It’s impossible to deny that college is one of the biggest expenses you, your children, and even your grandchildren will ever face. To make matters worse, the costs of college tuition are still climbing rapidly, with some schools forecast to cost as much as half a million dollars to attend as soon as a decade from now. No matter how old your kids are, or if you’re planning to have children in the future, saving for this is a daunting, intimidating task.
Abby Chao is the co-founder and COO of CollegeBacker – a team of college savings geeks working to democratize access to the best tools and information available to prepare financially for college and bring families together in the process. She believes in a world in which every child has a college fund and everyone knows there’s a community of people that supports them achieving their dreams. She’s also seen how the burden of college debt impacts entrepreneurship, career choices, and how people live their post-college lives – and wants to change things for the better.
Today, Abby joins the podcast to share the journey that led her to co-found CollegeBacker, how you can start saving for college no matter how old you (or your children or grandchildren) are, and the unique tools CollegeBacker provides to instill good habits and lighten this massive financial burden.
In this podcast interview, you’ll learn:
CLICK HERE to Connect with Abby and take advantage of her special $10 match offer, exclusively for Your Wealth and Beyond listeners.
[00:00:00] Andrew: And welcome, everybody, to another episode of Your Wealth & Beyond and today I am very excited to introduce you all to Abby Chao. Abby has really spent the last few years in helping to construct and help people save for the exorbitant cost of college. So, we’re going to dig into a lot of good nuggets today and help you, the listeners, whether you have kids or grandchildren or just friends that have kids learn about the ways that we can help save for college, some of the pros and the cons. So, Abby, welcome to the show. How are you today?
[00:00:36] Abby: I’m doing well. Thank you so much for inviting me on.
[00:00:40] Andrew: Excellent. So, listeners, we know this show, Your Wealth & Beyond, is built to help educate you, help you build wealth, find purpose, but, Abby, when we look at the exorbitant cost of college over the last 20 years, first and foremost, before we jump in, when is it going to end? How much higher can college costs go, both public and private, out-of-state? What are your thoughts on that?
[00:01:02] Abby: Yeah. So, unfortunately, it doesn’t appear that the trends are going to stop anytime soon. Some forecasts are saying the cost of college may double again in the next 10 years and so for families that are just getting started today, that could mean that all-in including room and board and everything and for four years it could be $0.5 million to send some of those kids to school. And so, that obviously can be a pretty scary idea for most families today, but the upside is, of course, you don’t have to pay for it all on your own, and if you are smart about getting started early and using tools like a 529, I’m sure we’re going to talk about to help speed your savings then you can put yourself in a really good position.
[00:01:54] Andrew: And I hope we didn’t lose every listener now after they heard 500,000, oh, my goodness. I have a 13-year-old so this I’m also going to selfishly learn from you today here, obviously, as a financial advisor but $0.5 million, that is daunting. And, listeners, don’t be scared. We’re going to figure out ways to make sure that that number, although alarming, is going to be much more accessible for you. So, when we look at your background and the show, Your Wealth & Beyond, is also about entrepreneurs and how we built businesses, successes, and failures. So, CollegeBacker, which we’re going to go into the details and how you’re helping across the country for people to save for college utilizing 529s. You and your co-founder, what was the – when we think about starting CollegeBacker a few years ago, where did this come from? I believe it’s a great idea and I love what you guys have done but how did this come about?
[00:02:48] Abby: Yeah. So, it came from a bunch of different things, but I would say immediately on my side at least I had started my career in finance. I was actually obsessed with personal finance even when I was a kid, so I was like a 15-year-old that was researching Roth IRAs and things like that. So, I started my career in finance but then I had a really interesting experience when I was working as a consultant where I actually got to learn a lot about the education system and I worked directly with school districts and foundations and philanthropists and really got to see how important finance is an education and how big of a barrier, a lack of finance and financial education can be for young kids that want to be able to achieve their educational goals and go to the school of their dreams. And so, for me, that was a heartbreaking thing to see and that’s a big reason that I was motivated to start doing work in the space.
And then I was really lucky to meet my co-founder, Jordan, who you alluded to, and his background is he was a product manager, a repeat entrepreneur, and he had already had this idea built on his own personal experience where he was seeing a lot of his friends having kids and being really, really stressed about the cost of college and not really knowing what to do about it. The landscape of figuring out how to save for college is actually extremely confusing and so he knew about a 529, he wanted to help his friends along that path, and he realized that education is unique because it is something where other people in your community want to help you. It does take a village as we often hear and that applies as much to saving for college as it does to any other part of raising a child and he had the idea to help families crowd from their college fund with CollegeBacker.
