How does Cal KIDS work? Free college funds for Californians

Nov. 2021 photo of student navigating the UCLA campus near Royce Hall.

By Jon HealeySenior Editor, Utility Journalism Team

Aug. 10, 2022 11:20 AM PT

It may be hard to believe, but California’s esteemed university system was tuition-free for state residents until 1970. Now, the average charge in the UC system is more than $13,000 a year, and fees, housing, meals and other costs add an estimated $25,000 to that total.

The increase in costs is due in part to the declining percentage of the UC budget that the state covered. Lately, however, state officials have tried to make higher education affordable again for more Californians, pumping larger amounts into the UC and Cal State University budgets and making community college tuition-free for low-income residents.

And now the state is launching CalKIDS, a taxpayer-funded scholarship program aimed at helping kids start saving for college from the day they’re born. The program grants up to $100 automatically to every child born in California on or after July 1 and up to $1,500 automatically to every eligible low-income student.

The tax-free money is invested in a mutual fund managed by ScholarShare, the state’s college savings plan, and can be spent on tuition, books and other education-related expenses. Withdrawals for other purposes would be subject to taxes.

The point, state officials say, is to encourage more kids to continue their studies after high school.

“Research demonstrates that children with a college savings account are three times more likely to enroll in college and nearly four times more likely to graduate than children with no savings,” the CalKIDS program information guide states. “The investments provided in a CalKIDS account can be a steppingstone to building a new savings behavior for families and serve as a tangible demonstration of the state’s commitment to supporting children in reaching the goal of higher education.”

Just to be clear, CalKIDS says it is a scholarship program, and unlike 529 savings plans that help parents and students to set aside money for college, you can’t add money to your child’s CalKIDS account. For that, you’ll need a 529.

Who is eligible? How does it work?

The program follows the model for child development accounts laid out by the Center for Social Development at Washington University in St. Louis, which calls for universal eligibility for newborns in the state. So if you live in California and have a baby on or after July 1, the program will automatically start a CalKIDS account for your child with a $25 grant. There is no citizenship requirement.

You’ll need to register online with CalKIDS to gain access to the account, but doing so comes with its own incentive: an additional $25 grant, bringing your child’s total to $50. You can do that at the CalKIDS site; you’ll need to provide the local registration number from your child’s birth certificate or the unique code that CalKIDS will send to all new parents, along with your child’s date and county of birth.

And if you set up a 529 savings plan at ScholarShare and link it to your child’s CalKIDS account, CalKIDS will deposit an additional $50, bringing your child’s total to $100. You can link accounts through the CalKIDS site.

What about older kids?

Starting in September, low-income children entering the first grade in California public schools will automatically receive a CalKIDS account with $500. Kids living with foster parents will receive an additional $500; those identified as homeless will also receive an additional $500.

Similarly, public-school students who were in grades 1 through 12 last year will be automatically enrolled, with the same grants available. According to CalKIDS, students will receive scholarships if they meet any of the following criteria:

They are eligible for free or reduced-price meals through the National School Lunch Program.
They receive benefits from CalFresh, CalWORKS or the food distribution program on a reservation.
They are in a state-recognized English language program for non-native speakers.
They are in a migrant household working in the agriculture, dairy, fishing or logging industries.
They are “considered by their school as a foster youth, or homeless.”

Do you have to do anything?

To maximize participation, CalKIDS is collecting information from the California Department of Public Health on babies born in the state and from the California Department of Education on students who meet the eligibility criteria. So the program can set up accounts without any input from parents.

Be forewarned — there’s a bit of a delay. According to CalKIDS, it will take up to six months after a baby’s birth for the account to be created. And while students’ eligibility will be determined in October, their accounts won’t be established until the following spring or summer.

And remember, to access an account, you or your child will have to register at the CalKIDS site.

If for some reason you don’t want the scholarship, you’ll need to mail an opt-out form to the program. You can find versions in English and in Spanish on the CalKIDS site.

What happens to the money?

According to the program, the CalKIDS scholarship grants are invested in what’s known as a target-date mutual fund, which is a mixture of more and less risky holdings. Specifically, it will go into the relevant ScholarShare 529 Plan Passive Enrollment Year Portfolio.

The closer your child gets to graduating high school, the more the investments shift into less risky assets. That way, the account is less likely to drop sharply in value if the stock market tanks just as you’re starting to make withdrawals.

What can the money be spent on?

That’s governed by federal law. Qualified expenses include tuition and fees at colleges, trade schools and other educational institutions whose “primary function is the presentation of formal instruction,” along with “books, supplies, and equipment required for courses of instruction at such an educational organization.”

Under federal tax law, if scholarship money is used for expenses that aren’t qualified, that amount must be reported as regular, taxable income.

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