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Housing

Individual Development Accounts:  How Legislators Can Use IDAs as a Tool to Increase Homeownership and Promote Asset Development

August 2005

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By Rochelle Finzel, Policy Associate

Contents

Introduction
History of Asset Development Policy
What is an Individual Development Account (IDA)
Research on the Use and Effectiveness of an IDA
American Dream Demonstration
Assets for Independent Demonstration
Policy Options 
Table 1: Public Funding Options in State IDA Programs
Challenges
Conclusion
Notes
References

Introduction

One in four families is poor in assets, meaning they lack the financial resources to sustain their family for a period of three months at the federal poverty level.¹  Most programs designed to support low-income families emphasize income and increasing their earnings.  What is often more challenging for families is their lack of assets to help cushion financial setbacks such as a job loss or a health emergency.  Asset development, as defined by the New America Foundation, refers to public policy and private sector efforts to enable persons with limited financial resources to accumulate and preserve long-term, productive assets—savings, investments, a home, postsecondary education and training, a small business, and a nest-egg for retirement. 

Homeownership in this country is viewed as one of the most important assets to achieve financial security.  In fact, home equity is the main source of savings for most middle-income households.²  Homeownership rates, however, are under 50 percent for families in the lowest fifth of income.³  Individual development accounts (IDA) is one way to increase homeownership rates among low-income families. 

IDAs are matched savings accounts for families with limited resources that are targeted to particular goals, specifically home purchase, postsecondary education and small business capitalization.  This report will provide a brief history of asset development in this country, an overview of IDAs and research on their effectiveness, policy options for state legislators, and challenges for policymakers to keep in mind as they build upon IDA programs.

History of Asset Development Policy

The United States has a long history of supporting asset development through public policies.  The Homestead Act of 1862 provided land for families, and the GI Bill in 1944 supported educational attainment, both important assets that often lead to increased financial security.⁴  The home mortgage tax deduction is another policy supporting asset wealth. 

Many low-income families do not benefit from current federal asset building policies.   Homeownership rates are lower for those with lower incomes, and therefore, fewer are able to take advantage of the mortgage tax deduction.  Low-income families have limited tax liability, which precludes them from taking advantage of other tax benefits. 

Two asset development programs exist that are targeted primarily to low-income families.  Enacted by Congress in 1990, the Family Self-Sufficiency (FSS) program of the U.S. Department of Housing and Urban Development (HUD) is an asset building tool for families who live in public housing or who are recipients of housing vouchers.  The program is administered through the state and local housing authorities and includes case management services and an escrow account.  Families’ rental subsidies are based on income; when a family’s income increases, their portion of the rent goes up.  In the FSS program, the increase in rent is set aside in an escrow account that a family can use once they graduate from the program.⁵  There are no restrictions on the use of the funds.  Most use it for homeownership, education or small business expenses.⁶ 

Individual development accounts (IDA) were created as a means to build assets for those with low incomes and can be an effective tool to increase homeownership rates.  IDAs are matched savings accounts for low- to moderate-income people for specified purposes, most often first-time home purchase, postsecondary education expenses or small business capitalization.  IDAs were first included in the 1996 welfare reform legislation, which gave states the option of including them in their state welfare reform plan, and specified that savings in these accounts be excluded when determining eligibility for assistance. 

The Assets for Independence Act of 1998 established a five-year IDA demonstration program funded with $125 million in federal money.  Administered by the Office of Community Services in the U.S. Department of Health and Human Services, the program awards grants to nonprofit community-based organizations, government agencies and financial institutions for IDA matching funds.   

What is an Individual Development Account (IDA)?