[00:04:50] Abby: And for me, given my background and where I was coming from, it just immediately resonated with me because I saw how every parent in America is facing this challenge and stressed about it, and wants to set up their kids for success in the future, but it’s a really daunting task when the numbers are what they are. And so, that’s what really inspired us to go in together on CollegeBacker. We really see a world in which every child has a college fund and every kid knows that there is a community of people that supports them achieving their dreams and that’s why we built CollegeBacker.
[00:05:30] Andrew: For you or Jordan did either one of you when you graduated from college, were you laden with debt or was that something that you’ve just seen some of your friends and contemporaries be just trying to get into the workforce, but then student loans are this daunting way of how am I going to pay for it?
[00:05:50] Abby: Yeah. So, Jordan’s experience was definitely that he had to make some tough financial decisions when it came to financing his education. On my part, I was actually quite fortunate in that my parents had a 529 and at that time they were really new, and it wasn’t a really common thing so they did save for my college education and I also was fortunate enough to have pretty generous scholarships that allowed me to graduate without debt. But frankly, I don’t think that I would be building CollegeBacker if I had the kind of student loan burden that so many of my friends and peers had. So, I saw a lot of my super intelligent, ambitious friends choose career paths because of the debt burden that they have and for me, when I think about what something like CollegeBacker could mean for our society and I think that there are tons of people who would be entrepreneurs, would be building incredible products that are making the world a better place if they weren’t burdened with these financial debts and so that’s a big motivating factor as well.
[00:07:05] Andrew: And I think, you know, when I look back, I’m a Gen X and I graduated Miami of Ohio back in the late 90s and my undergrad I was in-state, but it was like $10,000. So, thinking about how cheap that that was at that point, I think what happened it was just such a rapid rise of tuitions that parents were just caught blindsided by it and that’s really with the millennials and your generation there that the parents were looking at this and saying, “Oh my goodness, I didn’t ever think. Nobody educated me. I went to college and I paid for it as I went,” and then all of a sudden over the last 15 years it just multiplied so I think that is some of these issues that we’ve seen. And it is a crisis and it’s a crisis that your generation is going to have to figure out a means of taking care of that and paint it and I think today when we go through when you start having children, this is a perfect opportunity to not make that mistake.
So, when we think about saving for college now, what are some of the ways in which individuals whether we have kids or planning for kids, we’re grandparents or just friends, what are some of the things that you’ve seen that we can start doing to save for college?
[00:08:18] Abby: Yeah. So, the first thing is just starting really simple which is to start saving for college. So today, 92% of parents say that they want to save for college, but only about half of them are actually doing so and so the first step is just to get started with something. Even just setting some money aside on a regular basis is going to eventually start adding up and get you into that habit. And I would say the biggest danger is the analysis paralysis because there are a lot of different options out there when it comes to saving for college. That can really confuse people and then ultimately folks sort of give up and so the most important thing is to get started with something. But that being said, when it comes to how to save for college, we’ve done a ton of research before starting this company and basically have come to the conclusion that 529s are the best way for most families. The main advantage of the 529 is that it’s invested, and you get tax-free growth and withdrawals.
So, if you imagine starting when your child is just born and over 18 years, you’re setting money aside and it’s growing completely tax-free, that means that you’ll have something really meaningful set aside when your child turns 18 and they’re ready to start college. That being said, there are other things as well that sometimes folks will consider. Many families actually just use a checking or savings account which obviously lacks the advantages of the investment growth and it can also have some financial aid impacts as well, especially if that savings account is in the child’s name, but that’s one option that we wouldn’t necessarily recommend for most families, but for the convenience sometimes families choose. And then there’s a whole slew of different more complex options I would say. For example, sometimes people are interested in setting up trusts for their children, or other devices like that. Oftentimes, they can have financial aid impacts as well and so I would be cautious about exploring some of those options if you would like to look beyond the 529.
[00:10:20] Andrew: So, with your research and we look at the – we’ll talk about some of the main benefits of the 529, we’ll dig in a little deeper, but what do you think the percentage of people that actually know what a 529 is and that it’s available to help saving for college or higher education or trade school, etcetera?
[00:10:45] Abby: Yeah. So, shockingly, around 70% of parents do not know what a 529 is and so I think that’s a big reason that people ultimately end up choosing something like a checking or savings account. But to me, the 529 because it has such strong benefits compared to all the other options out there, it should be as prevalent and as known as any of the retirement accounts that we use, a 401(k) and all of that. The 529, unfortunately, has had a real sort of branding and distribution problem I think over the past few years and unfortunately, there are so many families that would choose it if they just knew about it, but awareness is not high.
