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Educational policy analysis archives.
n Vol. 13, no. 28 (April 22, 2005).
Tempe, Ariz. :
b Arizona State University ;
Tampa, Fla. :
University of South Florida.
c April 22, 2005
Savings education : learning the value of self-control / Patricia A. Hutton [and] James M. Holmes.
Arizona State University.
University of South Florida.
t Education Policy Analysis Archives (EPAA)
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E DUCATION P OLICY A NALYSIS A RCHIVES A peer reviewed scholarly journal Editor: Sherman Dorn College of Education University of South Florida Copyright is retained by the first or sole author, who grants right of first publication to the Education Policy Analysis Archives EPAA is published jointly by the Colleges of Education at Arizona State University and the University of South Florida. Articles are indexed in the Directory of Open Access Journals (www.doaj.org). Volume 13 Number 2 8 April 22 2005 ISSN 1068 2341 Savings Education: Learning the Value of Self Control Patricia A. Hutton Canisius College James M. Holmes SUNY at Buffalo Citation: Hutton, P. A. & Holmes, J. M. (2005, April 22). Savings Education: Lear n ing the Value of Self Control Education Policy Analysis Archives, 13 (28). Retrieved [date] from http://epaa.asu.edu/epaa/v13n28/. Abstract This article proposes a funded school based allowance and savings program targeted at ec onomically disadvantaged students with poor educational ou t comes to help poor children d e velop less present biased time preference patterns so as to increase student effort and skills acquisition, avoid the pi t falls that pave the path of adole s cence and mo ve from poverty to middle class status as adults. Time orientation is associated with low educational investments, poor educational outcomes, out of wedlock and teenage chil d birth, criminality, and poverty and n othing better chara c terizes the role of tim e preferences in distinguishing socioeconomic classes than attitudes and behavior with respect to money income. In po v erty, money income is to be spent whereas in the middle class and the wealthy, money is to be managed and invested and chi l dren are taugh t the value of self control and delayed gratification through the acc u mulation, savings and investment of regular allo w ances. We propose a model program parameterized in a way that children, given complete freedom of choice, should develop more f u ture ori ented pre f erences resulting in greater effort and skills acquisition in school, and the habits of conduct necessary for productive work life. Pr o gram cost, which cannot exceed program design, can be reasonably
Hutton & Holmes: Savings Education 2 antic i pated and is directly r e lated to the b enefit the more that a child saves, the higher the cost, but the more likely that the child has a c quired a future time orientation. We present evidence that even if the estimated maximum di s bursements occurred and only a minimal percent of pa r ticipating students changed their lives, the estimated benefits should out weigh di s bursement costs. I. Introduction Recent educational reform initiatives have focused on school voucher programs to pr o vide school choice, increased resources, im proved teacher qualific ations, the provision of economic i n centives for schools that achieve improvements in school accountability meas ures and disince n tives for those that fail, and tests, tests, and more tests. However, at the heart of all of this upheaval are chil dren chil dren who need to learn so that they can become responsible and productive cit i zens. What do children need in order to learn? The most important resource with which a child can be endowed is an intact family with well educate d parents who can teach and m od el values and habits of conduct that are critical for success. Policies designed to increase the endowments of di s advantaged children cannot duplicate this resource but they can attempt to mitigate the rel a tionship between disadvantaged family backgroun d characteristics and low investments in chi l dren. The current national movement for chara c ter development learning to be honest, kind, courteous, and respo nsible is one such policy response. Sanford N. McDonnell (2000) c hai r man of the Character Educ ation Partnership, argues that fee l ing an obligation to consider not only ones own personal well being but also that of others can create a moral and caring school community in which students work harder, leading to greater skills acquisition and, ultimat ely, increased producti v ity in adulthood and responsible citizenship. In this article we argue that a more significant character issue is that many disadvantaged children are unable to choose what is in their own long run self interest b e cause they have not been socialized to have future oriented time preferences, delay gratific ation, exercise self control and a c quire habits of conduct that reflect that socialization. Time orientation is associated with low educ a tional investments, poor educational outc omes, out of wedlock and teenage childbirth, criminal ity, po v erty, and adults who lack the temperament, character and intellect to function effectively in the wor k place (Loury 1998, p.52). Among the socioeconomic factors associated with time pre f erence patterns (LeShan 1952, ORand and Ellis 1974) poverty stands out. Unlike the middle class and wealthy for whom the f u ture is important and decisions are made against future ramifications because individuals b e lieve that they can change the future with g ood choices now, families in poverty are oriented to the present and decisions are made for the moment based on feelings or survival b e cause individuals believe that they cannot do much to mitigate chance (Sennett and Cobb 1972, 1993; Fussel (1983); Lewis 1972; Mayer 1997; Payne 2001). In turn, nothing better characterizes the role of time preferences in di s tinguishing socioeconomic classes than attitudes and behavior with respect to money i n come. In poverty, money income is to be spent. Without a strong connection to the past and to the future, it is as well to spend your money as it comes in and be sure of your enjoyments (Hamilton, 1898, p.56). In the middle class and the wealthy, money is to be managed and invested. A quintesse n tial characteristic of middle class families is that their children are taught the value of
