For young families, saving for college is a struggle in the best of times. The current health crisis and volatile economy have unfortunately made the process even more challenging.
CollegeBacker, a San Francisco-based fintech startup, is trying to reinvent college savings for the millennial generation and make it easier for families to recover from the impact of the pandemic with unique, smartphone-friendly programs to help them increase their savings.
“We are mobile-first and trying to make saving for college a more social experience,” explains CollegeBacker CEO Jordan Lee. “Many cash-strapped millennials, still paying off their own student loans, are turning to their circle of family and friends to help them save, and we make this more convenient by helping them recruit ‘backers’ for their child.” Lee calls this “circle funding” rather than crowdfunding because it’s mostly intimate relations who participate.
So far CollegeBacker’s families have saved an average of 43% more than they would have by involving their family and friends via its gifting features. This compares to a college savings industry average of only 1%-2% of assets coming from gifting.
Why A 529 Plan?
CollegeBacker leverages a college savings vehicle called a 529 plan which is popular because earnings on investments are not taxed, allowing a typical family to save more than in a low-interest savings account or taxable investment account.
Funds from a 529 plan can be used for college tuition as well as books and living expenses. Congress has more recently approved their use for K-12 private school tuition, apprenticeship programs, and paying off some student loan debt. See the full list of qualified 529 plan expenses here. Despite these many advantages, less than half of college savers are currently using a 529 plan.
A recent survey conducted by CollegeBacker found that nearly half of families saving for college have had to halt, reduce, or withdraw contributions to their college fund as a result of COVID-19. The good news is a 529 plan is a great way to maintain progress during a downturn.
CollegeBacker found that families with 529 plans were 3 times less likely to withdraw college funds than those using other types of savings vehicles.
Beyond the inherent power of a 529 plan, CollegeBacker has several unique features that make it an even better choice as compared to a traditional savings or investing account.
Connect Your Existing 529 Plan
Families who already have a 529 set up in one of the 20 states CollegeBacker currently supports can easily link their accounts in just a few minutes by providing a name and email address, and then searching for their plan.
CollegeBacker currently supports plans sponsored by the following states:
- New Mexico
- New York
- North Dakota
- Rhode Island
- West Virginia
Note that CollegeBacker primarily supports direct-sold plans and does not yet connect with prepaid tuition plans. The company says it hopes to add more states and plan options soon, so you may want to check their website for news of newly added states if you don’t see yours listed above.
If you don’t yet have a 529, CollegeBacker will help you set one up in about 5 minutes through the state of Utah, which is widely considered to have one of the best plans in the nation because of its low fees and “Gold” rating by Morningstar.
CollegeBacker does this with robo-advice that greatly simplifies the process of choosing an investment option, which can be complex and daunting for many families. Users are asked a few questions such as their state of origin and their risk preferences. This narrows the complex field of options down to a “golden path,” a set of age-based investment funds that most families would be wise to choose anyway. These funds self-adjust as a child approaches college, becoming more conservative as the college entry date nears.
Open an 529 Plan with CollegeBacker here >>
Families who live in states that offer tax incentives may want to consider setting up a 529 on their own state’s website and then returning to CollegeBacker to take advantage of its superior gifting capabilities, mobile apps, and other unique features. If you live in a state that is not one of the 20 that CollegeBacker supports, it is also possible to set up a second 529 with them to take advantage of those features and they’ll help you with rollovers if you ever want to consolidate.
Linking and managing your account can be accomplished on the CollegeBacker website or by downloading an Android or iOS app. Since only one of the 50 states has an app for managing their 529 plan, this fact alone will make CollegeBacker a no-brainer for many families.
Easy College Savings Gifting
Once your plan is connected, it’s easy to leverage CollegeBacker’s gifting and cash back rewards programs to save more.
To make gifting easier, CollegeBacker helps families create a personalized gifting page for each child (CollegeBacker.com/name) that can be shared with family and friends for birthdays, holidays, and other special occasions. Backer Gifts™ offers more payment methods (including credit card support) and recurring gift options, and will do the work to keep your child’s backers engaged.
A simple custom URL tends to be easier to share via text, email, or social media than the tools provided by the state plans themselves, which sometimes require the gifter to fill out complex forms, mail in checks, or know the child’s account number. And having the CollegeBacker app available whenever you need it on your phone makes it easy to encourage last-minute gifts.
College savers, along with the family and friends in their gifting circle, can then easily monitor their gifts and play an ongoing role in helping the family reach their savings goals.
Early this year, CollegeBacker launched Backer Bucks™, which lets families earn cashback rewards by shopping at 100+ name-brand online retailers, including Walmart, Office Depot, Party City, Ace Hardware, and Peet’s Coffee.
After a purchase is completed, CollegeBacker deposits the reward payout directly into your child’s college fund. Families can also earn cashback rewards by downloading and trying out mobile apps, refinancing their student loans, accessing online learning for their kids, doing their taxes, and signing up for other web or app-based services.
Lee says the company plans to add new partners every month and will also soon make the program available to family and friends so that they, too, can contribute to the child’s college education while shopping online. For many families struggling in the wake of COVID-19, having a way to translate their everyday purchases into college savings is a huge benefit.
Over the last decade, student loan debt has doubled and now stands at more than $1.7 trillion. The good news, according to another survey released by CollegeBacker last year, is that millennials are starting to save for college earlier than prior generations and are increasingly turning to family and friends for help. Unfortunately, a majority of Americans are still unaware of 529 plans, and many others are overwhelmed by the myriad of plan options and investment decisions they face when they go to set one up. This is especially true for low- and moderate- income families who tend not to be as financially savvy as wealthier Americans who can afford financial advisors.
Given that our current crisis will likely be with us for years to come, millions of families could potentially make up for some of the damaging effects of COVID-19 by creating a 529 plan or linking their existing one to CollegeBacker and leveraging their innovative savings tools. And now is a great time to get started.
“We were encouraged to see in our survey that the vast majority of families were not pulling funds out of their 529s to help make ends meet during the current emergency,” said Lee. “It appears that most families are prioritizing saving for their child’s future and thinking about their college savings for the longer term, which is consistent with how 529s fared during the 2008 Great Recession. However, we’re still concerned that a lot of families are going to lose ground during this crisis, so we’ve created these new features to help families save even when times are tough.”
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.