[00:11:30] Abby: Right. I think some of the challenges as a young family just getting started burdened with student debt, doesn’t have the investable assets yet. They’re not working with financial advisors. They’re not at that stage yet, so it’s that Catch-22. So, nobody’s educating them that it’s out there and also as you mentioned, has gotten a bad rap over the years just because a lot of these plans they were really expensive. Not a lot of options. Brokers were selling, making big fees off of it and so the industry really was tainted a little bit I would say over the last decade and it’s coming now over the last few years where we’re seeing it where there’s much more affordable plans, better options, and I’m sure that’s one of the reasons you guys started CollegeBacker to educate and then also to allow this systematic and easy way to save.
[00:12:21] Abby: Yeah. Absolutely. And I would say in the industry today, there isn’t really anybody responsible for just educating young parents on the options out there and guiding them towards a 529 and that’s one of the gaps that we really hope CollegeBacker can fill, to be that entity that comes in and says, “Hey, you just had this massive life change. You have a thousand different things going on in your life as a new parent but here’s one thing, one simple thing that you can do right away that’s going to set you on the right path. And, of course, you can optimize and make changes and things like that along the way. But most importantly, here’s just a quick and easy entry point to get you started,” and then you’re off to the races or you can be worrying about the other things that a new parent is worrying about.
[00:13:14] Andrew: Yeah. It does come back to that financial literacy that you talked about where you were the anomaly 14, 15, studied what a Roth IRA was. Nobody taught you that. You just found a passion for it and probably did your own research on it. We did a show a few episodes ago to help parents, as well as kids, become smarter about money and it just still blows my mind that they don’t have things in high school, in grade school to help the kids understand what’s out there in the balance, I’m not saying their checkbook, but just understand the value of money and then what options that they do have to save to ensure that they’re going to have a good retirement when they do separate out of the workforce.
[00:13:49] Abby: Yeah. Absolutely. And I think today CollegeBacker is really working with a lot of young families where the kids are very young, but over time we really hope that many families are using CollegeBacker as a way to help educate their kids too. As you have a 14-year-old, a 15-year-old whose parents were saving with CollegeBacker maybe that’s a place where they can be putting in their babysitting money or whatever it might be because they also are learning about the value of investing and the value of education as well.
[00:14:29] Andrew: So, let’s break down real high level for those of the listeners that have no clue what a 529 plan is, kind of maybe compare it to what they do know on the 401(k) side so let’s break that down. Let’s simplify it then we can get into some more of the nitty-gritty.
[00:14:43] Abby: Yeah. Absolutely. So, the retirement accounts are a great analogy to a 529. It’s actually very, very similar to a Roth IRA but for education. So, the way that a 529 plan works is basically you put in post-tax money and then the growth is completely tax-free, and withdrawals are tax-free as long as it’s for qualified educational purchase or, excuse me, an educational expense. A couple of the other great benefits of a 529 are that, one, it’s a lot more flexible than people might think. So, you can use it for all kinds of educational expenses from in-state and out-of-state graduate school as well, community colleges, some trade schools, even some schools abroad as long as it qualifies for federal financial student aid. It also includes categories pretty far beyond what you might think. So, oftentimes, people mistakenly think it’s just for tuition, but it actually also can be used for room and board, books, computers, and other supplies. And so, there’s a lot of flexibility there to make sure that your child is still able to achieve whatever educational goals they want with the help from the 529.
[00:16:02] Andrew: Okay. So, let’s say we have a family that has three kids, would we open up the 529 plan as one or do you recommend having the individual 529s and then funding each of them separate?
[00:16:16] Abby: We recommend that every child having their own 529 and there are a couple specific reasons for that. I think, particularly when it comes to CollegeBacker, we give you a custom page for each child. So, you might have CollegeBacker.com/Abby for one and then CollegeBacker.com/Andrew for another, and that’s primarily to be used at like birthdays and holidays and things like that so that at Abby’s birthday you’re sending a gift directly to Abby and it’s not being shared with the other siblings as an example. But for more of an investment perspective, it also matters because it influences the investment portfolio that might make sense. So, at CollegeBacker, we’ll recommend an age-based portfolio that’s more aggressive when the child is young and the more conservative as the child gets older so that you know that the money will be there when you need it to pay for tuition.