Educat ion Policy Analysis Archives Vol. 13 No. 28 3 self control and delayed gratification through the accumulation, savings and investment of regular allo w ances. Hence, i n this article we propose that a funded school based allowanc e and savings pr o gram be developed and implemented in grades K (or pre K) through 12 in schools with economically di s advantaged students and poor educational outcomes. The goal is to help poor chi l dren develop less present biased time prefe r ence patterns s o as to increase student effort and skills acquisition, avoid the pitfalls that pave the path of adolescence and move from poverty to middle class status as adults. The proposed program is substantially different from the typical family based plan or exi s t ing voluntary school based savings programs. The goal is not to teach why saving is impo r tant, how to save, or the mechanics of saving. The goal is to create within a child an internal locus of co n trol and more future oriented time preferences by creat ing rewards and opportunity costs substantial enough that it is rational for the child to choose to save and influence his time orientation. The pr o gram must not only substitute for, but also overcome, the absence of parental reinforcement of self control and delayed gratif i cation. We describe a model program parameterized in a way that we believe will influence time preferences because students will learn that seemingly inconsequential, bad choices in the pr e sent can have substantial negative future cons equences because the effects of bad dec i sions in the present tend to compound, and that decisions should be made against future ramifications. The pr o gram provides an economic incentive to the student to attend school and graduate from high school, rei n fo rcing habits of conduct that are necessary for productive school and work life. In addition, it o f fers the potential to create a sense of school community and connectedness b e cause all students would have the ability to participate and reap equal rewards. T he cost of a funded savings program can be reasonably anticipated and is directly r e lated to the benefit the more that a child saves, the higher the cost, but the more likely that the child has acquired a future time orientation. The program is desi gned to have a ceiling on accumulated sa v ings so that disbursement costs cannot exceed program design. We present evidence that even if the estimated maximum disbursement s occurred and only a minimal percent of participa t ing students changed their lives, the estimated benefits should out weigh disbursement costs. II. Why Target Time Orientation ? Economic theory suggests that individuals make choices by balancing di s counted returns with opportunity costs. Consequently, students with lower rates of time p refe r ence should choose greater effort and acquire more skills. Empirical evidence supports this th e ory. Different time horizon perspectives are good predictors of school investment by secondary education st u dents (Peetsma 2000) and are inversely correla ted with income and educational achievement (La w rence 1991 ). Eckstin and Wolpin (1999) report that teenagers who dro p out of high school have less m o tivation and lower expectations about the rewards from gradu a tion. Deep seated socioeconomic fa c tors dete rmine time preference patterns (LeShan 1952, ORand and Ellis 1974) and create a cycle and pattern of intergener a tional poverty and out of wedlock childbirth. Thirty five years of antipoverty programming has lifted many of the wor k ing poor out of poverty but largely failed to impact families headed by a working age but no n working adult. As a consequence, the percent of heads of poor households with children u n der age 18 who do not work at all has grown from 18% in 1960 to 36% in 1999. 1 As Mead (1997) poi nts out, the 1 Current Population Survey (March 2000), Table 17. Work Experience of Family Members, by Povert y Status of
Hutton & Holmes: Savings Education 4 poor are typically poor because they do not work steadily at any wage. Why not? With present biased preferences, individuals tend to make impulsive choices, driven by a te n dency to overweight rewards and costs that are in close temporal or s patial proximity or are sal i ent (Thayler and Shefrin (1980); Akerlof 1991; Thayler 1991; Thayler and Loewenstein 1992). Also c ontributing to the intergenerational transmission of poverty is out of wedlock chil d birth (Bronars and Grogger 1994, Furstenberg et al 1987, Trussell 1988). The poverty rate for f e male headed households is three times that of all households. 2 The pe r centage of all births that are to unmarried women reached 33.2 percent in 2000. 3 30 pe r cent of these out of wedlock births are to teenagers, 4 and 83 percent of these births are to poor or low income youth. Survey evidence i n dicates that about 80 percent of teen pregnancies are unplanned, 5 and only 18% of teenage pregna n cies end in the formation of two parent families. 6 The majority who give birth apply for and receive welfare benefits and end up on welfare for years. Less than 35 percent of teenage women who b e gin their families before age 18 complete high school, co m pared to 85 percent of those who delay childbearing. 7 Their chil dren have a greater likelihood of experien c ing health problems, abuse and neglect, poverty, poor school performance, committing crimes, repeating the cycle of teenage pa r enting and the creating a pattern of inte r generational poverty. Empirical evidence su ggests that teenage parenthood is less likely the result of a lack of co n cern for the welfare of others than it is the consequence of present oriented time preferences. As Maynard (1997, p.90) r e ports, interviews suggest that teenage parenthood is at odds with the stated values of the very adole s cents who have become teenage parents. Furthermore, teenage mothers want to be good mothers and provide a good life for their children, yet fail miser a bly in achieving these goals. Lundberg and Plotnick (1995) and Plotnick (1992) report that ha v ing a strong internal locus of control (the extent to which individuals b e lieve they control their lives through self motivation and self determination as opposed to a b e lief that change, fate or luck controls their lives) ha s a significant negative effect on the likelihood of premarital pregnancy, as do high educ a tional expectations and religiosity. III. Why Savings Education? Savings education can help to mitigate the effect s of disadvantaged family background cha r acter istics in several ways. 1. A savings program specifically targets time orientation by providing the understanding and guarantee of significant rewards in the future associated with self control and of a significant oppo r tunity cost associated with ma k ing a decision for the moment and teaching that decisions should be made against future ramifications. 2. A savings program directed at children in K 12 grades would provide rei n forcement of the behavioral modification goals and outcomes of subsidized prenat al and infant care, parent trai n ing, and compensatory education programs, such as Head Start and Title I, already directed at Families: 1999. 2 Current Population Reports 3 National Vital Statistics Report (2001) 4 Statistical Abstract of the United States: 2000, Table No. 86. Births to Unmarried Women by Race of Child and Age of Mother: 1990 to 1998. 5 Henshaw S.K (1998), Table 1. 6 Susan McElroy and Kristen Moore (1997). 7 Maynard (1997), p.94.
