CollegeBacker Review: A Smart Way to Save Money for CollegeSaving Money
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According to a recent Forbes article, student loan debt has reached No. 2 in the consumer debt rankings across the U.S. The article reports that students carry $1.5 trillion in student loan debt from 2018. That’s an insanely high amount of debt and education costs are only increasing. To stand a fighting chance of not drowning in college costs, many parents and loved ones of children are starting to save early. This is where CollegeBacker — automated tax-advantaged savings account for education — comes in. Our comprehensive CollegeBacker review follows.
CollegeBacker Review: How Does it Work?
CollegeBacker is a service that automates college savings by allocating money into a tax-advantaged CollegeBacker savings plan for education. The goal of the company is to encourage saving for college, so fees aren’t as large when children do go to school. The company also aims to make the entire 529 account process easier, as 529 accounts are known to be generally convoluted and difficult to fill-out and start.
Good to Know: You can open an account with CollegeBacker with as little as $25. In fact, CollegeBacker is social, meaning that others can also contribute money to the account as well, from monthly donations from grandparents to annual birthday gifts from friends and family. CollegeBacker is backed by Princeton University and 500 Startups as a way to confidently save for a child’s future education in an easy, streamlined way. CollegeBacker estimates an 8 percent return rate against 5 percent inflation.
Keep in Mind: The beauty of 529 plans is that they are similar to Roth IRA plans, meaning they come tax-advantaged. Contributions are made in the form of post-tax dollars. They aren’t subject to gains taxes as long as the money is applied to education costs.
Bonus: The company also has a range of great features. For instance, the company doesn’t charge any service fees. And if you do choose to pay up to $10 in service fees a month then 10 percent of that goes to low-income families also saving for education. Additionally, CollegeBacker offers a high-rated 529 or age-adjusted investment options. If you don’t like the options in your state, you can open a 529 from another state, even if you don’t live there.
How to Open an Account
To open a CollegeBacker account you need to be eligible. There are just a few requirements:
- a valid Social Security Number (SSN) or Tax ID Number
- a valid U.S. address
- be at least 18 years old
To open an account, you need to prepare the following information:
- Date of birth
- S. address
- Phone number
- Social Security Number (SSN) or Tax ID Number
- Beneficiary information
- Savings goals
Once you have the information prepared, then you can get started in just five easy steps.
- Go to CollegeBacker’s website.
- Click “Start Saving for College Today” at the top of the page.
- Create a plan by entering the beneficiary’s age and savings goals. Click “Create Profile.”
- Enter your personal information and the benficiary’s personal information. Click “Create Fund.”
- Once the application is finalized, you can invite family and friends to contriute via the “Give the Gift of College Savings” button at the top of CollegeBacker’s website.
Tax Deductible 529 Accounts
As mentioned above, CollegeBacker offers a high-rated 529 or age-adjusted investment options. If you don’t like the options in your state, you can open a 529 from another state, even if you don’t live there.
Good to Know: A big question a lot of people ask is if contributions to CollegeBacker 529 accounts are tax deductible. The answer is that it completely depends on the state your account is in. Please do note that which state you choose will impact your state income tax deductions or credits. Within the states, there are three different categories impacting any 529 plan: claim certain tax benefits, claim benefits made into state-specific plans, and no benefits. Here’s the state breakdown:
- Claim certain benefits for 529 contributions: Arizona, Kansas, Minnesota, Missouri, Montana, Pennsylvania, and Utah.
- Certain tax benefits for contributions to state-specific plans: Alabama, Arkansas, Colorado, Connecticut, Georgia, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nebraska, New Hampshire, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, and Wisconsin.
- No benefits: Alaska, California, Delaware, Florida, Hawaii, Kentucky, Nevada, New Jersey, North Carolina, South Dakota, Tennessee, Texas, Washington, and Wyoming.
As an example of how a CollegeBacker savings plan actually works, the company has a handy “How much can you save?” calculator on their webpage. As an example, if you saved $200 a month from the time your child is 1 year old, then these are the projected outcomes for a 2037 college start date, according to CollegeBacker:
- If you keep the money in a savings account: $45,200
- If you invest the money in the stock market: $68,700
- If you save money with CollegeBacker: $80,803.
By the time your child starts their education, there could be a 187 percent return on investment with CollegeBacker. That amount is currently (on average): 100 percent of tuition for an in-state public university, 73 percent of tuition for an out-of-state public university, and 58 percent of tuition for a private university. Starting to save today with CollegeBacker can help you significantly reduce or even cover the cost of schooling for your child.