And so, by having a separate 529 plan for each child then you know that you can set up the investment portfolios in a way that makes sense for each child’s timeline. That being said, if you do have multiple children, you don’t have to worry too much about how you’re allocating the money across these different accounts because with a 529 you are allowed to transfer, either transfer the money or change the beneficiary of a 529 account as long as it’s somebody within the family. So, if the first kid decides not to go to college or they get a full ride or whatever and they don’t need the money, you can transfer that to the second child or even transfer it back to yourself if you wanted to go and pursue additional education.
[00:17:56] Andrew: Yeah. Very, very important component of that, listeners, is that you’re not locked into that. It’s something that they can continue to grow it deferred and maybe they did get a scholarship and now they want to go on to get their Ph.D. and then they can utilize it there. And then if not, you decide you want to go back and even retirement and you want to go in and take some theater classes, you can ultimately use it. So, very flexible in that regard but let’s take a step back so you talk about when we put money in and to get the listeners to think about when they’re investing in their 401(k) or their own Roth IRA, they’re going to have choices. They’re going to have underlying funds to invest in. So, that becomes, in a sense a daunting task because a lot of people just don’t know. So, what has CollegeBacker done to make this process easy for a novice who doesn’t have a financial advisor but wants to start saving in a 529 plan? How do you help make sure that they make the right investment for that particular child?
[00:18:55] Abby: Yes. So, this is a big challenge that we really designed CollegeBacker to address which is, it can be very daunting for somebody who is not deep in the space to make the selections. And so, the way that works with CollegeBacker is basically when you sign up and you put in your information and your child’s information, we will take a look at all the options out there and give you a recommendation for a specific 529 plan and portfolio, that is, as I mentioned earlier, custom to your child’s age and their timeline to potentially enrolling in college. That being said, I think if you do want to take a look at the different options out there and do your own research, there are some considerations that we’ve certainly taken into account and that one of the biggest of which is just taking care to look at those underlying fees.
So, you had alluded to this earlier. There’s a really wide-ranging spectrum of different portfolio fees and 529 plan fees out there and for some, it could be over 1% annually for the plans that are coming directly from different states like the California plan, New York plan, the Illinois plan, or whatnot. The average of those plans tends to be about 0.6% so 60% of what you might get if you’re often doing an advisor-sold plan through Schwab or Fidelity or something like that but we really did the research to find a low-cost plan that’s just a fraction of that even and so that’s one big consideration to take into account. The other thing to consider is looking into your own state’s 529 plan to see if there might be an income tax deduction and whether you need to use your state’s plan in order to qualify for that deduction, or if you can get that deduction regardless of which state you live in.
[00:20:55] Abby: So, for example, in the state of Pennsylvania, regardless of what state or, excuse me, regardless of which 529 plan you choose, you can still qualify for that income tax deduction.
[00:21:08] Andrew: Yeah. That is something that you definitely want to talk to your advisor CP on but it’s kind of a loophole where you could if you have a deduction like [inaudible] $1,000 deduct joint and that’s any state plan. So, ultimately, if you’re paying for college already and you didn’t have the time to let it grow, you can fundamentally put that 15,000 into a 529 plan and then get the state tax deduction and then ultimately pull it out the next day as long as it’s there and using it for the higher education, the textbooks, whatever qualifies for that. So, a little bit of a loophole there that if you’re at that point where the kids are ready in college, in university, maybe a private school that you need to pay for, it is a great way to take advantage of that. But that’s not for all states, so just make sure that you understand how it works and don’t take tax advice from either I or Abby on this podcast.
[00:22:02] Abby: Yeah. Exactly.
[00:22:03] Andrew: So, again, it’s going to be invested. The longer we have, the more risk we can most likely take and then the other thing, listeners, remember that the money is growing tax-deferred so the value of that of compounding like your 401(k), like your Roth IRA, allows for in a sense that triple compounding, which allows the money to grow faster. So, then when we get to that point of taking money out then, Abby, that money comes out. It’s going to be all tax-free any gains that we had, as long as it’s been used for that higher education, qualified education?
[00:22:36] Abby: That’s right. And that’s a huge benefit of CollegeBacker is once you put the money in there, you basically don’t have to worry about having to ever pay taxes on it again. That money is going to go directly to the university or whatever expense you ultimately need it for. So, that’s an enormous benefit for you and your family.
[00:22:59] Andrew: And so, then if we were fortunate to get a grant or a scholarship and parents had saved for a 529 plan with that particular child, what’s the flexibility with scholarships in it and not taking that tax penalty if the money’s taken out and not used for qualified higher education?
[00:23:18] Abby: Yeah. So, this is a very, very common question because folks are often like, “Oh, well, my kid is brilliant and they’re just going to get a full ride so why do I need to save for college anyway?