Educat ion Policy Analysis Archives Vol. 13 No. 28 5 disa d vantaged children. These programs develop effective social and behavioral skills in pa r ticipating children and children succ eed in kindergarten and first grade, as measured by low rates of grade r e tention and referral to special education. However, the effectiveness of such programs in i n creasing high school graduation rates, preventing adolescent childbearing or reducing the incidence of later criminal behavior is less certain. One can expect decay over time, the infl u ence of these programs will likely wear off, absent continued rei n forcement. 3. Early socialization is imperative to create future oriented time preferences a nd an i n ternal locus of control. Achievement levels of third grade students have been demonstrated to be a good predi c tor of long term school performance (Husen 1969) and adult status (Kraus 1973) and there is evidence that time preferences are firmly est ablished, for life, by adolescence (Ma i tal and Maital 1977). There is even ev i dence that intervention in the teenage years may be too late to offset the detrimental effects on long term wages and employment of the time preference pa t terns which the averag e disadvantaged teenager has acquired by age sixteen (Keane and Wo l pin 2000). 4. Savings education creates an opportunity for economically disa d vantaged students to learn the power of choice to bring about change which they are less likely to learn withi n their families because of differences in the role and form of discipline in many poor families. In mi d dle class families, discipline is about choice and change. However, the limited resources avai l able to the poor imply li m ited opportunities for choice and to learn the power of choice to bring about change. One cannot develop an internal locus of control without opportun i ties for decision making in which it is self governance and good choices in the present that are rewarded in the future. Parents wit h out an internal locus of control cannot teach self discipline to their children. Consequently, di s cipline in poor families is often about penance and forgiveness (Payne 2001) rather than choice and change 5 Savings education increases sophistication the ability to foresee that one will have self control problems in the future (ODonoghue and Rabin 1999). Effective parenting develops within children a self awareness of their impatience and the potential for experiencing imp a tience as adults, as well as the possibility that costs are potentially more immediate or greater than perceived. This can mitigate the effects of present bias preferences and is most likely to help when costs are imm e diate. For example, ODonoghue and Rabin (1999) report that so phistication has been demo n strated to increase savings and decrease consumption of addictive pro d ucts compared to naifs who under save (because the increased future payoff that saving allows is delayed) and overindulge in a d dictive products (rewards are im mediate and costs are d e layed). Furthermore, sophistication can also develop less present biased preferences in children because their prefe r ences are still formative. 6 A school savings program that helps students achieve a lower rate of time preferenc e t o ward money income can be the centerpiece of a curriculum designed to help students genera l ize the relationship between early effort and later reward. When students generalize that rel a tionship, they are more likely to both develop a lower rate of time preference with respect to other choices and base their academic effort decision on the balance between its discounted r e turn and its opportunity cost, resulting in greater academic effort and skills acquisition. 7 A specialized curriculum can enhance s chool identification and increase student ac a demic effort. Related family, neighborhood, and school characteristics affect the process of b e ing educated (Entwisle and Alexander 1993), which also affects returns to schoo l ing (Wilson 2001). Akerlof and Kra nton (2002) theorize that when students do not identify with their school, the discounted return to skills in the labor market will not even enter their effort decision. I n stead, a students effort will depend only upon their current social situation. Ak erlof and Kra n ton report that this is supported by the findings of ethnographies that high school students ide n tities are the dominant influence on
Hutton & Holmes: Savings Education 6 achievement. On the other hand, both anecdotal evidence 8 and Akerlof and Krantons theory su g gest that it is possible to produce significant changes in education outcomes through special curri c ula that create school communities by inventing a new, di f ferent social category with which both students and teachers can identify. Special curricula can reduce how di fferent from the school ideal a student feels so that the discounted return to skills enters the effort decision, raise school academic ideals and overcome the effect of st u dents backgrounds on school participation and effort. IV. Why a Funded School Based Savings Education ? Voluntary school savings programs have existed in the U.S. off and on since the 1870s but have not persisted on a widespread basis since the 1950s. The funded school based savings educ a tion program that we propose can and must do what voluntary programs have not done and ca n not do. 1. Voluntary programs have placed too much reliance and burden on teachers and the i ndividual school. Developments such as Save For America 9 a U.S. Department of Education a p proved curriculum desig ned for use by teachers or parents to teach students in grades 4 6 basic pri n ciples of personal economics and help them practice the skills they have learned by partic i pating in a school based banking program have made it possible to reduce that burden. H o w ever, as designed currently and in the past, such programs are inadequate to tran s form the values and behavior of children in poverty in such a way as to tran s form their lives. 2. The intention of voluntary programs is to teach why saving is impo r tant, how to save, and the mechanics of saving whereas the fundamental goal of our pr o posal is to create within a child an internal locus of control and more future oriented time prefe r ences. 3. To participate in a voluntary program, children must save out of money pr o vided by families. However, families in poverty may have little or no money to provide. Furthe r more, this requirement creates an obvious inequity and divisiveness within schools between the haves those students whose parents can provide an allo w an ce for saving and the have nots. 4. Children do not participate in these programs long enough to d e velop life long changes in attitudes and behavior nor do they begin early enough. It r e quires eighteen years to raise a child and to instill life long va lues and habits of conduct, and time orientation education must begin b e fore the third grade. 5. Existing voluntary programs r e quire the school to find a sponsoring bank that pays all of the costs. It is the sponsoring bank that funds the interest pay ments. Consequently, the ince n tive to forgo current expenditures for savings is miniscule because students can earn only the market rate of interest on savings. The market rate of interest on savings may be sufficient to encourage target sa v ings but it i s unlikely to engender values that would carryover to lifelong behaviors and attitudes. There is no substantial reward for forgoing current expenditures for sa v ing and most children quite reasonably find it difficult to do so without substantial parental r ei n forcement. 6. Savings cannot and should not depend upon the parental reinforcement. Firstly, it is likely absent in families mired in intergenerational poverty. Secondly, it is not e n forcement that is desired. It is desirable that a child exercise f ree choice and free will with respect to the dec i sions to save and withdraw savings because it is through choice that the preferences, beha v iors and attitudes that are necessary for a middle class standard of living are internalized. There is little pride in achievement, 8 Comer (1980), Meier(1988) 9 Save for America (1998) Teaching PreK 8 (28), 58 9