IDAs are matched savings accounts for low- to moderate-income people for targeted asset goals.  Purposes most often include homeownership, postsecondary education expenses or small business capitalization.⁷  More recent policy has broadened the use of individual development accounts to include home repair, vehicle purchase or repair, and the purchase of computers or assistive technologies to help individuals get and maintain employment.⁸  Although not as frequent, they can also be used for a second home purchase, manufactured home purchase, land or first and last month’s rent deposits.⁹

Eligibility.  Programs are targeted to low-income families who meet annual income eligibility guidelines.  Two-thirds of IDA programs target those who are eligible for Temporary Assistance for Needy Families (TANF).¹⁰  Others require participants to have an annual income below 200 percent of the federal poverty level—$32,180 for a family of three.  Some programs use 80 percent of area median income as the eligibility threshold.  Generally, programs require account holders to participate in financial education classes.  

Match rates.  Individual contributions to IDAs can receive matching dollars at a rate typically ranging from 1:1 to 3:1.  Some programs have different match rates for different savings goals.  Match funds for IDAs come from a variety of sources.  The largest source of matching dollars is federal grants, followed by state and local governments, financial institutions and private foundations.¹¹  States can provide match money with general fund appropriations, federal and state Temporary Assistance for Needy Families dollars, Community Development Block Grant funds, and with tax credits for match contributors and individual account holders.  States may also choose to use general funds for administrative costs.  The federal Office of Refugee Resettlement also has funds available for match contributions.

Administration.  Individual development accounts are often administered by community nonprofit organizations or community action agencies in collaboration with state and local entities, banks and credit unions.  Community development corporations and affordable housing agencies also often offer individual development accounts.  Financial institutions maintain the accounts and often provide other services to the family, including budget counseling, homebuyer workshops and general financial education.  Some financial institutions also provide funds for match contributions. 

Location.  The Iowa legislature was the first to pass legislation creating an IDA program in 1993.  In that same year, many community-based organizations also started programs.  At least 35 states and the District of Columbia have now passed legislation and programs currently exist in all 50 states.¹²  More than 500 programs and more than 20,000 accounts exist nationwide and the field continues to grow.¹³  IDAs are found in rural, urban and suburban areas.

Research on the Use and Effectiveness of IDAs

Policymakers and program administrators were at first unsure of the ability of the target population to build assets.  Low-income families tend not to have extra money to put into savings.  The research shows, however, that poor people can and will save given the right opportunity and incentives.  Saving is not dependent on income level, but includes a combination of factors, including the structure of policies and institutions to encourage such saving.  Individual development accounts have shown to be an effective way to increase the assets of working families.   

According to a 2003 survey, IDA account holders saved $14.5 million, which was matched with an additional $22.5 million.  The savings and match funds were used to leverage an additional $130 million—most of which is attributable to home loans.  A total of $168 million was invested in purchasing assets for low-income families.¹⁴

The majority of account holders are female.  One-third of participants are African American, one-fourth are white and one-fifth are Hispanic.  Nearly 90 percent have incomes below $30,000 per year.  More than half are between the ages of 30 and 49.¹⁵

American Dream Demonstration

The American Dream Demonstration was the first study of IDAs conducted by the Corporation for Enterprise Development and the Center for Social Development at Washington University in St. Louis.  The study ran from 1997 to 2003 and followed participants in the Tulsa, Okla., IDA program operated by the Community Action Project of Tulsa County.  The program included a 2:1 match for homeownership and a 1:1 match for other allowable uses.

The study indicated more than 60 percent of participants who withdrew money used matched withdrawals for housing purposes.  The most common use was home repair or improvement.  Twenty-six percent used their matched withdrawal for home purchase.  The average withdrawal was $1,480 per participant.  With match funds, the average withdrawal amount grew to $3,431 per participant.¹⁶  Housing needs is the top use for individual development accounts.

The evaluation found that IDA programs resulted in a higher rate of homeownership.  It increased families’ real and total assets.  There was an increase in educational attainment as more participants took a postsecondary education class than those who did not have an IDA.  The positive effects were even greater for African Americans, especially in terms of homeownership and retirement savings.¹⁷  IDA programs can have a significant impact on participants’ ability to accumulate assets. 