[00:23:27] Andrew: They’re so smart. They’re the smartest kid I’ve ever met, best looking, and the most athletic kid.
[00:23:31] Abby: Exactly. In which case, to be honest, I would say the first thing is that even if your kid gets a full tuition scholarship, there are a lot of expenses that are outside of tuition that you might need that money for so the room and board, buying a new computer. And so, if you can use the 529 for those expenses, I would recommend that first, generally. And then if you do want to continue to save for a second child or a third child, you can use that trick of changing the beneficiary that we already talked about. But one of the great benefits of the 529 is that if your child gets a scholarship, you can actually withdraw that money without the normal penalty and use it for something else for a general-purpose withdrawal essentially. And so, normally, if you were to just take the money out and say buy a car, you would have to pay a 10% penalty and taxes on the gains. But in this case, because your child was so brilliant and you got a scholarship, then you are able to take that money out without the penalty.
[00:24:40] Andrew: Okay. Listeners, so make sure those kids are studying, get those tutors, and you’ll be able to take advantage of that. So, with your company, CollegeBacker, walk the listener through and in our show notes and we’ll talk about a special offer that you provide to help people get onto that path of starting to create that habit of savings because like you mentioned early, investing, success and investing, it’s all about creating habits and putting money away in whether it’s coming out on a monthly basis and you don’t see it, that’s usually the best way. So, how have you developed the software to create this ease-of-use and then I also want to get into a little bit of the crowdfunding, which is also a unique, I think, trait of what your company does versus others.
[00:25:29] Abby: Yeah, absolutely. I’ll tackle a little bit on both of those sides. So, when you come to CollegeBacker.com, there are actually two different ways that you can use the product. So, first, which we’ve been talking about, mostly is the experience as a parent. You come to CollegeBacker.com, you put in your information and your child’s information, you set up this college fund, you get this custom link like CollegeBacker.com/Abby and then you can schedule your own contributions into the college fund and you can also share that custom link with other people at birthdays, holidays, or any other occasion and essentially say to folks, “Hey, if you’re looking for gift ideas, we just set up this college fund,” or some other communication like that. The other thing that…
[00:26:11] Andrew: So, before you jump in there because we get this a lot with the hundreds of clients we work with their grandparent. They want to help sit their grandchild and saving for college, so you’re saying that they don’t, in this case, have to go and set up a 529 plan where grandparent owns it and then child, grandchild, is the beneficiary?
[00:26:31] Abby: That’s right. So, we actually generally recommend that when possible, the parent is the one who is the account owner and the reason for that is financial aid. So, essentially when it’s a grandparent, owned by anybody other than the parent 529 plan, there can be some additional financial aid impacts that you’ll want to look into yourself. That essentially when the parent owns the 529 that is generally optimal for financial aid.
[00:27:01] Andrew: Okay. And then when I do provide a $500 contribution, I am grandparent, I mean, I’m not able then, in that case, I’m not getting a potential state tax deduction? That’s more in a sense, is that like I’m gifting that money over to them?
[00:27:16] Abby: That’s right. On a state-by-state basis, sometimes the rules around that state income tax deduction can be different, so that will be something that you want to check for your state, and the parent state, or rather the beneficiary state exactly how those contributions to the 529 plan will be treated because it does vary on a state-by-state basis.
[00:27:30] Andrew: Awesome. So, listeners, you think about that. If you’re planning your child’s third birthday and instead of them getting 15 additional gifts and presents and more toys that you don’t even have room for, imagine being able to send out a nice email, or at the party and saying, “Hey, listen, we don’t want any gifts but if you wanted to help us with the future cost of the higher education, boom, this is how you do it. This is how easy it is.” Are you starting to see people do that on that level on the front level as well as the family level?
[00:28:11] Abby: Yes. We see it quite a lot actually particularly, even so we see a lot at birthday parties, and even as early as the baby shower as parents are planning and before birth is when the parents have the time to think about all this kind of stuff and we see people using CollegeBacker at the baby shower even to get things started. And oftentimes a birthday party is raising several hundred dollars just in one go. So, if you imagine doing that for the next 10 years, every year you’re raising a few hundred dollars from a birthday party. Meanwhile, you’re also saving your house from all the additional clutter of all those extra toys and gifts that you really want, that can really add up to a lot.
[00:28:52] Andrew: Win-win for everybody there. And then with you in San Francisco and I know the higher cost of this for a lot of people to go to private schools or even just nursery schools and so forth, when you’re educating your customers or your other advisors out there, your clients, what does CollegeBacker thought of saving for the long-term and using it for college versus kind of slush funding it and putting it in and then using it year by year to help pay for if they are going to a private school with the changes to the tax law that is now being able to be used?