Educat ion Policy Analysis Archives Vol. 13 No. 28 7 the responsibility for which is carried by others, and little responsibi l ity accepted for opportunity costs that can even marginally be blamed on somebody else. It is e s sential that the opportunity to accumulate savings out of the earned allowance create rewards and opportunity costs substantial enough that it is rational for the child to choose to save and influence his time orient a tion. V. A Funded Savings Education Plan We propose a funded savings education program with the follo wing characteristics. 1 An Attendance Based Allowance To avoid inequity and divisiveness within schools b e tween the haves and the have nots, an allowance earned on a daily attendance basis should be funded. Allowances establish routine and routine pr ovides structure something that is often mis s ing in the lives of those living in poverty. One of the indicators of lack of stru c ture is a higher rate of school absenteeism. Basing the allowance on attendance links it to a habit of conduct that is ne c es sary for productive school and work life and provides an economic ince n tive to attend school. 2. Above Market Rate of Interest In middle class and wealthy families it is common for parents to enforce savings. However, it is both unreasonable to expect reinforcement from fam i lies mired in poverty and coercion is not desirable. It is desirable that a child exercise free choice and free will with respect to the decisions to sa ve and withdraw savings because it is through choice that the pre f erences, behav iors and attitudes that are necessary for a middle class standard of living are internalized. To influence time orientation, the size of the allowance should be small, but the co n sequence of not earning and saving should be dramatically larger than curren t voluntary programs can offer. Influencing time orientation depends upon unde r standing that seemingly inconsequential decisions can have significant r e wards or costs. This requires an above market rate of interest. 3 Time Horizon Time orientation ed ucation cannot start too early and, as those of us who are parents know, it r e quires eighteen years (and sometimes longer) to raise a child and to instill life long values and habits of conduct. It is proposed that the savings education begin in kinderga r ten or even pre kindergarten and continue until graduation from high school. 3. Potential Accumulated Savings What amount of potential accumulated savings would be su f ficient to develop long term savings behavior and the time orientation it represents, bu t result in an expense that taxpayers and donors would be willing to underwrite? We believe that the beha v ior of a child in poverty, certainly a young child, can be influenced by the expectation of accumula t ing savings of $100 by the end of the school yea r. It could perhaps be much less. The younger chi l dren are when they begin the program, the smaller the required economic incentive to influence time orient a tion. For the purpose of further discussion and the determination of disbursement costs, we will a s sume that the amount is $100 per year. The assumption that the maximum annual accumulation should be approximately $100 can be achieved with a variety of combinations of daily allowance earned, rate of interest and frequency of compounding. Consider a o ne cent per day allowance (5 cents per week) and 40 week school year. If the child does not save at all, the maximum annual allowance disbursement per child is $2.00. Ear n ing a weekly interest rate of 15% compounded over a 40 week school year will result in a maximum accumulated savings of $102.30. 4. Rewards and Opportunity Costs. Table 1 presents the weekly maximum accumulation, or rewards, of savings, as well as the weekly opportunity cost of forg o ing savings.
Hutton & Holmes: Savings Education 8 Table 1 Weekly Maximum Accumulated Savin gs and Opportunity Cost of Forgone Savings Based on a 5 Cent Weekly Allowance Earning a 15% Rate of Interest Per Week Week Allowance Interest Rate % Accumulated Allowance Plus Interest Opportunity Cost o f Not S a v ing 5 Cent Allo w ance 1 $0.05 15 $0.06 $13.39 2 $0.05 15 $0.12 $11.65 3 $0.05 15 $0.20 $10.13 4 $0.05 15 $0.29 $8.81 5 $0.05 15 $0.39 $7.66 6 $0.05 15 $0.50 $6.66 7 $0.05 15 $0.64 $5.79 8 $ 0.05 15 $0.79 $5.03 9 $0.05 15 $0.97 $4.38 10 $0.05 15 $1.17 $3.81 11 $0.05 15 $1.40 $3.31 12 $0.05 15 $1.67 $2.88 13 $0.05 15 $1.98 $2.50 14 $0.05 15 $2.33 $2.18 15 $0.05 15 $2.74 $1.89 16 $0.05 15 $3.20 $1.65 17 $0.05 15 $3.74 $1.43 18 $0.05 15 $4.36 $1.24 19 $0.05 15 $5.07 $1.08 20 $0.05 15 $5.89 $0.94 21 $0.05 15 $6.83 $0.82 22 $0.05 15 $7.91 $0.71 23 $0.05 15 $9.16 $0.62 24 $0.05 15 $10.59 $0.54 25 $0.05 1 5 $12.24 $0.47 26 $0.05 15 $14.13 $0.41 27 $0.05 15 $16.31 $0.35 28 $0.05 15 $18.81 $0.31 29 $0.05 15 $21.69 $0.27 30 $0.05 15 $25.00 $0.23 31 $0.05 15 $28.81 $0.20 32 $0.05 15 $33.18 $0.18 33 $0.05 15 $38.22 $0.15 34 $0.05 15 $44.01 $0.13 35 $0.05 15 $50.67 $0.12 36 $0.05 15 $58.32 $0.10 37 $0.05 15 $67.13 $0.09 38 $0.05 15 $77.26 $0.08 39 $0.05 15 $88.90 $0.07 40 $0.05 15 $102.30 $0.06
Educat ion Policy Analysis Archives Vol. 13 No. 28 9 The information in T able 1 can help children understand the relationship between early e f fort and later reward and not h ing can make clearer the contrast between the short run benefits of a choice and the long run opportunity cost of a choice forever foregone than the first row of values in Table 1. The short run benefit of saving the first weeks allowance is the difference b e tween the values in columns 4 and 2. The decision not to save the first weeks allowance may seem incons e quential if the child only sees that saving initially only adds an add i tional penny. The student may perceive that forgoing that weeks savings involves only a loss of a penny. However, we know that decisions should be made on the basis of future ramifications b e cause the bad effects of bad decis ions in the present tend to compound. The actual opport u nity cost of not saving the first weeks allowa nce is actually $13.39 (last column ) because the student foregoes the o p portunity to have the in i tial savings grow at a rate of 15% per week for 39 mor e weeks. That amount is also the difference between the values of accumulated savings in rows 39 and 40 of co l umn 4, which represents the difference between sa v ing for 39 weeks rather than 40 weeks. If time occurs only in the present for children, then l et them learn, understand and, if need be, experience the 275 fold opportunity cost of a seemingly inconsequential dec i sion made in the moment to delay saving 5 cents for one week. Give children with limited opportunities for dec i sion making in which it is self governance and good choices in the present that are rewarded in the future an o p portunity for informed, rational choice and to learn the power of choice to bring about change. It is arguable that 5 cents per week, earning an inte r est rate of 15%, com pounded weekly does not create sufficient initial interest earnings or incentive to save. At this rate, the child must wait 19 weeks before a total of $5.00 is accumulated. Table 2 presents accumulations and opport u nity costs associated with an interest rate that starts higher but then diminishes. In Table 2, the interest rate is 100 percent during the first four weeks, declines to 50 pe r cent at week five, to 20 percent by the seventh week, to 10 percent at week eight where it r e mains until week thirty ei ght when it drops to 7 percent and then to 5 percent for the last two weeks. Begi n ning with a higher rate of interest creates a stronger incentive to save. One can then reduce the rate of interest because the compounding of accumulated savings will offse t that decrease. This parameter i zation generates a maximum accumulation of approximately $100 but results in a $5.00 accumul a tion in less than half the time (between weeks 8 and 9) of that associated with a constant rate of i n terest of 15 percent (week 19) It keeps the dollar value of interest earnings (additions to savings) fairly even over the 40 week period, but magnifies the opportunity costs of postponing inves t ments in the first weeks. Again, the decision not to save the first weeks allowance may seem inconsequential if the child only sees that saving initially only adds an additional five cents. The student may pe r ceive that fo r going that weeks savings involves only a loss of five cents. However, as the first value in column 5 indicates, fully 45 percent of the potential accumulated savings for the entire school year are ass o ciated with the dec i sion to save 5 cents the first week of school.