These accounts also result in positive psychological effects for participants.  Based on interviews with account holders, many felt more confident and had a greater sense of responsibility.  Having an account helped them think about long-term goals and future opportunities.¹⁸  Research also suggests positive effects on the children of participants, such as improved living conditions, educational opportunities, and positive modeling of savings behavior.¹⁹

Assets for Independence Demonstration

The Office of Community Services in the federal Administration for Children and Families administers the federally funded Assets for Independence Demonstration program.  The most recent report on this program based on data received from 176 of the 211 grantees for projects administered through September 2003 shows:

• The average account balance at the end of the year was $489.²⁰
• The average withdrawal from an IDA was $548.  Withdrawals for home purchases were the largest, averaging $1,107.²¹
• Match rates varied from 1:1 up to 8:1.  Some offered different match rates depending on the asset goal.  The most common rate across the sites was 2:1.²²

Nearly all programs require financial education and counseling for participants on budgeting, credit use, savings, investments and taxes.  On average, participants are required to attend 19 hours of financial literacy training before they are able to withdraw their savings for a purchase.²³  Ninety percent of programs provide home purchase and ownership classes.²⁴  Many programs also offer microenterprise development classes and postsecondary education training.  Many nonprofits administering IDA programs also offer case management, help with employment issues, child care or transportation support.

In summary, the research from both demonstration programs illustrates the effectiveness of IDAs at increasing assets for low-income families.  The majority of participants use their savings for housing purposes.  IDAs have helped to increase homeownership rates for low-income families and have the most positive effects on African American families.  Financial education is an important component for a program and participants to be successful.

There are, however, concerns about the programs. 

• High administrative costs. IDAs are costly to administer, which may be partly due to relatively few accounts.  The cost efficiency may increase as programs grow in scale. 
• No increase in overall wealth.  IDAs result in an increase in some form of asset accumulation, yet not necessarily overall wealth.
• Many unmatched withdrawals.  Account holders must use withdrawals for allowable expenses in order to be eligible for match funds.  Many participants withdraw unmatched amounts, which may suggest the need for more flexibility in allowable uses, or the need for separate mechanisms to pay for short-term needs versus long-term asset goals.
• High housing prices.  Homeownership is not the only way or the best way to build assets for low-income families.  Some markets are prohibitively high priced, and researchers are concerned that a sudden drop in prices would hurt low-income families the most.²⁵ 

Policy Options

Create a program.  Programs exist in all 50 states at the community level.  Policymakers should first identify existing programs and determine what is needed to strengthen and support those programs.  At least 35 states plus Washington, D.C., have created individual development account programs through legislation.  States without legislation could create a program modeled after other state programs.  States could also choose to only allow savings to be used for homeownership, although that may not be necessary given the high use of these accounts for that purpose.  States may want to keep in mind short-term versus long-term needs as identified by the frequency of unmatched withdrawals for purposes other than those outlined in the program guidelines. 

Expand uses of current programs.  As shown in the research, many account holders withdraw unmatched dollars to use for other needs.  States with existing programs can examine ways they may change statutory language to incorporate other uses of IDA funds, whether it be car purchase or repair, rent payment or other expenses.   States could choose to expand the allowable uses to cover some short-term needs while maintaining the long-term savings goals. 

States that have passed legislation more recently have included broader uses of the money, to include the purchase of a computer if necessary for educational goals or a vehicle for employment purposes.  Washington created an IDA program targeted specifically toward young people who will be moving out of foster care to cover housing and medical costs, postsecondary education and training as well as a purchase of a computer.  Other states could modify their programs to accommodate specific populations and needs.

Fund programs.  States can provide funding for IDAs through general fund appropriations, TANF funds, state TANF maintenance of effort dollars, or Community Development Block Grant money.  Most states provide funds to be used as a match to the individual contributions.  States could also choose to fund administrative costs.  See Table 1 for those states that have provided public funding for IDA programs.