[00:29:31] Abby: Yeah. So, we’ve gotten a lot of questions around this new rule that allows you to use 529 savings for K-12 tuition and it’s definitely exciting that 529s are expanding and becoming more useful for many families. That being said, it is something again that parents need to be a little bit careful about because depending on what state you live in or what 529 plan you’re using, there may be some specific rules about what happens when you withdraw the money for the K-12 purpose. So, in some states even though generally speaking, federally, you can use the money for K-12 purpose, in some states, they might actually claw back the income tax deduction that you might have gotten for those contributions because on a state level they’re really intending it for higher education.
That being said, another kind of caution, cautionary point would be that if you have initially set aside this money in a 529 for the purpose of using it for college and then you take it out early for that K-12 private tuition, you should recognize that you are giving up the tax-free growth that you would’ve had if you had waited and continue to use that money to save for higher education, for college. That being said, if you are a new family and say your kid is three or five years old and you’re really thinking about planning for a private high school or something, then it makes a ton of sense for you to be thinking about that almost as a separate fund compared to your college fund. So, all that being said, the way to put it quickly would be don’t raise your college fund to pay for middle school, but if you planned to use this as a tool to save for middle school, then that’s a great option.
[00:31:29] Andrew: That’s kind of the same way we teach on the health savings accounts, the HSAs which we’ve done some podcast on. I would think it’s actually the pinnacle of all retirement accounts because it is the triple whammy of getting money and getting a tax deduction, growing a tax-deferred and then having the money come out tax-free which in that context, similar to the 529, but you get a little bit better tax deduction. By rating it and using it as a slush fund versus growing it, I think it’s just a detriment just because, as you stated, a tax-deferred growth inside and then the tax-free if used for the right purpose, in this case, medical is very, very important there. So, when you think of CollegeBacker, one thing I’m just trying to get my head around here, I know we have the state plans and for some people, they live in Arizona, but they have a Nevada plan, what is CollegeBacker? Are you just taking and inputting in the data and then helping them find a state plan or are you actually where the money is being invested and acting as a plan itself?
[00:32:31] Abby: So, more of the former, but I’ll say a little bit more. So, the way that we work is we’re structured as an investment advisor that sits above a 529 plan so we’re not the one who’s actually managing the assets. Essentially, we’ve done the research to identify a great 529 plan that we can help you open an account with but we’re not actually going to be the folks that are holding the money and making investment decisions on a regular basis aside from the overall recommendation that we provide to you at the very beginning. So, from that perspective, the advantage to you as the potential client is that, God forbid, CollegeBacker goes out of business, your savings are still safe with the 529 plan that you’re using.
[00:33:18] Andrew: So, on the technology front when I go on and I go through the questionnaire, then you’re going to then provide that individual, what is the recommendation based off of what plan they should have, what type of investment they should put it in?
[00:33:34] Abby: Right. So, we’ll make that recommendation based on your child’s information and the time horizon and everything, and then we will help you with the account opening process as well so that you don’t have to worry about any of the paperwork. And then lastly, as you’re making contributions and as other people are making contributions, CollegeBacker essentially facilitates all of that and then make sure that those contributions are directed into the actual 529 plan. Another benefit there is that not only is it just a nicer experience for both you and the gifters, but we can also support different kinds of contribution. So, for example, we can support credit and debit card contributions which might be really convenient for somebody who is sending a birthday gift into the college fund. We can also support regular monthly contributions from other family members. So, for example, maybe grandma wants to put in $100 a month or maybe there’s an aunt or uncle that wants to put in $20 a month and we can facilitate all of that as well.
[00:34:37] Andrew: Okay. This is interesting. So, I’m going to put on my entrepreneur hat, my business owner hat. How do you guys at CollegeBacker, how do you make money?
[00:34:47] Abby: Yes. So, we have a really new business model I would say for the industry. So, again, remember that from our perspective, the goal is a college fund for every child. So, our mission is really to go out for not only the affluent families but help the middle-class families and the lower income families save for college as well. And I would say in the industry today, the typical business model is an asset under management fee for many of these 529s and as a result, a lot of times their marketing dollars end up being skewed towards more affluent clients, but instead what we want to do is make it accessible for everyone. And so, what we do is we charge a voluntary monthly subscription fee to parents, which is zero to $10 a month and then a tip on gifts from third-party contributors so you can choose your own amount. You know, if you give $100 to a kid maybe you tip $5 to CollegeBacker.