Hutton & Holmes: Savings Education 10 Table 2 Week ly Maximum Accumulated Savings w ith a Declining Rate of Interest and Weekly Opportu nity of Foregoing Savings of Weekly Allowance Week Allowance Interest Rate % Accumulated Allowance Plus Interest Opportunity Cost of Not Saving 5 Cent Allowance 1 $0.05 100 $0.10 $44.46 2 $0.05 100 $0.30 $22.23 3 $0.05 100 $0.70 $11.12 4 $0.05 100 $1.50 $5.56 5 $0.05 50 $2.33 $2.78 6 $0.05 50 $3.57 $1.85 7 $0.05 20 $4.34 $1.24 8 $0.05 10 $4.83 $1.03 9 $0.05 10 $5.37 $0.94 10 $0.05 10 $5.96 $0.85 11 $0.05 10 $6.61 $0.77 12 $0.05 10 $7.33 $0.70 13 $0.05 10 $8.1 1 $0.64 14 $0.05 10 $8.98 $0.58 15 $0.05 10 $9.93 $0.53 16 $0.05 10 $10.98 $0.48 17 $0.05 10 $12.13 $0.44 18 $0.05 10 $13.40 $0.40 19 $0.05 10 $14.80 $0.36 20 $0.05 10 $16.33 $0.33 21 $0.05 10 $18.02 $0.30 22 $0.05 10 $19.88 $0. 27 23 $0.05 10 $21.92 $0.25 24 $0.05 10 $24.17 $0.22 25 $0.05 10 $26.64 $0.20 26 $0.05 10 $29.36 $0.19 27 $0.05 10 $32.35 $0.17 28 $0.05 10 $35.64 $0.15 29 $0.05 10 $39.26 $0.14 30 $0.05 10 $43.24 $0.13 31 $0.05 10 $47.62 $0.11 32 $0.05 10 $52.43 $0.10 33 $0.05 10 $57.73 $0.09 34 $0.05 10 $63.56 $0.09 35 $0.05 10 $69.97 $0.08 36 $0.05 10 $77.02 $0.07 37 $0.05 10 $84.78 $0.06 38 $0.05 7 $90.77 $0.06 39 $0.05 5 $95.36 $0.06 40 $0.05 5 $100.18 $0.05
Educat ion Policy Analysis Archives Vol. 13 No. 28 11 The o nly cost of failing to save is a pure opportunity cost it does not cr e ate an out of pocket loss for the child, only an opportunity forgone always followed by a renewed o p portunity to learn and change. If she decides not to delay further, the child incur s the opport u nity loss and it will be a sunk cost, never to be recovered. On the other hand, the child has repeated opportun i ties to learn from her regrets. She is immediately presented with the o p portunity to begin saving again through her earned attenda nce allowance. The potential reward for dela y ing can never be as great as it originally had been, but there always remains a reward. The information contained in Tables 1 and 2 is instructional to both teachers and students although an alternative visua l devise should be used with you ng children. These tables make it easier for a teacher to u n derstand why a disadvantaged child would find it difficult to marshal the self discipline required to learn habits of conduct or to read when she cannot understand the opport u nity cost of failing to do so. Both have rewards and opportunity costs that are well repr e sented by the numbers in these tables. The benefits are small in the short run and accumulate slowly. Chi l dren born into intergenerational poverty have very limited opportunity to observe those who i n vested early and reaped the long term benefits. By the time they begin to experience the significance of the opportunity fo r gone, it has become a sunk cost. The information in these tables helps children und erstand the relationship between early e f fort and later reward. Both tables clearly demonstrate that it is the early i n vestment that has the greatest return. Postponing savings results in a missed opportunity to obtain the greatest returns and can never be regained. There are many alternative parameterizations that will satisfy the cr i teria that the size of the allowance should be small but the consequence of not earning the allo w ance and saving it should be large. These tables provide children with the opportunity to learn that rational choice requires full information. An individual cannot make an optimal decision without fully understanding the oppo r tunity cost of alternative choices. The student must be informed of the opportunity cost of wit h drawing and spending any fraction of his savings at any time. Because of the effects of compoun d ing, this opportunity cost will change over time as the savings accumulate and the time hor i zon changes. It is easy to provide the teacher with a programmed software spreadsheet in which the r e wards and opportunity costs are automatically recalculated when the teacher e n ters a withdrawal or addition to savings. Such a spreadsheet, accompanied with appropriate visual d e vises such as jars filled with monopoly money, ha s tremendous instructional value because the teacher can demo n strate the effects of alternative decisions with respect to savings and withdrawals, thereby demo n strating the opportunity cost of alternative decisions. It is of vital importance that even you ng st u dents be given complete freedom to make the decision to withdraw sa v ings at any time. The goal of the program is not to accumulate savings. The goal is to change time preferences. Some children will need to actually experience the opportunity loss and sunk cost of withdrawing savings in order to experience regret and change their time preferences. The savings plan and the instructional value it contains provide an opportunity for educ a tors to help children generalize the relationship between earl y effort and later reward. It should be e m phasized to children that many of lifes choices have rewards and oppo r tunity costs similar to those displayed in Table 1 and 2, but with less certainty attached. Learning habits of conduct, rea d ing, writing and mathematics skills all have small benefits in the short run, but the long run opportunity cost of failing to do so is immense. The evidence that third grade achievement level is a good predi c tor of long term school performance and adult status is consisten t with the exa m ple of a very high interest rate in the early years, which declines thereafter. The imperative of learning early is abstract for chi l dren. However, savings education can make it concrete.
