI projects are in operation, and, since the program began, close to 60,000 participants have saved earn income in AFI supported IDAs. The ORR IDA grant program, which restricts program participation to refugees, has 22 grantees. Other sources of funding for IDA programs include state and/or local government, banks and other financial institutions, and/or private foundations. While some IDA programs may have single source funding, many combine funding sources, in part due to a requirement of the AFI program that applicants must secure non-federal funds in an amount equal to or greater than the grant amount requested from AFI.
Depending on funding sources, IDA programs offer various match rates and have different allowable uses for match funds. For example, IDA programs funded by an ORR grant cannot offer a match higher than one-to-one, but participants can use their savings and the match money to purchase a vehicle. IDA programs funded by an AFI grant can offer up to an eight-to-one match rate (every dollar deposited by the account holder gets eight dollars of match), but vehicles are not an allowable use of match funds. The most common allowable uses are buying a first home, starting or expanding a small business, and obtaining post-secondary education or training. Some IDAs allow matched savings for home repair, adaptive equipment, and retirement.
While IDA programs allow participants to save for their own education or training, there are also asset-building programs that focus on saving for one’s child (or children’s) higher education. Qualified Tuition Programs, commonly known as 529 plans because they were authorized by Section 529 of the Internal Revenue Code, are tax-advantaged savings plans intended to encourage savings for future college costs. There are currently two types of 529 plans, college savings plans and pre-paid tuition plans. With a college savings plan, an adult creates an account to save for a child’s college expenses. Account-holders must decide what type of account to create, taking into consideration investment concepts like risk and return. Withdrawals can be used for qualified higher education expenses at most colleges and universities. Pre-paid tuition plans essentially allow a parent to make tuition payments over time and in advance of their child actually beginning college. One benefit of this type of plan is that it locks in tuition expenses, protecting against future increases. A downside is that these plans also lock a student into a particular college or university system (often a state system).
While 529 plans are available to any family regardless of income and often require a low initial investment, the main incentive these plans offer is that of a reduced federal income tax burden, which is less of a benefit for lower-income families that pay little or no income tax than for those families that earn more. To encourage college savings among the low income, some states—Louisiana, Michigan, Maine, Minnesota, and Rhode Island—will match 529 deposits for families that meet eligibility rules established by the respective state.
As a third example, the Earned Income Tax Credit (EITC), a refundable federal income tax credit for low-income working individuals and families, is considered to be an asset building tool by practitioners in the field. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. This can result in a large amount of money coming into a low-income household every year, which provides an opportunity to save, invest, or purchase an asset. However, individuals must file a tax return in order to receive the EITC, and IRS estimates indicate that many eligible persons miss out on this opportunity every year. Thus, increasing awareness of the EITC through targeted campaigns has been another focus of organizations and practitioners working on asset building among the low income.
Additionally, asset building policy advocates have worked with the IRS to make it easier for tax filers receiving a tax refund to split the refund into two accounts, e.g. a transaction account and a savings account. Others see tax refunds and the receipt of the EITC lump sum as an opportunity to encourage lower-income individuals to purchase US savings bonds. Interest continues in looking at EITC-related initiatives and programs to not only ensure that eligible families receive the EITC, but to encourage the use of these funds to build assets.