Levelling the field for less advantaged kids & turning college savings into a team sport

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Government subsidies and licensing for public-interest goods sound great and have social appeal until you consider the second-order effects of taking those measures too far and distorting the demand and supply forces of the market. We see this in everything from fossil fuels to health insurance. Subsidizing the supply side creates distortions and misguided perceptions of the demand. Nowhere is this more apparent than in the higher education system in the States. Student debt is a recurring theme on Scatter Brain.

Today’s chat with Backer’s CEO, Jordan, is about helping families save more to reduce the need to take on student debt by turning saving into a team sport.

In this chat, Jordan and I talked about:

• Digitization of government services

• The root cause of student debt crisis

• Personal story in discovering the problem

• Helping the less advantaged kids

• 529 savings plan as a wedge

• Early product interactions

• Turning saving for college into a team sport

• Product experience of the kid’s parents

• Reducing inertia and activation energy

• Becoming an RIA

• Business model exploration

• Building a social graph & promise of social fintech

• Rebranding the company

Sar: Let’s start with your big-picture view on startups working with the government. 

Jordan: The internet and smartphones have radically transformed how American consumers conduct most of their lives, but their lives as citizens remain frozen in the mid-2000s. Many in government would like to change this, but they operate within an institutional environment that makes it difficult to redesign services, so they keep pace with rising consumer expectations. And these expectations are now extremely high: If you’re accustomed to Amazon next-day delivery, how patient will you be when asked to trudge through a buggy, 15-step web form to update your driver’s license or apply for a permit? A decade ago, it was still notable for interaction with the government to happen online. In the 2020s, merely being online is not enough.

Tax-advantaged 529 savings programs are an instructive case study. They’ve been around for 25 years but have only evolved in minor ways. Backer is a bridge between fintech and the state-sponsored education savings industry. If we can help these programs work better for a wider pool of American families, we’ll also help restore some much-needed trust in the government itself.

Sar: That blindspot around consumer expectations is hurting their ability to maximize the impact of policies we already have and limiting their ability to imagine new ways to achieve the outcomes they care about. What got you interested in the problem of student debt, which has become a hot topic again because of the debt forgiveness program introduced by the Biden administration? I believe it is treating symptoms instead of the root cause. 

Jordan: Assuming the debt relief program survives a variety of legal challenges, it will make life a bit easier for some Americans with a lot of debt, but it won’t change the fundamental dynamic in which the federal government is providing cheap debt to an industry with strong pricing power. It makes sense for the government to subsidize education – a well-educated citizenry is a clear social good and competitive advantage – but these loans have made it easier for universities to increase their fees well beyond what unsubsidized demand would support. This has led to ballooning bureaucracies, extravagant facilities investments, and a consumer mindset that has begun to view college as a luxury good.

My interest in college affordability began with my own improbable path through higher education. I grew up middle-class, went to public schools, and was the child of two loving freelance film professionals who cared more about fostering my creativity than demanding academic excellence. For most of my childhood, I would spend hours working on coding projects or exploring the early internet rather than doing homework. My academic prospects improved when a high school English teacher nominated me for a summer program at UC Berkeley. I gave it a shot and took “Programming in C++” – something I genuinely cared about. Doing well in that class gave me the confidence to become a more ambitious student overall.

My parents had not thought to save much for my education, so when I ended up at Harvard, they had to refinance our home and make other sacrifices to help me afford it. It wasn’t easy for them, and I was lucky to have their support. Once I got there, I realized that a huge percentage of my classmates had far more support and had clearly come from very well-off families. I began to wonder if places like Harvard were becoming mere finishing schools for the elite. And how many kids had no hope of getting to college at all because their families lacked the resources? I wanted to do something to level the playing field so that kids with fewer advantages could have a shot at a great education without amassing crippling student debt.

Sar: How did you land on the 529 savings plan to attack the debt problem?

Jordan: The idea began to form after a close friend with a newborn mentioned that the best way to save for college was a 529 savings plan, which he described as a retirement account for education. I thought it sounded like a great idea, but when I asked him how much he had put into the account, he stared blankly before admitting that he had never gotten around to setting it up. He sensed that he’d need to sit down for several hours to do research before making a decision. If this friend of mine, a well-educated parent with savings to invest, hadn’t figured it out, how many millions of others were still stuck at step one?

Innovating within the government-sponsored 529 industry was squarely outside of “consensus fintech” at the time, so it felt like a unique, high-value business opportunity if I could figure out the right angle of attack. My first insight was that the user experience of a 529 plan was at least ten years behind consumer fintech companies. It also seemed that education savings, if done correctly, had the unique potential to bring people together around a shared financial objective. With beginner’s mind (and a lot of naivete), I dove into building a modern, mobile-first 529 enrollment experience that could help a parent open an account in a few minutes, choose a goal, set up regular contributions, and invite family and friends to chip in.