Hutton & Holmes: Savings Education 12 V I Disbursement Costs Students participating throughout K 1 2 grades, accumulating the maximum of $100 per year, could graduate with $1300. This amount could be higher if a rate of interest was applied to savings accumulated year to year and the student chose to accumulate savings year after year. For exa m ple, th e student could be provided an incentive to accumulate his savings from year to year by allowing each years accumulated savings to earn an additional 15% annual rate of interest compounded a n nually. Assuming that $100 was accumulated each year, the maxim um a c cumulated savings would be a p proximately $4000 per student at the end of 13 years. Consider this cost in comparison to alternative proposals. It is compar a ble to the $300 $3,000 range of "Last Dollar Scholarships" that the Philadelphia Educational Fu nd Philadelphia Scholars program pr o vides to over 250 public school students per year who have been admitted to co l lege but face financial need, approximately 85% of whom are the first members of their families to attend college. 10 On the other hand, it is considerably less than alte r native economic incentives such as high school graduation bonuses that have been proposed. For example, the Rand Instit u tion has considered four years of cash and other incentives, expected to cost almost $13,000 per st u dent, to induce disadvantaged high school students to graduate. 11 One would e x pect that the cost of a savings program would be less because the younger a student is when s/he begins the program, the smaller the required economic incentive to influence time orien tation. Waiting until s/he is a teenager should require a considerably higher economic incentive to infl u ence self control. Compare the maximum disbursement cost of $4000 per student over 13 years to the cost of early chil d hood interventions. The High/Sc ope Perry Preschool Project (a widely cited high quality early childhood education program) costs more than $12,000 per child (in 1996 do l lars) and the Early Childhood Initiative of Allegheny County costs almost $13,000 per child. 12 The Rand Institute esti mated the cost of the home visits and day care costs of an intervention program designed to r e duce the incidence of later criminal behavior over six years to be almost $30,000 per child. If implemented on a national basis, the total disbursement costs w ould depend upon acc u mulated savings per year per student and the number of participants. A l though the ideal is to direct the program at only children identified as below poverty level, it is reasonable to anticipate that, b e cause of the importance of neig hborhood effects, equality of treatment and school ident i fication, the program would be targeted at those schools with high proportions of students receiving free or r e duced price lunches (indicating SES or low income) and all students, both high and low S ES, would participate. Approximately 15 million K 12 students receive a free or reduced price school lunch. Let us assume a uniform distribution of the number of students by grade level (1.15 million per grade ) A child participating in the program for all thirteen years of schooling could accumulate $4000. If all participating students accumulated the maximum possible savings accepting disburs e ment at graduation from high school, annual disbursement cost of this pr o gram could be as high as $4.6 billio n in current dollars. Consider this cost in relation to what is already being spent on these children. The 15 mi l lion students eligible for reduced price or free lunches represent approximately one third of all st u dents enrolled in public schools and one third of the $400 billion annual expenditure on public ed u cation. If the program is successful in developing savings behavior, the additional cost increases the annual public education expenditures by slightly more than 1 percent. If the pr o posed program t urned out to be an abject failure in influencing savings behavior and each of the 15 million students 10 http://philaedfund.org/collegeaccess/index.htm. 11 Greenwood et al (1998) 12 Karoly et al. (1998). Gill, Brian, Jacob W. Dembosky, and Jonathon Caulkins (2002).
Educat ion Policy Analysis Archives Vol. 13 No. 28 13 merely collected their attendance allowance each week, the annual cost would be only $30 million. This is insignificant in relation to what is currently b e ing spent. V I I. Outcomes/Benefits The goal of this program is to lower students rate of time preference, and increase school participation, student effort and skills acquisition. The direct measurements of time preference and increased school partici pation are school attendance and savings disbursement expenditures. Expe n ditures within each school are a direct measure of the effectiveness of the program in d e veloping savings behavior. It is unimaginable that a student able to graduate from high schoo l with two or three or four thousand dollars of wealth accumulated a penny per day would not be transformed in ways other than savings behavior with respect to money. One would expect that a lower rate of time preference and better attendance will increas e student effort and skills acquisition, resulting in higher standar d ized test scores and social evaluation marks, higher rates of high school gradu a tion, higher rates of participation in post secondary education and/or the military, higher rates of employ ment, labor force participation and marriage, and reduced rates of criminality, teenage pregnancy and chil d birth, drug and alcohol abuse, and dependence on public assistance. These should be corr e lated with the length of time a student participates in the program and the amount of disbursement s. Another measure of the benefits of the program is what the student does with the disbursement Does the student continue to save the disbursement invest it in education, buy a car, or is it expended on cu r rent co n sumption and how? The degree to which these benefits are realized will depend upon how the program is i m plemented. Implementing such a program on a school wide basis and incorporating it in curri c ula can further support development of an internal locus o f control and a lower rate of time pre f erence within individual students, build a school community and allow a school to incorporate the philos o phy it represents into the academic ideal, increasing both student effort and skills acquis i tion. What amount of benefit is required to justify the cost of this program? Assume for a m o ment that the only benefit is a reduction in births to low income teenagers. Each year there are nearly 500,000 births to teenage mothers, 83 percent of who come from poor or low income fam i lies. One e s timate of the taxpayer cost of each family that begins with a birth to a teenager is about $14,000 annually over 20 years (Trussell 1988), or a total cost of $280,000 per birth per year. This implies that if annual births to low inc ome teenagers decreased by 16,000 a redu c tion of only 4 percent that alone would justify the annual disbursement costs. Lower rates of criminality could potentially justify the program as well. The Rand Corpor a tion concluded that the program of four years of cash and other incentives to induce disa d vantaged high school student to graduate, costing $13,000 per student, would have a crime pr e vention rate of 50 percent and that the benefits would totally offset the costs. It is arguable that the saving s pr o posal could have similar results because students would have a longer exposure to this values ed u cation and because of the school identification effects. It is improbable that a st u dent could earn the maximum disbursement of $4000 and not have lear ned the self discipline to avoid criminal b e havior. Finally, the proposed disbursement s are tiny compared to the estimated $400 billion in local, state and federal government income tested benefits 13 that existing low i n come and poor families 13 Based on 1998 benefits of $391,733,000,000 (Statistical Abstract of the U.S. 2000, Table 604).
