A Unique Way to Save: Using the Earned Income Tax Credit to Improve Financial Literacy

October 2, 2015

By Liz Glaser - Graduate Research Assistant

When researching early-awareness efforts throughout the US, it is easy to get lost in a sea of successful programs and forget that there are other avenues to inspire early awareness and planning.  This can include federal policy changes and even tax policy, like the Earned Income Tax Credit. This is why I was excited to attend a panel hosted by New America Foundation called “A 21st Century EITC: Fighting Poverty in an Age of Income Volatility.” The panel was filled with tax policy experts and people who have led pilot programs to change the EITC, and each person discussed the importance of tax credits in improving financial stability, and you can watch the recording of it here. This panel sparked an interest at NCAN about how tax credits and financial stability can help in the context of college access.

Early-awareness mostly revolves around creating a culture of college-going, and if families can improve their financial stability, that can only improve their college-going attitudes. NCAN doesn’t specialize in tax policy, but we can tell you that the Earned Income Tax Credit has helped millions of Americans stay out of poverty. The EITC is simple: low-income families, particularly with children, earn a lump sum that is delivered with their tax refund annually. Proponents of the EITC agree that access to this refund can help families by promoting long-term financial planning, encouraging savings accounts, and assisting families in becoming financially stable. These are important values and mindsets for families to practice, especially if they are raising children who are going to attend college.

Families have adjusted to the practice of receiving one lump sum annually. However, two different organizations have proposed changing that timeline in order to improve the benefits already accrued. In Chicago, participants in the Center for Economic Progress pilot program received their EITC funds in smaller payments four times throughout the year. Economists at the CFED proposed a “Rainy Day EITC,” where families could “opt-in” to receive 80% of their EITC credit at tax time, and receive the remaining 20% - plus a 50% match – six months later. The three goals of long-term planning, saving, and being financially stable are all intended to improve through these proposed programs. In Chicago, participants were found to have lowered debt, decreased use of payday loans, and increased family and educational investments. In creating a changing mindset for college-going low-income families, these changes could certainly help.

Savings are a crucial aspect of college-going. While college savings accounts are often utilized by middle-income families, programs like the EITC, with or without changes, may help low-income families create their own savings accounts. Research has shown that in many low-income families, the act of making the savings account specifically for college is more of a driver for college enrollment than the actual amount in that account. College savings accounts certainly are, and can be, an option for EITC money. When families plan to receive their EITC, they have the opportunity to think ahead about what their family will prioritize with their money. 

Combined with early-awareness efforts that focus on saving, the EITC can continue to help low-income families while also contributing to a culture of change. A report by the Urban Institute explores using the tax process to disseminate information about college finances, and helps to show that increased financial stability through saving and long-term planning is effective in every college-related decision that low-income families can make. Using tax paperwork to promote college-going can feel uncomfortable, but it’s one of the few processes that reaches almost every American, and low-income families are familiar with the process. If things like the EITC can continue to be useful, we can utilize the process to promote college-going and change. 

 






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