The millennial generation has struggled with an unprecedented level of student debt and is desperate for their kids to avoid a similar fate. Besides a promising business idea, helping them achieve this felt like a world-positive social mission that I could work on for a decade or more.

Sar: Talk about the first six months of your journey.

Jordan: The first six months were both inspiring and demoralizing. We spoke with dozens of parents, and nearly every one of them fit into one of four buckets: (1) completely unaware of 529s; (2) dimly aware but confused about the details; (3) actively frustrated by a prior attempt to open one; or (4) underwhelmed or unhappy with the one they had. The response was overwhelmingly positive when I showed them a janky front-end web flow that they could use to enroll in a 529 and invite family and friends. A few naysayers already had a 529 – and with it, a certain pride of ownership around having done the research – but most people’s eyes lit up at the prospect of an easy 529 experience where family and friends could participate. I was encouraged when a few dozen of these early interviewees turned into customers.

As we prepared to launch an early alpha of the product, we discovered the real challenge in the 529 world: getting “permission to innovate” from the right players. I crisscrossed the country for about a year, building relationships with state officials and their private-sector counterparts. After a few lucky breaks, we formed a relationship with a 529 plan well-known for being one of the best. And then the real learnings began: how important or not important a state tax incentive is for certain market segments; how to position an investment product that most Americans think of as a savings product; and how to help families with fewer resources overcome the activation energy of starting to save at all.

Sar: You are turning savings into a team sport. What has been its impact compared to the alternative scenario of parents saving by themselves? Saving is a private activity. Was it weird to ask others to contribute to a savings plan?

Jordan: Nationwide, about 1-2% of education savings has come in the form of gifts from family and friends, which means most parents are saving on their own. But most Americans share a deep-rooted desire to support their community and loved ones. By making Backer social, we have tapped into that ethic: 40% of the $26 million we’ve helped families save has come from gifters, which is 30x higher than the industry average. That means our families are saving an average of 4x more than they would have if they were going it alone.

Social savings was central to our strategy from day one, but it took years of experimentation to get it right. In the beginning, we encountered a mix of clear enthusiasm and skepticism that tended to grow proportional to how distant the relationships were. Many early users were comfortable asking their parents (the child’s grandparents) or siblings to contribute but were reluctant to ask extended family or friends. We focused on how to make “the ask” less awkward to expand the universe of potential gifters, which we call “backers.” We anchored around birthdays, holidays, and baby showers as natural opportunities to ask for contributions to the college fund in lieu of physical gifts. We helped parents craft assertive but not-too-pushy messages tailored for different levels of intimacy. We emphasized the projected future value of a gift to help backers feel excited about giving even a small gift.

Adding easier payment methods was a major unlock in increasing gifting volume. And we evolved our early social layer from a slightly crass, transaction-focused one – where parents explicitly asked backers for money – to a less direct, more emotionally-intelligent one. We added the ability to follow a child’s fund without contributing money and built ways for the family to share updates with the child’s backers. Our goal throughout this journey was to productize the idea that “it’s the thought that counts.”

Zooming out, I believe we’re slowly moving toward a more collaborative phase of financial services where “personal finance” will give way – or at least cede some ground – to “social finance.” We hope to lead the charge in building a more multiplayer financial future in which the modern family, defined expansively as “meaningful real-world relationships,” will be the atomic building block of a financial social graph. Education savings is a uniquely powerful starting point to build such a network.

Sar: Talk about the product experience of parents.

Jordan: Our brand promise is to help any family get set up with a smart long-term solution for education savings in a few minutes. After a brief welcome experience, we ask the parent to choose a name for their first fund. From there, they land on their dashboard and can activate their 529, set up contributions, customize their gifting page, create and share a family update, and reach out to backers to join the team. The initial setup process only happens once for each child, but features like “family updates” – a slideshow experience showcasing recent moments from the kid’s life – provide parents with a non-financial way to keep their backers engaged. In the background, we encourage backers to set up recurring contributions and reminders so they never miss a child’s birthday or holiday.

Sar: You are a registered RIA. Why?

Jordan: We’re an SEC-registered investment adviser because we help our clients invest in securities. We advise parents that a 529 plan is the best way to save for education costs and recommend one of three “target enrollment” portfolios based on their risk tolerance and objectives. We also have a novel “future baby” feature that makes it easy for an expecting parent to set up a fund with an appropriate investment option, even before birth. Our advice also includes ongoing support to families as they increase their contributions and recruit more backers.

Sar: Can you talk about the Backer Boost concept and its origins?