Table 1. Public Funding Sources in State IDA Programs

Source: Center for Social Development, Washington University, 2004

Provide tax credits.  Another option is to provide tax credits to both individual contributors and match donors.  Ten states authorize tax credits to contributors (see Table 1).  Oregon passed legislation in 2005 that allows a tax credit against the amount of money withdrawn from an account up to $2,000, or the individual’s tax liability, if the withdrawal is used for home purchase.   

Incorporate or integrate asset development strategies.  IDAs are one strategy in an overarching goal of increasing homeownership and building assets of low-income families.  States can examine existing policies to identify ways to integrate them as part of an overall asset development framework.    

Link IDAs with federal and state earned income tax credit: The federal and state earned income tax credit for low-income working families can provide families with up to $4,300 in a tax refund.  Research shows that families tend to use this money as an opportunity to pay off debt or invest in longer term financial goals.  A maximum federal EITC refund of $4,300 would go a long way in building up resources for a down payment.  Linking the EITC refunds with IDA accounts can build a family’s savings rather quickly.  Legislators can work with local EITC outreach campaigns and free tax preparation sites to encourage them to connect the EITC with IDAs.  

Remove the asset test from public assistance programs.  Many public assistance programs include an asset test, meaning persons are denied assistance if they have more assets than allowable under law.  While the welfare program excludes IDAs from this test, states could remove the asset test from public assistance programs as a way to encourage savings through multiple avenues.  Virginia removed its asset limit after it found it only denied a small number of applications due to excess savings.²⁶ 

Promote collaboration between IDA programs and FSS.  States could examine ways to integrate IDAs with the Family Self-Sufficiency program for public housing recipients.  FSS account holders often use the savings for the same purchases as allowed by IDAs.  Integration could help families increase the amount they are able to save through both accounts.  It could also result in administrative cost savings if programs share resources and align program guidelines.

Incorporate financial education and asset management.  Most IDA programs require account holders to participate in financial education classes.  As families begin to build a savings account, they also need the tools to know how to properly manage and protect those assets.  Rising consumer debt, identity theft, payday lending and home foreclosures make it important for consumers and state legislatures to understand their roles in ensuring consumers understand the basics of financial management.  NCSL recently announced it will be offering a program designed to educate legislators and staff on financial services issues, including consumer protection options, at their regular meetings and forums. 

Build an Asset Policy Coalition. Asset policy encompasses more than homeownership.  States can build coalitions to address the various ways families can build assets.  A recent report by Heather McCulloch for the Fannie Mae Foundation highlights state asset policy initiatives in six states: California, Delaware, Hawaii, Illinois, Michigan and Pennsylvania. 

The Asset Policy Initiative of California (APIC) includes more than 30 nonprofit, public and private sector leaders from across the state.  The initiative is focusing on various policy initiatives around asset accumulation, leverage, preservation and creation.  Specific initiatives include: the creation of a state financial education task force, state earned income tax credit, children’s savings accounts and other educational savings accounts for low-income families.  The coalition is also hoping to address homeownership concerns through a homeownership trust fund, refundable renter’s credit, inclusionary zoning to promote affordable housing and microenterprise development.  To help consumers protect assets, the coalition is supporting legislation on predatory lending and expansion of health insurance coverage.  The coalition worked with the state legislature to pass a resolution recognizing the coalition’s work and calling for research on asset poverty.  They have also developed state and national partnerships and garnered media attention on the issue of asset development.²⁷

In 2001, Delaware Governor Ruth Ann Minner created a statewide Task Force on Financial Independence at the encouragement of the state treasurer, Jack Markell.  Policy priorities include asset facilitation, incentives, protection, and removal of barriers to asset accumulation.  Specific policy priorities revolve around financial literacy, state and federal EITC, expansion of current health care programs, and supporting policies that help consumers maintain assets. 