Hutton & Holmes: Savings Education 14 receive each year, with the vast majority of that money spent on remediating the effects of po v erty on the ability to purchase medical care, housing, food, etc., but doing little to interrupt the cycle of intergenerational po v erty, out of wedlock childbirth and crime. VII I Implementation Although it is the role of education experts, with appropriate consultation, to develop the mater i als necessary to deliver this program as well as developing methods and materials that support the ge n eralization of the relationshi p between early effort and later reward throughout the school curric u lum, we offer several suggestions. No doubt, some children will find it extraordinarily diff i cult to delay gratification for 13 years without parental reinforcement, the likelihood of whi ch is very small. Indeed, some chi l dren may even be pressured by their parents to make withdrawals. Hence, parental support should be e n cou r aged. Despite their poverty, virtually every family owns a television and a VCR or DVD player. A video and educat ion materials should be created and distributed to each family that describes and demonstrates the not only the potential for each child to accumulate savings, but the correspo n dence between delayed gratification and significant future rewards. This progr am can and should be administered locally but with oversight. In addition to ed u cational materials, schools need computer access (already available) and a programmed student a c counts sprea d sheet (part of the educational materials) in which to record savin gs and withdrawals. There should be administrative oversight of these records to pr o tect against fraud. Schools need access to a supply of money, for which there should be local administrative oversight, to fund st u dent cash withdrawals. Alternatively, local banks could sponsor the accounts, as is done with the Saving for America program, with the interest disbursement s underwri t ten by the government. The extent to which schools incorporate the savings program into everyday cu r riculum should be a local decision, at least during a pilot project, and the vari a tion would allow for measurement of the impact of the curriculum support on the effectiveness of the pr o gram. IX. Conclusions Some leading poverty experts have concluded that economic models that attempt to e x plain poverty and dependency in terms of rationality and incentives and disincentives cannot be successful because many of the poor are not rational. Lacking foresight and self control, their behavior is best described as impuls iv e (Mead 1992 p. 182). It is precisely for that reason that we believe that the long run solution to education reform, poverty and its associated problems must include educa t ing and socializing students to have an internal locus of control, a time orientation towards the future, and an appreciation of opportunity costs that are not immediate. It is foresight and delayed gratif i cation based on experience and learning that distinguish the behavior of respons i ble adults from the behavior of their children. For the fam ilies that begin with an out of wedlock childbirth and void of family trad i tions and histories of middle class values and behavior, it is the responsibility of society to inte r vene in the lives of their children in a way that (1) helps them learn to value achievement, learn self governance and self sufficiency, and to believe in choice and the power of choice, but also (2) respects the ba l ance between self reliance and altruism (Solow 1998, p.5) that middle class taxpayers quite re a sonably expect. We have proposed a model program in which children and adolescents can experience si g nificant rewards from choosing to postpone current consumption in favor of savings and
Educat ion Policy Analysis Archives Vol. 13 No. 28 15 inves t ment and, in so doing, develop the behaviors and attitudes that will cause them to in crease effort in school, acquire skills and move from poverty to middle class. We have chosen param e ters that we believe are reasonable in so far as they may be sufficient to motivate a child in po v erty but result in an expense that taxpayers and donors w ould be willing to underwrite, given the potential to produce responsible citizens and ta x payers. Our belief in the role that an allowance, savings and investment plan can potentially play in time orientation and character formation is reflected in the p lan we implemented for each of our own three children. At approximately age three, each child began to receive an allowance (pe n nies). Until age seven the entire amount of each childs accumulated savings was doubled at the end of the calendar year rep resenting an annual rate of return of 100 percent at the begi n ning of the year but approaching infinity as the end of the calendar year approached. This was compounded over three years. After age seven, past sa v ings were not doubled but were placed in a s avings account to earn the market rate of interest. However, the annual addition to savings (including this earned interest), which can increase as the allowance is increased and we help them invest in mutual funds, is do u bled. The most important aspec t of the plan we devised for our own children is the inform a tion we have provided them on the rewards and opportunity costs of their savings and spending dec i sions. We calculated the potential accumulations of savings over their childhood based on altern a tive scenarios with respect to their decisions to consume and save from their weekly allo w ance, which increased with age and inflation. We have never required our children to save. I n deed, we encourage them to spend and explain to them that spending thei r allowances reduces our disburs e ment costs. We had evidence that our first born had internalized the concept of opportunity cost by the age of seven. While standing with her in a grocery store cashier line on Dece m ber 26 th her four year old brother fo und a quarter on the floor. As he pondered the candy on the shelves, she a d vised him not to spend it in six days, it will be worth twice as much, she told him, adding and dont spend it on this candy you can get more in the bu lk section. He took her advic e.