And so, the benefit of that is that first of all, we make it really accessible to everyone to as many people as possible to just get started and start saving. We’re really incentivized to make sure that all of our customers are really happy because otherwise, of course, they won’t be paying us any voluntary subscription fee and we’re also incentivized to help you get as many other contributors and backers as you can so that hopefully, we’re earning additional tips.
[00:36:12] Andrew: So, when somebody does become a client whether they paid you or not then they get into a program where you continually reach out, help educate them, kind of get them in that process or journey so that they are staying ahead of the game and then also being able to understand how to bring other people into the mix to help maybe fund for that so teaching them about how grandparents and friends and so forth can help in that pursuit of making sure that their child is going to have enough money there to pay for college.
[00:36:43] Abby: Exactly. Exactly.
[00:36:44] Andrew: So, let me ask you this. So, you guys have started a few years ago. What is the percentage of people that actually do pay you for the service?
[00:36:57] Abby: So, yeah, a pretty significant majority or pretty significant chunk of people do choose to pay, and the other benefit of our business is that because we’re structured in a pretty light way, we don’t have a lot of ongoing costs. So, for me, as a business owner, I would rather have you come on to my product, use the platform for free, but hopefully, refer other people, send gifts to your friends, invite them to contribute to your college fund and eventually I’m pretty sure that I will make money off of the referral or the gift tips from someone else, even if you aren’t paying a fee directly.
[00:37:37] Andrew: It’s such an interesting business model. I mean, I think you guys are definitely a step ahead and being very innovative here in that honor system that’s crowdfunding that mentality there. Obviously, we’ve seen other sites that were there to raise money. So, are there any companies out there that are in the 529 industry that do what you do in the case of that business model?
[00:38:01] Abby: Not in the 529 industry. We’ve certainly taken some inspiration from other fintech startups that are kind of pioneering these pay-what-you-want models. So, for example, there’s another company called Aspiration.com that does investment management, particularly for the audience that really cares about sustainable investments and they’ve got a similar business model and there are a couple others out there too that are really pushing the frontier here. And I think what it really comes down to is financial services asking itself how do I make sure that my business model and that my incentives are also aligned with the best interest of consumers and I think in some cases that’s true with the current institutions out there, and in some cases, it’s not. And so, now I think the new crop of fintech companies that we’re seeing were all really thinking how do I make sure that these incentives are aligned so that when I win, my customers win, and vice versa.
[00:39:01] Andrew: Yeah. I think this is a really, really intriguing idea. So, have you guys partnered or created relationships with investment advisory firms? Like Bayntree, we have a lot of clients and in our world, we’re helping people get to and through retirement. We don’t really focus on advising internally on the 529. We help them set it up. We lead them to whether it be the Fidelity site or whatever plan it’s going to make the most sense, but I see that as a niche there where you can partner with firms like ours and help educate and then take a little bit of that away from us even though we’re not getting compensated on it. We’re still helping our client or client’s family save for that inevitable cost of education in the future.
[00:39:44] Abby: Yeah. To be honest, it’s something that we’re interested in, but haven’t fully explored yet so if there are financial advisors that are listening to this podcast, please reach out and we’d love to be able to do those kinds of partnerships. We have on a more ad hoc basis I would say kind of like being on this podcast today interacted with different financial advisors who say, “Oh wow, this is a really interesting new way to think about saving for college. That might be really useful for our clients,” and so sometimes we find a way to work together informally, but we’d love to be able to do that on a larger scale as well. We hear that a lot from financial advisors, that particularly in the 529 space, you want to do the right thing by your client. So, you’re guiding them towards, say, a state-based 529 plan that makes sense for them, but it can still be daunting for them because it’s going to be separate from the other things that you might be managing and CollegeBacker might just be an easy way for that person to get in there and get set up pretty quickly. And then you could even be set up as a contributor to the 529 plan through CollegeBacker and kind of be able to keep tabs on the account as well.
[00:40:57] Andrew: I think we definitely need to talk after this podcast so that’s good stuff. So, as we kind of get to the close just if we think of like the two or three biggest mistakes that you see for people in saving for college, I know we touched on some of them, but what would you say that is and, obviously, we know there’s ways to rectify it but what are some of those top two or three mistakes?
[00:41:20] Abby: Yes. So, the first couple we’ve already talked about, one, not getting started, procrastinating, or getting analysis paralysis, all of those things, feeling just too scared about the overall cost of college. And so, ultimately, people just don’t get started but if you can get started today and even just put a few dollars aside on a monthly basis that’s going to make a big difference. So, with CollegeBacker, it’s as easy as going online, claiming your personal link and getting started. The second thing I would say is potentially putting that money just in a checking or savings account. And that’s much better of course than not saving for college at all, but you’re leaving so much opportunity on the table by not using these tax-advantaged accounts that are really going to boost your savings over time. The third thing is that people really think that they have to solve this on their own and it’s just not true because there is this community of people around you that really wants to help. The grandparents, the other relatives, even your friends, they do want to get involved in your kids’ education. This is an amazing way for them to do so.