The task force has accomplished many goals: 

• Financial education now counts as a work activity for TANF recipients. 
• The Delawareans Save! IDA Collaborative received additional funding to expand the program. 
• The Department of Labor created a fact sheet for unemployed workers outlining resources available to them. 
• The number of families claiming the EITC has increased through public education campaigns. 
• The state has also adopted an economic self-sufficiency standard to calculate what it takes to raise a family without any public support.  The standard is being used by the Economic Development Office for awarding certain state funds.²⁸ 

The Ho`owaiwai Asset Policy Initiative of Hawaii is focusing on advocacy, capacity building and education.  Hawaii has one of the lowest homeownership rates, second only to New York.  The policy priorities include expansion of IDAs, supporting financial education initiatives, increasing affordable homeownership opportunities and connecting asset building to economic development.  The initiative is in its early stages of development.²⁹ 

The Illinois Asset Building Group began meeting in 2003.  Led by the Heartland Alliance and the Sargent Shriver National Center on Poverty Law, the coalition has identified policy priorities around education, health insurance, access to financial institutions, housing, small businesses, consumer protection, transitional jobs and transportation.  The group supported legislation to expand health care coverage to low-income families, to regulate the payday lending industry and to provide rental subsidies.³⁰

The Michigan IDA Partnership is in the process of identifying policy initiatives that support broader asset building initiatives.  The partnership has successfully secured more funding for IDAs and worked with another agency to establish a children’s savings account program for 500 Head Start households.  They also were successful in removing savings in education accounts from asset tests for state assistance.³¹  

Pennsylvania state representative Dwight Evans, Secretary of Banking Bill Schenck and Governor Edward Rendell led the effort to create a statewide Task Force for Working Families.  Priorities of the task force include: financial education, moving families beyond living “paycheck to paycheck,” small business creation and fair treatment of consumers by financial institutions.  The governor’s budget included funding for recommended policy priorities of the task force.  The Office of Financial Education is charged with establishing a clearinghouse of financial education resources.  The task force is also working on outreach to families on the earned income tax credit.³²      

Challenges

Individual development accounts are a relatively new policy option.  It is a growing field and is crossing over into other areas of asset development.  There are some challenges that face the IDA community as it moves forward.

• Reaching more individuals.  When one in four families in America is considered poor, 20,000 accounts is a small number.  Bringing these programs to scale and reaching more families is a challenge that must be taken into account before moving too far forward. 
• Finding and retaining match sources.  The match rate is what allows a low-income family to turn a small bit of savings into a substantial asset.  Securing and maintaining public and private funding sources is critical to the success of IDA programs.
• Providing follow-up services.  Protecting assets that families worked hard to secure is essential to long-term financial security.  Homeownership is a way to build financial security, but it can also be a quick path to foreclosure and even further debt if families are not given the tools to protect their assets. 
• Recognizing homeownership may not be right for everyone.  Research suggests that the mortgage tax deduction is not as effective for those with low incomes and little tax liability.  Studies also show that low-income families often do not stay in their home long enough to benefit from appreciation.  The high cost of housing and a possible decline in the housing market may result in families actually losing money.³³  IDAs can be a tool to address other housing needs, such as rent deposits rather than solely focusing on homeownership. 

Conclusion

Individual development accounts are part of a growing policy dialogue around asset development as a way to reduce poverty and build wealth for low-income families.  They are effective at increasing homeownership rates and overall assets.  Although these accounts and homeownership are not for everyone, it can move many families who are living from paycheck to paycheck into more secure financial footing.  States can play a vital role in increasing the scope of these programs and shaping asset policy in the future.

Notes

1. Corporation for Enterprise Development, 2005 Assets and Opportunity Scorecard, (Washington, D.C.: CFED, 2005), 2.

2. Adam Carasso, Elizabeth Bell, Edgar O. Olsen, and C. Eugene Steuerle, Improving Homeownership among Poor and Moderate-Income Households (Washington, D.C.: Urban Institute, June 2005), 1.

3. Ibid.

4. Karen Edwards and Lisa Marie Mason, State Policy Trends for Individual Development Accounts in the United States: 1993-2003: Policy Report  (St. Louis: Washington University Center for Social Development, May 2003), 1.