No CollegeBacker review would be complete without a discussion of the company’s pros and cons. These are subjects which you need to carefully consider before deciding to open an account with CollegeBacker.
1. Not Subject to Capital Gains Taxes
The money put into a CollegeBacker account is invested in a tax-advantaged 529 College Savings Plan. That means it grows tax free, without any capital gains tax when used to pay for education. When saving for anything, but especially such an important and expensive goal as education, it is important that the money you put in the account stays in the account and is not whittled down by taxes.
2. High Rate of Return
CollegeBacker predicts an 8% rate of return against 5% inflation, based on the past fluctuations of the S&P 500. That means that $100 invested can turn into as much as $500 in just 18 years. In this regard, CollegeBacker’s account can help you save and make more money. As the time of education grows closer, such as a college start date, CollegeBacker will automatically make your investments more conservative, meaning there will be less of a chance of losing any money right before hitting the goal.
3. Optional Service Fees
A great feature about CollegeBacker is that they don’t charge service fees. Instead, you have the option to pay $0-$10 per month, depending on what you feel you can pay. Additionally, 10 percent of your monthly contribution goes toward assisting low-income families prepare for college. So, you cannot pay a fee or feel good doing it.
4. Start with Only $25
A major barrier to many looking to start saving for future education and college funds is that they simply feel like they don’t have or make enough money to start saving properly. The feeling is understandable, as college prices skyrocket and many students, parents, and loved ones are left looking at ridiculously high numbers. Not everyone can start by saving hundreds or thousands at a time. That’s why CollegeBacker’s $25 minimum is a great feature. For many, $25 is the price of a date night or a large pizza. One less of those and you can start a CollegeBacker college savings account. It’s as simple as that.
5. Quick and Easy Setup
Another reason many people don’t want to start a savings or investment account is that they don’t want to do all of the paperwork that comes with opening it. Who does like paperwork? Luckily, CollegeBacker’s setup process takes only five minutes. And, once completed, you can immediately start saving. There’s no annoying wait period.
6. Family Friendly
For many people, receiving a little bit of cash on a birthday or big event may be a normal occurrence. CollegeBacker makes it easy for others to participate in the college savings plan. For example, a close family member or grandparent can set up a monthly contribution. Or, birthday guests can place money directly into the account for your birthday present. Instead of no one knowing what to get you, why not provide a way for them to give you a gift that will really matter to your future? A lot of people don’t like giving cash, but in this transaction, there’s a clear goal: education.
7. No Contribution Limits
Other than the $15,000 federal gift tax exclusion limit, there is no cap to how much can be contributed to the account per year. That means that family and friends can customize how much they give, meaning everyone could offer the gift of education, not just those who can gift hundreds or thousands at a time. It’s a nice way to get your family and even friends involved in helping further your future goals.
8. Strong Backing
When you are considering placing your money into any savings account, you want to know that it is with a legitimate, thoroughly vetted company. CollegeBacker is backed by Princeton University and 500 Startups, high-ranking institutions within their fields.
Of course, this CollegeBacker review also needs to discuss cons. No company is perfect and these are subjects which you need to carefully consider before deciding to open an account with CollegeBacker.
1. Additional Fees
CollegeBacker’s website notes that customers can pay $0-$10 per month to support CollegeBacker and their product. It’s a pay-what-you-can type system. Something to be aware of, though, is that CollegeBacker’s 529 is a managed fund and you’ll have to pay a 0.5 percent annual advisory fee based on how much you have in the account. CollegeBacker reviews note that while you may find that much cheaper than most adviser-sold plans, it is also more expensive than if you just purchased a 529 plan directly.
2. All Online
CollegeBacker is only online. For most people, that’s a huge plus, meaning they can assess it from anywhere in the world at any time, as long as they have internet connection. However, for people who are not tech-savvy, or for times when confusion happens, some people prefer to visit a brick-and-mortar store, which is not possible with CollegeBacker.
3. Credit and Debit Fees
Going off of that, because CollegeBacker is entirely online, you’d think that using credit or debit cards to make contributions would be fee-free. However, that’s not the case. There’s a 2.9 percent fee plus $2.95 when anyone contributes money via credit or debit card. To avoid the fees, bank transfers are the only fee-free option. That’s a definite con that needs to be weighed when considering CollegeBacker reviews and if the account is the right choice for you or your loved one.
CollegeBacker is a company built to make the 529 account process easier and therefore encourage people to save for future education in a safe way. Many of the elements, such as a $25 minimum, online interface, and social giving are excellent features. Ultimately, this CollegeBacker review’s information should help guide you, whether you decide to sign up and start saving for your child’s future or not.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.