Jordan: We realized earlier this year that engagement with the service increases once a family reaches $1,000 in savings. Above that threshold, they contribute more, access the site or app more frequently, and invite more backers. Most families take a year or more to get to that point, so we started thinking about how to accelerate the process. With the Backer Boost, we give families an effective “advance” of $1,000 the day they sign up. From then on, their regular monthly contributions go toward “repaying” that amount. We display market fluctuations on the $1,000 as if it had been invested on day one, but we don’t actually invest the money upfront. Instead, we pay out and invest the gains on whatever portion of the $1,000 is paid back within a set amount of time, and never penalize them if the market goes down.

Sar: Why not invest that amount upfront to help compound the gains?

Jordan: From the family’s perspective, it feels exactly as if we had invested it on day one, except we protect them from the downside risk of starting with a bigger amount. Here’s an example: a user signs up, and their $1,000 boost grows to $1,100 over 12 months. If they repay us the full $1,000, we add $100 to their account. If the $1,000 boost falls in value to $850, then they end up with the real market performance of the $1,000 they paid back – effectively turning their regular repayment into dollar cost averaging. Because it’s not a loan, we don’t need to do a credit check. The point is to provide training wheels for families new to investing, so they can experience it safely before committing a significant amount of money.

Sar: What ideas did you reject or try before landing on your current biz model? 

Jordan: It took several years for us to land on a pricing model that works. We thought we would monetize the assets we manage but realized quickly that robo-advisors were in a race to the bottom and that it would take even longer to reach meaningful AUM with 529s, which tend to be smaller than retirement or taxable investment accounts. We then tried “pay what you think is fair,” inviting users to choose their monthly fee and tip on gifts. This worked surprisingly well, but it wasn’t as predictable as our current subscription pricing ($2.99 for one kid or $5.99 for up to five). Some price-sensitive 529 savers choose to go direct to a state to avoid our fee, but most families are comfortable paying a small monthly fee for a modern user experience with a great plan, investment advice, and gifting (which adds significant additional principal to their investment and more than covers our fee).

Sar: Why did you rebrand to Backer during the pandemic? It feels like you have broadened the vision of what the company wants to do now.

Jordan: Several factors drove our decision to rebrand to Backer. Congress passed legislation expanding 529 coverage beyond higher education costs to include K-12 private school tuition, apprenticeship programs, and some student loan paydown. Saving for college is still top-of-mind for most families, but our brand is now a better vessel to explain saving for all forms of education, not just college. In addition, the work we had done in our first few years to build the social savings graph was starting to pay off, with a higher volume of gifts and an increasingly dense network of connections forming around – and sometimes in between – individual families. Backer seemed like the perfect name to capture this social experience.

Sar: How are you considering using the graph to lean more into social fintech?

Jordan: Even before we changed our name, we used the word “backer” to describe adults contributing money to a child’s college fund. Last year, we started to think more expansively about what our nascent social graph could become over time as we connect parents with family and community members who want to support their kids. Beyond education savings, how could backers support their kids financially as they grow up? What about services that sit between the parents and their parents? We envision Backer evolving into a trusted platform for financial collaboration within real-world communities of people.

Sar: What do you do now that you didn’t when Backer was 2 years old? 

Jordan: The biggest difference is how I pitch investors. Early on, I didn’t have the confidence or nuanced industry understanding to describe a compelling long-term vision with clear intermediate stages. The pitch was problem and solution-heavy and strategy-light. Years of grinding through tough stretches – combined with insights that can only form after you work on something long enough – have given me much more confidence when articulating our vision and the strategy needed to get there.

Sar: What’s on the horizon for Backer?

Jordan: Our team is fired up for 2023 because we will bring to fruition two major projects that we weren’t even sure were possible a few years ago. Together, we expect them to massively expand the market for 529 plans and set a new bar for 529 usability that will be felt industry-wide. I would love to share more, but that would ruin the surprise!

Today’s Scatter Brain is brought to you by AngelList!

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A common theme on Scatter Brain is startups working with the government to improve the user interface of interacting with public programs or help them deliver on public interest activities. Here are some past chats on that theme :

Simplifying tax filing experience with Gavin Nachbar, CEO of Column Tax

Helping people on food stamps with Jimmy Chen, CEO of Propel

Providing real-time curb data to manage parking with Ritwik Pavan, Cofounder of Vade

Transforming farming with Jayce Hafner, CEO of FarmRaise

Simplifying immigration to relocate for work with Hanna Asmussen, CEO of Localyze

Recent chats :

Reflections on being a CEO and building a real estate marketplace, with Anthemos Georgiades, CEO of Zumper

Moving money without freaking out the CFO with Daniel Yubi, CEO of Payable

Building smarter pipes for debt with Danielle Pensack, Cofounder of Rightfoot

Relocating for work in the remote world with Hanna Asmussen, CEO of Localyze