A College Fund for Every Child
Our Plan to Modernize and Democratize College Savings
This week CollegeBacker opened its doors to the public with a singular ambition: to make saving for college so easy, its value so self-evident, that by 2025 every American child will have a college fund, no matter their family’s means, where they come from, or what they look like.
Our vision is of a country where government more effectively supports the social mobility of its citizens, where everyone receives the best tools and knowledge from the financial sector at a fair price, and most importantly, where communities across America are empowered to band together to support the highest aspirations of the next generation.
This vision may sound overly ambitious, but I would argue that it is readily achievable and necessary. In fact, it’s table stakes if we hope to maintain our leading position as the world’s cradle of opportunity and innovation.
The Challenge of College Costs for a Struggling Middle Class
There’s a narrative in Silicon Valley that goes largely unchallenged: college is a bubble. An overpriced ritual that we subject our kids to for no better reason than society says we should. Never mind that most of the people in a position to make this argument went to elite schools. And never mind that the handful of wildly successful dropouts we lionize don’t themselves endorse the narrative. Against a backdrop of college costs continuing to outpace inflation — and graduates leaving college with more debt every year — it is a seductive narrative.
The statistics tell a different story. For example, the average college graduate will earn about $1 million more over the course of his or her career than the average high school graduate. And the value of college is only becoming more evident: 65% of U.S. jobs in 2020 will require some form of postsecondary education, a trend that picked up speed after the Great Recession and will only accelerate as advances in automation and artificial intelligence continue to displace low-skill workers. As Bernie Sanders repeatedly reminded us, a college degree is the new high school diploma, and we’ll need a whole lot more of them if we hope to compete in the global economy.
However obvious it may be that higher education is worth pursuing, the financial calculus for sending their child to college is not always so obvious to parents. Last year, student-loan debt hit an all-time high of $1.35 trillion dollars (which is more than total credit-card debt in the U.S.), and students in the Class of 2015 graduated, on average, with $35,000 of debt. Meanwhile, the cost of college has increased by 12x over the last 30 years and is expected to double again over the next 10. Given how daunting these numbers are, it’s not surprising that over half of parents today are not saving at all: the prospect is just too overwhelming to contemplate. Even more alarming, 71% of savers are using checking or savings accounts, which don’t even keep up with inflation.
The Unfulfilled Promise of 529 College Savings Plans
A 529 College Savings Plan is like a retirement plan (specifically, a Roth IRA) but for college costs (like room & board, textbooks, computers). Your post-tax dollar contributions grow tax free and can be withdrawn tax free (federally, and usually at the state level too) as long as you use the money to pay for “qualified education expenses,” a category that has been enlarged to cover just about everything that goes into the cost of college.
The power of a 529 is twofold: 1) it can be invested, which means a saver can grow their principal rather than lose ground to inflation; and 2) the appreciation of the investment can be 100% tax free, potentially adding up to tens of thousands of dollars of savings over a long enough holding period. And they’re flexible, too! They can be put toward other higher-ed institutions, like graduate school or vocational school, and if your child decides not to pursue higher ed, then you can transfer the account to extended family members.
If 529s are so great, you ask, then why aren’t they more commonplace? Well, 72% of Americans haven’t heard of them, and according to the Government Accountability Office, less than 3% of families that could benefit from one have one. The investment vehicle has come a long way since its enactment by Congress in 1996 — from zero accounts to 12 million that now hold about $260 billion in assets — but this is still just a quarter of the $1 trillion set aside for college savings in the U.S. Why aren’t more parents using 529s?
- Confusing landscape: As a parent looking to start saving for college, your options are to go with an “advisor-sold” 529 plan (a higher-cost, often actively managed choice sold by brokers or financial advisors), or to go with a “direct-sold” plan (a lower-cost, typically passively invested option offered directly by certain states). Are you still with me? This is where people’s eyes start to glaze over, and that’s exactly the problem. Either you defer to the advice of a professional, who might be selling you a higher-cost option because it pays them commissions (new rules from the Department of Labor will soon protect retirement savers, but not college savers), or you have to set aside several hours to do your homework on which state’s direct-sold plan makes the most sense for you, considering a variety of factors including the plan’s longevity, performance, investment options, and whether or not it carries tax-advantages for residents.
