IDAs for Economic Self-Sufficiency

William Amt, EDFS Manager, NADO Research Foundation

Thousands of Americans are moving out of poverty by accumulating assets once accessible only to higher income people. According to Rene Bryce-Laporte, Senior Program Manager at the Corporation for Enterprise Development (CFED), Individual Development Accounts (IDAs) are expanding anti-poverty policy beyond that of income maintenance by encouraging the poor to save for appreciating assets. As Bryce-Laporte and others put it, “It’s a step ladder out of the safety net.”

Originally conceptualized in the 1980s by Dr. Michael Sherraden of Washington University, IDAs are like a 401(k) for the poor. Managed by a growing number of community-based organizations and financial institutions, IDA programs use public and/or private funds to match program participants’ monthly deposits. Deposits and matching funds are held in separate accounts that can be accessed once target amounts have been reached. These are used to obtain an asset that will promote the account holder’s economic self-sufficiency, such as starting a small business, purchasing a home or paying for post-secondary education.

Financial literacy training is an integral part of IDA programs. Personal financial management courses teach account holders about household budgeting, goal setting, personal credit and other issues. In addition, they receive training specific to the asset they will be obtaining. For instance, people planning on using their funds to start a microenterprise take a business management course.

Several programs have supported the growth of IDAs over the past five years. In 1997, CFED launched the first national IDA program, the five-year American Dream Demonstration. The US Department of Health and Human Services’ (HHS) Assets for Independence (AFI) Demonstration became the first federal IDA program in 1998. The five-year, $125 million program makes grants to nonprofit organizations, public agencies applying with a nonprofit, community development financial institutions, and low-income credit unions. The maximum federal match per account is $2,000, which needs to be equally matched by nonfederal sources (such as banks, corporations, and local government), for a total possible match of $4,000. HHS’ Office of Refugee Resettlement has a smaller IDA program that supports asset accumulation among low-income refugees. Most states provide assistance for IDAs either through their Temporary Assistance to Needy Families (TANF) program or a freestanding IDA initiative.

IDA programs are successfully building wealth among poor individuals and families. CFED estimates there are over 400 IDA programs. The 13 project sites funded through CFED’s program have established 2,364 accounts, and more than 220 grants made by HHS’ Assets for Independence project expect to open almost 40,000 accounts in the next five years. After two years of operation, HHS grantees reported that 151 first homes had been purchased, 126 businesses capitalized, and 128 participants were using funds to pay for education.

IDAs are making a difference in the lives of rural residents. The community development corporation of the Northwest New Mexico Council of Governments (see page 8) established its IDA program in 2001. Funded by a grant from the HHS AFI program and matching funds from the New Mexico State Community Development Block Grant program, Rehoboth Private School, and the New Mexico Mortgage Finance Authority, the program expects to set up 155 accounts from 2002-2005, with assets purchased by September 2006. To date, six accounts have been opened: three for education, one for homeownership and two for small business capitalization.

An additional 18 accounts will be opened in January 2003: 12 for education, one for homeownership, and five for business. Thirty-two participants have so far completed the 18-hour Financial Skills for Families course. “This training came just at the right time when we were in so much debt,” said Marie Gallegos, an account holder. “I now know how to organize our debt and how to achieve my goals through what I have learned. Thinking of opening a small business doesn’t seem impossible now that I learned how to plan around our budget.”

For more information: Visit www.idanetwork.org or contact Rene Bryce-Laporte at rene@cfed.org and Patricia Lundstrom, Executive Director of Northwest New Mexico COG at lundstrm@cia-g.com or 505/722-4327.

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