And in fact, you know, if you’re a grandparent, you can even kickstart your grandchild’s college fund with CollegeBacker by sending a gift to the parent and then say send $100 to the parent through CollegeBacker and they’ll receive an email that says, “Hey, grandma just sent you $100 through CollegeBacker. Click here to get started and set things up.” So, what we’ve really seen is that there are so many people who would actually rather give college savings than go stand in the toy store and like pick something off the shelf because it feels more meaningful and it’s something that’s really going to the last over time rather than perhaps your child’s short attention span. And so, there is this huge opportunity out there if you’re willing to just start the conversation and put it out there.
[00:43:15] Andrew: Yeah. I would say if I asked 80% of my clients would probably be down for this of being able to gift even like you said $25, $50. It’s just getting started. Think about listeners when you started your 401(k), you may only put $25 of paycheck away and now a few years into it, you’ve got $5,000, $6,000, $7000. What’s neat about CollegeBacker is when you go to the website, you guys create a nice kind of like in the 401(k) space but a nice chart to show if I put X amount of dollars away, first and foremost, do I think it goes back to on what type of institution do I think I’m going to have my child go to and then you guys work backwards from there based on the age of looking to say how much is it going to cost? And then what if I put away X amount of dollars a month, what is the percentage that I can reach that goal? And visually, I think from you guys you built that because it helps people understand I’ve got this goal and I can actually obtain it.
[00:44:15] Abby: Absolutely. Yeah. I would absolutely encourage folks to go to CollegeBacker.com and play with the calculators there because we started this conversation with some pretty scary numbers but once you get in there and you look at the calculator and see how much your money can grow over time, and then imagine adding on top of that, a few hundred dollars a year from a birthday party, maybe a little bit of contributions from relatives that might be doing it on a regular basis. You can see that those goals are actually achievable if you are starting early and if you are really being engaged with the process and not being afraid.
[00:44:49] Andrew: Yeah. I mean, don’t put your head in the sand because it’s not going to just be in 18 years, you’re going to figure out a way to pay for it in that particular year and those four years. So, that’s something get started early, create that habit, and making it simple I think is the key to that success and that’s what you guys are trying to build here with the technology and the education. So, in the scope of what the listeners could do to start this process, obviously, we talked about CollegeBacker.com but what would if I’m a listener, I’m like, “Okay. I need to figure out what’s going on here. I want to set up my account. What would that look like?”
[00:45:25] Abby: Yeah. So, we’re excited to provide a $10 match to all the podcast listeners today. So, if you do want to get started and you’re ready to explore, go to CollegeBacker.com/Wealth and you will and go ahead and sign up for CollegeBacker, start the college fund for your child, and when you make a contribution of at least $10 we’ll match it with another $10 as a gift from CollegeBacker so we’ll be your first backers into that college fund. And I think the note I’ll end on is this that for so many of us thinking about the cost of college and saving for college is a really scary and daunting thing. There’s no surprise given some of the steps that we started with. But our mission is really to make it a really different experience and flip it on its head because when you think about saving for college for your kid, it should be a really inspiring and exciting idea because your kid is going to be able to get their future started in this really beautiful way. And you can kick that off and get started on the right foot by just going to CollegeBacker.com/Wealth, making a contribution of at least $10, and receiving your first $10 gift from CollegeBacker.
[00:46:38] Andrew: I love it. So, Abby, thanks for being on the show. I know listeners, the show is built to learn from entrepreneurs. Well, obviously, Abby checks that box. They’re trying to really turn and flip the 529 world on its side using and being innovated and using technology and then we learned today and it was a little bit tip of the iceberg but we’re helping to educate you of what the options are, the value of the 529, how we can incorporate it into the long-term planning, and then by leveraging technology, being able to get other people, family members, loved ones to help you reach those goals. So, we did it. We intertwined it and fantastic stuff. So, Abby, thank you so much and in the show notes will be all the items we talked about, links that will allow you to go to CollegeBacker.com and we appreciate the time, Abby. Thank you so much.
[00:47:29] Abby: Thank you so much for having me today.
[00:47:31] Andrew: And listeners, stay tuned for later this month for a new episode of Your Wealth & Beyond. Happy planning, everybody.