5. Program length is typically five years, but many families graduate in fewer years.  Jeff Lubell, HUD’s FSS Program – A Promising Alternative Vehicle for Helping Low-Income Families Build Assets  (Houston: FSS Partnerships, September 2004), obtained from http://www.fsspartnerships.org/includes/fssoverview.pdf.

6. For more information on FSS programs go to http://www.fsspartnerships.org.

7. Karen Edwards and Lisa Marie Mason, State Policy Trends for Individual Development Accounts, 1.

8. 2005 Kan. Sess. Laws, (chapter number not yet assigned) HB 2222; 2005 Wash. Laws, Chap. 402.

9. Corporation for Enterprise Development, A Look at the Growing Individual Development Account Field: Results from the 2003 Survey of IDA Progrmas, (Washington, D.C.: CFED, 2003), 24.

10. Ibid., 5.

11. Ray Boshara, Individual Development Accounts: Policies to Build Savings and Assets for the Poor, Welfare Reform and Beyond Policy Brief No. 32 (Washington, D.C.: Brookings Institution, March 2005), 2;  CFED, A Look at the Growing Individual Development Account Field, 24.

12. Karen Edwards and Lisa Marie Mason, State Policy Trends for Individual Development Accounts, 1.

13. CFED, A Look at the Growing Individual Development Account Field, 4.

14. Ibid., 11.

15. Ibid,, 16-17.

16. Gregory Mills et al., Evaluation of the American Dream Demonstration: Final Evaluation Report (Cambridge: Abt Associates Inc., August 2004), v.

17. Ibid., vii.

18. Margaret Sherraden et al., Saving in Low-Income Households: Evidence from Interviews with Participants in the American Dream Demonstration (St. Louis: Washington University Center for Social Development, January 2005), 147.

19. Ibid., 159-161.

20. U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services, Assets for Independence Demonstration Program: Status at the Conclusion of the Third and Fourth Years: Interim Report to Congress (Washington, D.C.: Office of Community Services, May 2004),38.

21. Ibid., 35.

22. Ibid., 39.

23. Ibid., 40.

24. Ibid., 41.

25. Dean Baker, Who’s Dreaming? Homeownership Among Low Income Families, Center for Economic and Policy Research Briefing Paper (Washington, D.C.: CEPR, January 11, 2005), 3.

26. Mark Golden, “Asset Policy In Virginia” (presentation at Fourth Annual State IDA Conference, St. Louis, April 20-22, 2005).

27. Heather McCulloch, Promoting Economic Security for Working Families: State Asset Building Initiatives, (Washington, D.C.: Fannie Mae Foundation, July 2005), 9-11.

28. Ibid., 11-12.

29. Ibid., 15-16.

30. Ibid., 16-18.

31. Ibid., 18-19.

32. Ibid., 13-15.

33. Dean Baker, Who’s Dreaming, 3. 

References

Center for Social Development State Assets Policy

Edwards, Karen and Lisa Marie Mason. State Policy Trends for Individual Development Accounts in the United States: 1993-2003: Policy Report.  St. Louis: Washington University Center for Social Development, May 2003.

FSS Partnerships

IDA Network

Knowledgeplex®

McCulloch, Heather, Promoting Economic Security for Working Families: State Asset-Building Initiatives. Washington, D.C.: Fannie Mae Foundation, July 2005.

Mills, Gregory et al.  Evaluation of the American Dream Demonstration: Final Evaluation Report. Cambridge: Abt Associates Inc., August 2004.

Sherraden, Margaret et al., Saving in Low-Income Households: Evidence from Interviews with Participants in the American Dream Demonstration.  St. Louis: Washington University Center for Social Development, January 2005.

U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services

U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services, Assets for Independence Demonstration Program: Status at the Conclusion of the Third and Fourth Years: Interim Report to Congress.  Washington, D.C.: Office of Community Services, May 2004.

Acknowledgments Special thanks go to Cathy Atkins and Mary Fairchild for their research help and insightful comments.  Also, thanks go to Julie Lays for overall editing.  This report is supported by the Fannie Mae Foundation.

 Housing