These apps aim to change the way parents save for their children’s college education
- As more people turn to their phones to trade stocks, new companies are hoping parents will also embrace apps to help them invest for their children's futures.
- The investments offered range from traditional 529 plans to stock funds, but the goal is the same: to help kids avoid the high debt burdens that many college grads face.
- Ultimately, the companies aim to help make financial literacy education a family effort.
When Jordan Wexler's niece recently lost her first tooth, he sent her $15 along with a video of himself dancing while dressed up as a Tooth Fairy.
The money was not the typical cash kids traditionally receive under their pillows.
Instead, Wexler put the money toward an investment on EarlyBird, an app aimed at letting parents and family and friends save for children's futures, where he serves as CEO.
The video also lives on the company's platform, where his niece regularly requests to watch it again.
"She has that connection to the product already at almost 4 years old," Wexler said.
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As investing apps become more mainstream, new companies are emerging hoping to find young millennial parents where they typically are – on their phones.
The apps aim to make it so parents can automate investing for their children's college educations and other pursuits, and let friends and family help toward those goals.
The accounts offered can include 529 plans — tax-advantaged savings accounts for education — as well as custodial investment accounts that adults manage on behalf of minors.
Backer, a San Francisco-based company that is working to make 529 plans more accessible, went live with its app in 2017.
The company is led by CEO Jordan Lee, a self-described underperforming student until one teacher took an interest in him. Now, his academic career includes degrees from Harvard, Yale and Princeton.
Through Backer, Lee wants to help give children the same encouragement he received.
The message he said he hopes the contributions to the app convey: "You are a college-bound person because someone thinks you are."
Making 529 plans easily accessible
Participation rates in 529 savings plans are low. Just 36% of Americans can correctly identify the funds as an education savings tool, according to a recent survey from Edward Jones and Morning Consult.
Those who do know about the plans often do not know they can be applied for uses other than college, such as K-12 tuition, practitioner programs and some student debt pay-down.
Moreover, costs associated with the plans are often high.
Backer is hoping to change that by making 529s available to a wider audience at lower costs. A Backer account costs a minimum of $1 per month, while it's up to families to decide if they want to pay more.
The company currently has about 50,000 families signed up, according to Lee. About 70% of the company's customers earn less than $100,000. About half are non-white.
The 529 plans Backer recommends to clients typically cost about 20 basis points, compared to 60 basis points for an average 529, according to Lee.
Backer recently raised $8.4 million from venture capital investors led by Crosslink Capital, an early investor in Chime. Other investors included Rally Ventures, Correlation Ventures and Expansion Ventures.
"Setting aside even a little bit regularly can make such a huge difference for how much you'll ultimately save," Lee said.
Ultimately, the goal is for children not to rack up student debt, he said.
Helping to prevent people from amassing large student debt balances is also why Ksenia Udina founded college savings app UNest.
Udina, who serves as CEO of the company, first came to the U.S. from Russia when she was 18 and ultimately took on $180,000 in student loans to pay for her education.
Now, she wants to help children and families avoid accruing those high balances.
In 2020, UNest launched its app. It currently includes five investment options through Vanguard funds that range from conservative to aggressive. The portfolios also come with an age-based option, which automatically rebalances to more conservative investments as a child grows.
UNest charges $3 per month, or $6 per family. That monthly fee covers the stock and managed accounts for children, with no commissions.
The accounts allow for unlimited gifts from friends and family. Parents can also earn rewards to their UNest accounts by shopping with certain brand partners.
UNest's accounts are custodial accounts, which means the investments ultimately belong to the child. That frees up the money to be used for broader future goals , like purchasing a car or home, versus 529 plans.
Currently, 90% of UNest's users earn less than $100,000.
The company has raised a total of about $15 million in venture capital funding through investors including Anthos, Draper Dragon, Artemis Fund, Northwestern Mutual and Unlock Venture.
UNest's users, who are age 34 on average, have said they would like more stocks and even cryptocurrencies to choose from, which the company plans to eventually add.
But the company's emphasis continues to be long-term buy-and-hold investments to create a legacy for younger generations, Udina said.
For EarlyBird, the focus is not only on improving the long-term savings strategy for families, but also helping to solve the question of how to best give to children.
Wexler said he had the epiphany that there had to be a better way when he was scouring the shelves of a local store for a gift for a friend's child.
Now, the company hopes to inspire the same zeal for investing that Wexler got when he received his first brokerage account from his father when he was 10 years old.
EarlyBird's app is also providing custodial investment accounts that the children can eventually use for multiple purposes, from college tuition to starting a business.
The portfolios are comprised of exchange-traded funds, which range from conservative to aggressive. An algorithm provides recommendations based on how users answer certain questions.
Ultimately, the company is planning to expand to include 529 plans and cryptocurrencies to its investment menu.
EarlyBird has three pricing tiers. For investments from $0 to $200, there is no cost. However, once an account surpasses $200, the fee is $1 per month per child. Then once an account reaches $5,000, that switches to 25 basis points.
The company launched its app publicly at the end of December. So far, it has raised seed funding through investors including Network Ventures, Chingona Ventures and Bridge Investments.
By providing children ages 6 to 13 with resources to build their financial literacy, and then view-only access to their accounts from 13 to 18, EarlyBird plans to help them get ready to manage their money in adulthood.
"Our goal is that if you start around zero to 3 years old, you can have about $20,000 to $40,000 fully invested by the time you turn 18 or 21, depending on the state," Wexler said.
"And you also have this priceless library of memories from loved ones over 18-plus years."
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