Senator Hillary Clinton recently proposed the US government give each US born child a $5,000 bond to help children pay for college costs, a down payment for a house, or starting a business when they turn 18 years old.
I don’t like the idea – for many reasons.
First, it will cost taxpayers an extremely large sum of money every year. There are approximately 4 million children born in the US every year, which would equate to around a $20 billion dollar annual bill. The US is currently overextended and the current debt (as of Oct. 2, 2007, according to the US Department of the Treasury) is 9.15 trillion dollars. That exact amount is actually $9,151,786,966,610.65. Adding an additional $20 billion dollars to this every year is probably not a good idea. In fact, Senator Clinton did not have an answer for where the money would come from.
Second, a program of this magnitude would lend itself to rampant fraud. Who would police the system, how would fraud be prevented, and what penalties would be in place for those caught cheating the system? If the aftermath of the funds designated for Hurricane Katrina relief efforts is any indication, the US government does not have a good plan in place for distributing funds. Unless there is a well thought out plan, and some serious fraud protection in place, much of this money will be fraudulently redirected and the benefits will not reach those they are intended for.
Third, what can the children use the money for and when? Can the money only be used to go to college, make a down payment for a house, or start a business? What about associated costs of going to college? That sounds reasonable until you realize the US government just bought every newborn a car when they reach college age – whether they go to college or not. What about kids who graduate high school early and attend college at age 16 or 17? It’s not common, but it’s not unheard of either. What about children who have medical or family emergencies? Can the money be used then? If the child dies before age 18 does the money disappear, or can it be transferred to another family member?
Finally, it’s not enough money. That’s right. It’s not enough money to make much of a difference. Take $5,000, let it compound at 5% interest (reasonable for a bond) for 18 years, and what do you have? Just over $12,000. What can you do with $12,000? Well, the median cost of college for the 2006-2007 school year is $16,950 per year, the median house price was over $220,000 in 2006, and business start-up costs vary by business.
The $5,000 bonds she is recommending will barely keep pace with inflation over this time period, and while the dollar value will certainly be higher than $5,000, the purchasing power may not be much higher at all. But for fun, let’s use the estimated $12,000 the final value of the bond.
When was the last time you could use $12,000 as a decent down payment for a house? To afford just a 10% down payment with $12,000, you would have to go back in time almost 18 years when the median house price was around $120,000. I cannot see the future, but I am guessing that in 18 years, $12,000 will barely be enough to cover year’s rent in some places, and less than 6 months in most urban locations.
While the median tuition is $16,000, there are many options that can be cheaper than that. For the 05-06 school year, a two-year community college averaged $2200 per year, and public universities averaged $5,400 per year (source American Council on Education). However, historically, tuition inflation has outpaced the US inflation rate. At best, Senator Clinton’s Baby Bonds will pay for 1-2 years of tuition. At worst, it is a tease and a false sense of security which will prevent many people from saving for college expenses because they think they will be covered.
What are supporters saying? Even though I disagree with the idea of Clinton’s Baby Bonds, some people are already supporting Clinton’s idea (although I hesitate to say it is her idea since Britain started a similar program on a smaller scale several years ago).
“I think it’s a wonderful idea,” said Rep. Stephanie Stubbs Jones, an Ohio Democrat who attended the event and has already endorsed Clinton. “Every child born in the United States today owes $27,000 on the national debt, why not let them come get $5,000 to grow until their 18?”
Great statement, Rep. Jones. Let me answer you question for you: “Every child born in the United States today owes $27,000 on the national debt, why not let them come get $5,000 to grow until their 18?” My answer: Because everyone owes $27,000 to the debt! Your statement basically equates to saying, “You already owe $30,000 in credit card debt, why don’t you trade in your car and buy a new one.”
How can one justify adding debt just for because there is already a substantial amount of debt? That makes no sense. Yes, it’s true the $5,000 will grow to more than $5,000, but who pays for it? We will pay for it now, and because the nation is already in a large amount of debt, the children receiving the money will likely be paying for it for their entire lifetime. (By the way, Rep. Jones, I am a registered voter in OH, and based on your math, I don’t think I will be voting for you any time soon).
If Senator Clinton wants to help the US increase the number of people who can afford college, buy a house, or start a business, the money would be better used in today’s dollars, for today’s youth. $20 billion dollars in additional grants and scholarships would go a long way toward helping many people afford college – which in turn helps people get better paying jobs, start new business, buy house, and yes, even pay more taxes. If you are intent on making a program like this happen, why not get a head start and start it now with today’s youth? You may even get a few more votes.
Note: I was recently out of the country on a vacation and I did not read about Clinton’s proposed Baby Bonds until recently. Thanks to the personal finance blog Money Smart Life, who recently asked “Who Will Pay For Baby Bonds and How?“, a similar article which inspired me to write one in turn.