College savings fintechs: Disruptors, or bank partners?

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Setting up a 529 education savings plan to fund a child’s college years can mean hours of research and laborious amounts of paperwork. Two fintech firms with free apps are aiming to shrink the process into minutes and may pursue bank partnerships as a marketing channel for their services.

CollegeBacker and UNest have similar goals: help parents quickly and easily set up a 529 account for their children. Both apps are broadening their reach to more mobile users. UNest launched as an iOS app in 2018, but recently became available to Google Android users. CollegeBacker started as a website in 2017, and debuted its iOS app in January; an Android version launched Thursday.

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These startups are both challengers to traditional financial institutions and potential partners for them. Savings is a bread-and-butter part of banking, but the industry at times has been criticized for not offering sophisticated enough savings for big education expenses. And some banks lack the brokerage subsidiaries that may be necessary to offer them.

The two fintechs — and 529s in general — provide a better alternative to parents who want to save for their children’s tuition than relying on a traditional checking or savings account. By contributing to a 529 plan, parents can get a state income tax deduction or tax credit, typically by choosing a plan in their home state. Earnings and withdrawals are tax-free as long as the money goes towards qualified higher education expenses or tuition for elementary or secondary schools.

At the same time, both companies say they are open to partnering with banks and credit unions.

The process of setting up a 529 can be cumbersome, and an estimated 67% of parents do not know this savings vehicle exists, according to a 2019 study by the financial services firm Edward Jones.

The cumbersome part is the problem both tools are trying to solve.

Ksenia Yudina, founder and CEO of UNest, was inspired to create the app after spending four years as a vice president at Capital Group American Funds, a large provider of 529 educations savings plans.

“Even parents who did know about 529 plans found the process intimidating and complex,” she said. “I wanted to combine technology and finance and come up with a solution that was simple and affordable, compared to using a traditional financial adviser.”

Ksenia Yudina, founder and CEO, UNest
“I wanted to combine technology and finance and come up with a solution that was simple and affordable, compared to using a traditional financial adviser,” says Ksenia Yudina, founder and CEO of UNest.

After downloading the UNest app, users can set up an account (and upload a photo of their child, if they like), project the growth of their portfolio using the built-in college cost calculator, and choose an amount to deposit each month, with a minimum monthly contribution of $25. UNest charges a flat $3 per month for each account.

CollegeBacker works in a similar fashion, but only requires minimum contributions of $5, whether that is a one-time, monthly or annual deposit. There is no required contribution to get started. Alternatively, account holders can seed their fund with gifts from family members or friends.

Unlike UNest, CollegeBacker does not charge any set monthly fees. Instead, users can tip the company an amount of their choice.

One sticking point with both apps is a lack of choice when it comes to the actual 529 plan. There are dozens of 529 plans available across the U.S. Parents can invest in one from any state, although contributing to their home state’s plan may result in greater tax benefits.

But both tools whittle down options to one: CollegeBacker users will be placed in Utah’s my529, a direct-sold plan, while UNest users will start saving with Illinois’ Bright Directions Advisor-Guided College Savings Program, an adviser-sold plan.

Both companies say they did extensive research to settle on plans that carry reasonable fees, show consistently high returns and provide a solid mix of investments.

“We picked the best option for the majority of our clients,” Yudina said. She said the tax deductions from one’s home state plan are usually offset by higher fees or lower returns.

Jordan Lee, founder and CEO of CollegeBacker, said his tool will probably add more 529 plans by the end of this year. He acknowledged that parents may get a better deal by investing in their own state’s 529 plan.

“Especially if you are doing the lion’s share of contributions, there is a stronger argument to considering your state’s plan if you can max out your state’s tax benefit,” he said. But he argued that his app encourages users to be more active savers than they might have been otherwise, especially considering CollegeBacker’s strong “social” component, where family and friends are encouraged to add to the pot, whether it is a recurring deposit or one-time birthday gift to the beneficiary.

“If you can do a GoFundMe-style approach to a college fund, you’re getting a lot of new principal you wouldn’t have invested otherwise,” Lee said.

UNest expects to introduce its own gifting feature within the next couple of months.

CollegeBacker currently has about 7,000 accounts and $6 million in assets under management. UNest will not say how many accounts it has, but points to the account-growing experience of its chief operating officer, Mike Van Kempen, who joined in 2019. During his tenure as director of growth at the investment app provider Acorns, the Acorns app added more than 4.5 million investment accounts.

Both tools allow account holders to roll a separate 529 account into their app-based plan and change plan beneficiaries.

Although Yudina said alleviating the burden of student debt is top of mind for her right now, she hopes UNest will offer other services in the future, including life insurance.

“As soon as you have your first baby, life insurance and college savings are your top two priorities,” Yudina said.

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