Florida-based online gift registry rethinks business model after complaints

eearl@bradenton.comJuly 28, 2013 

As parents look for new ways of paying for college after years of recession and dwindling savings, they can consider a number of options but should do their homework when looking at various funds.

For parents who have set up a savings plan for their students, they can ask family members and friends to contribute directly to the fund.

Abby Berman, a spokesperson for the College Savings Plans Network, said it's probably the easiest and safest way to make sure all of that money is going to the student's education.

Gift-giving websites tout that they offer an easy way to donate, but they sometimes charge fees and their marketing can be misleading, according to the network, which has filed complaints to the federal Securities and Exchange Commission.

Marcos Cordero, the founder of the college savings registry site GradSave, says he has developed a sophisticated and user-friendly way to help parents easily save for their child's education.

He claims his website makes giving easier and more personal by allowing parents to post their child's picture and set up a profile that encourages giving, without having to personally ask friends and relatives to give.

But the College Savings Plans Network wrote a letter of complaint to the Securities and Exchange Commission last December, claiming that Grad Save and GiveCollege.com, a similar gifting website, were charging fees when giving directly to a college savings plan is free. They also complained about the organizations' marketing claims.

"Whenever you are an innovator, you have hesitation from more entrenched groups in the industry," Cordero said.

The letter from the College Savings Plans Network also had a complaint about a similar site called GiftofCollege.com.

The complaints were around suspicion that the site became inactive.

Wayne Weber, the founder of GiftofCollege, said the site did suspend activity for a short time for business reasons.

"I don't want to sell our secret recipe, but we were in the process of aligning with a broker dealer to determine fraud, monitor contributions daily and monitoring the daily donations that get transferred into the savings funds."

GiftofCollege relaunched its website April 29.

"I believe our competitors have a common goal

laced with promise," Weber said. "But I think that all are not taking the necessary steps."

GradSave also made some changes to its site, although Cordero said the changes had nothing to do with the complaints.

Two weeks ago, GradSave revealed a change in its business model, announcing there would no longer be a 5.9 percent fee charged for each donation, although they were not able to do away with the nominal third party fees for processing credit cards or e-checks.

Cordero, who founded his site in Miami, said that decision was unrelated to the complaints from the College Savings Plan Network. Cordero said that he's never had a complaint from the site's 8,000 plus customers.

The company has not filed 501(c)(3), Cordero said, because of potential of making profit down the road without charging fees, such as through ad revenue.

"We are part of a shareholding company, and we are essentially making an investment because in the long term, there could be ways to make profit," Cordero said. "But in the short term, we are looking at how endeavors like Facebook and Twitter began and how they are driven by having a lot of users."

Cordero said that while it is possible to contribute to a college savings plan at no cost, he said there is nothing wrong with making profit and that the convenience factor trumps the extra steps involved in giving for free.

"You have to make calls, print a PDF, people can't comment or personalize the contribution and you can't share it on social media," Cordero said. "The level of functionality of GradSave and contributing ... on your own is night and day."

Cordero said he was inspired to create the site in 2011 after struggling to figure out what to give as a gift for a small child's birthday. Cordero wanted to give a financial gift, but he also wanted to ensure it would be used for the child's academic future.

"It is the web 2.0 of gifts for a child's birthday, Christmas or milestones such as a Bar Mitzvah," Cordero said.

Cordeo said that he believes GradSave is a "sophisticated" way to make financial contributions to a child's academic future.

"It is a sensitive way to ask for a financial gift for education rather than saying 'give me a check,'" Cordero said. "That is an important point from the parental perspective. For the giver, it is easier to go online and give a gift, and they can be certain that it will make it to the college savings fund."

GradSave holds its escrow accounts for the financial gifts with Bank of America and transfers the gifts into the savings accounts twice a month.

"This allows gifts to be grouped together and is operationally more effective than transferring on a more frequent basis," Cordero said. "With a profile, you can track at all times the gifts that have been given in real time."

Gabriella Vega, a financial aid specialist at the University of South Florida Sarasota-Manatee, said that while the GradSave site looked safe, parents should always do thorough research.

"It looks like a Facebook where you share a profile, and it is a 'dot com,' but parents should look into privacy issues," Vega said. "That's what parents need to do is research. Then making a profile is something you can make the decision on and go with it."

Cordero said that parents can make their profiles searchable on GradSave, or they can make it private so only people they allow to have the link can see the profile.

Cordero added that to have a working profile on GradSave, a parent has to have a 529 plan, because the funds donated are meant to go strictly toward higher education.

It wasn't just fees that elicited complaints, the College Savings Plans Network said that the websites had factual inaccuracies about so-called "529" plans and unclear language that could confuse consumers.

Berman said the complaints did not result in any suits or investigations or any action on behalf of any regulatory body, including the Securities and Exchange Commission.

Kevin Calahan, a spokesperson for the Securities and Exchange Commission, said he cannot comment on complaints.

"Investigations are nonpublic unless enforcement action or a case is brought against somebody," Calahan said. "But we do look at everything that comes in."

Michael Williams, a securities lawyer in Tampa, said that since GradSave and sites like it are private companies, than the Securities and Exchange Commission does not have jurisdiction as it is not a securities issue. Williams said that it would only be an issue for the Securities and Exchange Commission if GradSave sold stock, which it does not.

"If it was a public company or sold stock, the commission could do anything they want as far as an investigation," Williams said.

The College Savings Plans Network did not submit a complaint to any other regulatory body.

Cordero said that he cannot recall a specific inaccuracy from his site and that the College Savings Plannings Networks was not just pointing at GradSave in their complaints.

"They were talking about other companies that had inaccuracies," Cordero said. "It was not just about GradSave."

Cordero said that GradSave has had a few blog posts in the past about choosing a 529 plan, but he said that the company has since gotten away from talking about which 529 plans people should choose or giving investment advice of any type.

GradSave also altered its description of 529 plans. The current description reads:

"A 529 plan works a lot like a 401(k). Money invested in a 529 grows tax-free and can be withdrawn tax free as long as the funds are used to pay for qualified college expenses, such as tuition, room and board and books."

The two types of 529 accounts are savings accounts and pre-paid plans. Florida Pre-Paid is a well-known example.

Kristin Lock, a spokesperson for Florida Pre-Paid, said the IRS provides strict rules on what is qualified as a 529 plan.

"There are nuances when describing investing, and there are a lot of big differences between a 401(k) and a college savings plan," Lock said. "I can say that a 529 is indeed tax-advantaged and used for high education expenses."

The definition of a 529 on the Florida Pre-Paid website is a plan for saving for a child's future high education costs through investment options where earnings accrue tax-free.

Lock said that every investment should be looked as a risk.

"Anyone doing any type of investing should seek advice," Lock said. "We are just here to help execute the plans."

Erica Earl, education reporter, can be reached at 941-745-7081.

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