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Hutton & Holmes: Savings Education 18 O Rand, Angela and Robert A. Ellis (1974). Social Class and Social Time Perspective, S o cial Forc es 53, 53 62. Payne, Ruby K. (2001). A Framework for Understanding Poverty aha! Process, Inc. Peetsma, Thea T. D. (2000). Future Time Perspective as a Predictor of School Investment, Scandinavian Journal of Educational Research 44(2), 177 192. Plo tnick, Robert D. (1992). The Effects of Attitudes on Teenage Premarital Pregnancy and Its Resolution, American Sociological Review 57, 800 811. Save for America (1998) Teaching PreK 8 (28), 58 9 Sennett, Richard and Jonathan Cobb. (1993). The Hidd en Injuries of Class London/Boston: Faber & Faber. Solow, Robert M. (1998) Work and Welfare Amy Gutmann, Ed. The University Center for H u man Values Series. Princeton University Press. Thayler (1991). Some Empirical Evidence on Dynamic Inconsisten cy, in Richard H. Thayler, ed., Quasi Rational Economics New York: Russell Sage Foundation, 127 133. Thayler Richard H. and George Loewenstein (1992). Intertemporal Choice, in Richard H. Thayler, ed., The Winners Curse, Paradoxes and Anomalies of E conomic Life New York: Free Press, 92 106. Thayler Richard H. and Hersh M. Shefrin (1981). An Economic Theory of Self Control, Journal of Political Economy 89(2), 392 406. Trussell, Jane. (1988). Teenage Pregnancy in the United States, Family P lanning Perspectives 20(6), 262 272. Wilson, Kathryn (2001). The Determinants of Educational Attainment: Modeling and Estimating the Human Capital Model and Education Production Functions. Southern Ec o nomic Journal 67(3), 518 551. About the Authors Patricia A. Hutton Professor of Economics Department of Economics and F i nance Canisius College 2001 Main St. Buffalo, N.Y 14208 James M. Holmes Professor of Economics Department of Economics State University of New York at Buffalo Buffalo, NY 14260
Educat ion Policy Analysis Archives Vol. 13 No. 28 19 Educ ation Policy Analysis Archives http://epaa.asu.edu Editor: Sherman Dorn University of South Florida Production Assistant: Chris Murrell, Arizona State University General questions about appropriateness of topics or particular articles may be addressed to the Editor, Sherman Dorn, epaa editor@shermando rn .com EPAA Editorial Board Michael W. Apple University of Wisconsin David C. Berliner Arizona State University Greg Camilli Rutgers University Linda Darling Hammond Stanford University Mark E. Fetler California Commission on Teacher Credentialing Gustavo E. Fischman Arizona State Univeristy Richard Garlikov Birmingham, Alabama Gene V Glass Arizona State University Thomas F. Green Syracuse University Aimee Howley Ohio University Craig B. Howley Appalachia Educational Laboratory William Hunter University of Ontario Insti tute of Technology Patricia Fey Jarvis Seattle, Washington Daniel Kalls Ume University Benjamin Levin University of Manitoba Thomas Mauhs Pugh Green Mountain College Les McLean University of Toronto Heinrich Mintrop University of California, Berkeley Michele Moses Arizona State University Gary Orfield Harvard University Anthony G. Rud Jr. Purdue University Jay Paredes Scribner University of Missouri Michael Scriven Western Michigan University Lorrie A. Shepard University of Colorado, Boulder Robert E. Stake University of Illinois UC Kevin Welner University of Colorado, Boulder Terrence G. Wiley Arizona State Univ ersity John Willinsky University of British Columbia
Hutton & Holmes: Savings Education 20 Archivos Analticos de Polticas Educativas Associate Editors Gustavo E. Fischman & Pablo Gentili Arizona State University & Universid ade do Estado do Rio de Janeiro Founding Associate Editor for Spanish Language (1998 2003) Roberto Rodrguez Gmez Editorial Board Hugo Aboites Universidad Autnoma Metropolitana Xochimilco Adr in Acosta Universidad de Guadalajara Mxico Claudio Almonacid Avila Universidad Metropolitana de Ciencias de la Educacin, Chile Dalila Andrade de Oliveira Universidade Federal de Minas Gerais, Belo Horizonte, Brasil Alejandra Birgin Ministerio de Ed ucacin, Argentina Teresa Bracho Centro de Investigacin y Docencia Econmica CIDE Alejandro Canales Universidad Nacional Autnoma de Mxico Ursula Casanova Arizona State University, Tempe, Arizona Sigfredo Chiroque Instituto de Pedagoga Popular, Per Erwin Epstein Loyola University, Chicago, Illinois Mariano Fernndez Enguita Universidad de Salamanca. Espaa Gaudncio Frigotto Universidade Estadual do Rio de Janeiro, Brasil Rollin Kent Universidad Autnom a de Puebla. Puebla, Mxico Walter Kohan Universidade Estadual do Rio de Janeiro, Brasil Roberto Leher Universidade Estadual do Rio de Janeiro, Brasil Daniel C. Levy University at Albany, SUNY, Albany, New York Nilma Limo Gomes Universidade Federal de Minas Gerais, Belo Horizonte Pia Lindquist Wong California State University, Sacramento, California Mara Loreto Egaa Programa Interdisciplinario de Investigacin en Educacin Mariano Narodowski Universidad Torcuato Di Tella, Argentina Iolanda de Olive ira Universidade Federal Fluminense, Brasil Grover Pango Foro Latinoamericano de Polticas Educativas, Per Vanilda Paiva Universidade Estadual Do Rio De Janeiro, Brasil Miguel Pereira Catedratico Universidad de Granada, Espaa Angel Ignacio Prez Gme z Universidad de Mlaga Mnica Pini Universidad Nacional de San Martin, Argentina Romualdo Portella do Oliveira Universidade de So Paulo Diana Rhoten Social Science Research Council, New York, New York Jos Gimeno Sacristn Universidad de Valencia, Es paa Daniel Schugurensky Ontario Institute for Studies in Education, Canada Susan Street Centro de Investigaciones y Estudios Superiores en Antropologia Social Occidente, Guadalajara, Mxico N elly P. Stromquist University of Southern California, Los Angeles, California Daniel Suarez Laboratorio de Politicas Publicas Universidad de Buenos Aires, Argentina Antonio Teodoro Universidade Lusfona Lisboa, Carlos A. Torres UCLA Jurjo Torres Santom Universidad de la Corua, Espaa