- Difficult to open and use: Let’s say you find the time to do the research and end up with a low-cost, direct-sold option. Typically, your next task is to advance through a ten-step account opening process with a clunky web form (if there is a website at all) and choose an investment portfolio option from a menu of ten or more (a challenge for parents who aren’t financially sophisticated). Once the account is open, you’re left with a rudimentary account management interface that does little more than present you with the current value of your account and a record of your past contributions. Not sure how much you should be saving each month? Sorry, it won’t help you figure that out. For anything slightly more involved (and sometimes even for simple tasks), you have to print, sign, and mail paper forms. With enough initiative, a parent can make this work for their family, but what this also means is there’s a vast sea of parents who are simply too busy to go to the trouble.
- Limited ability to involve others: Some of the better plans offer simple gifting portals that can be used, in theory, to collect contributions from friends or relatives, but they tend to be clunkier than the account management interface itself. Even the best 529 management interfaces cater to a single individual. It’s rarely possible to add a spouse or grandparent to help oversee the account, and none of the contributors through these portals ever hears about the account again.
The outcome of all of this complexity is that affluent families are more likely to have a 529 than your average family—the ones Congress originally intended to support—and to use them as a tool in estate planning. This reputation led even President Obama, in his 2015 State of the Union address, to propose reducing 529 tax advantages so that the resulting tax revenue could be deployed more progressively to direct grant programs. After widespread outcry from across the political spectrum, much of it focused on how urgently the middle class needs this type of support, his administration swiftly abandoned the proposal. This demonstrates that the real problem is not with the structure of 529s, but rather with their inaccessibility to the middle class: too few people are aware of them and they’re too difficult to use.
CollegeBacker: Easy, Collaborative 529 Savings for All
CollegeBacker bypasses all of this complexity. As a parent looking to start saving for college, you can sign up in about 5 minutes and start contributing to a reputable, low-cost, direct-sold 529 plan with as little as $25. CollegeBacker helps you determine a smart savings goal specific to your child, and also encourages you to invite relatives and friends to become “Backers” on your funding team. A grandparent might set up a monthly contribution, helping you chip away at your monthly target, and birthday party guests can easily send gifts directly to the fund.
A collaborative college fund: it’s as simple as it sounds, but the implications are more profound than you think. By involving more actors in the college savings process — grandparents, uncles/aunts, godparents, family friends — CollegeBacker not only reduces the parents’ financial burden at a crucial time of increasing college costs; it also helps them build a community of moral and financial support for their children. Does your brother, an engineer, live across the country? Now he can view photos of your daughter’s science projects and encourage her to pursue a career like his. Do you live in an apartment without much space? Now you can encourage birthday party guests to contribute to your 3-year-old’s college fund, rather than add toys to your already overflowing closet. After all, a few hundred dollars invested in a 529 at age 3 could turn into a thousand or more by the time college rolls around, and that’s not including any other contributions those “Backers” may make for future birthdays or significant events like graduations, a Bar or Bat Mitzvah, First Communion, or Quinceañera.
Ultimately, what CollegeBacker provides is a way for parents to make saving for college a collaborative enterprise with a diversity of participants. Some, like a grandparent, might have found a way to contribute before (by sending cash to the parents), but CollegeBacker expands the circle of socially acceptable participants to many others that the parent might never have thought to ask, or who would never have felt comfortable offering. By coordinating these actors, CollegeBacker helps the parent create a brag-safe zone where it’s okay to talk about their child’s academic achievements, and where a virtuous circle can form between the student’s motivation and the Backers’ support and engagement.
Toward Universal College Savings in 2025
A movement has taken root in recent years among nonprofits and municipal governments to open Children’s Savings Accounts (CSAs) for kids in certain populations. San Francisco’s Kindergarten to College program, for instance, automatically opens a savings account for each of the city’s public school kindergarteners, seeds it with an initial $50, and will commit up to $100 in matching contributions. A similar program in Oakland is kicking off this fall, and across the country other cities are considering their own initiatives.
With the same spirit of universality, CollegeBacker has set out to design an experience that anyone can use, and which increases in value when people use it together. If we use Splitwise to divvy up the cost of a trip, why can’t we use CollegeBacker to share the burden of college savings? If we use Tilt to organize and pay for events with our friends, why can’t we use CollegeBacker to receive birthday party contributions to a college fund? If we use Venmo to reimburse our friends, why can’t we use CollegeBacker to send the gift of college savings to any kid who could use the support?
We’re just getting started on this journey, but already we have hundreds of happy CollegeBackers working together to give their young loved ones a head start in life. We can’t wait to spend the coming months and years helping them do this in new and creative ways.