Here’s a
newsflash: children are expensive. Never mind diapers, food, clothing,
computers, MP2 players, trips to the mall, etc. One of the biggest expenses
your child(ren) will incur
is college tuition. The cost of further education is ever on the rise, and even
with scholarships the costs can be staggering. The amount of federal financial
aid granted to undergraduate students in the form of loans is shocking as well:
according to one study by the National Center for Education Statistics, 71 to 92%
of middle–income students attending 4-year schools in one study received some
type of financial aid during the academic year 1999-2000.
As they
say, the first step is admitting you have a problem! So if you have thought
about or have even started a savings mechanism specifically for your children’s
college education, you are ahead of the curve. If you haven’t, right now is the
time to start.
One of the
best methods of saving for education is a 529 College Savings Plan. Named after
Section 529 of the Internal Revenue Code, 529 College Savings Plans are tuition
savings programs exempted from taxation. They were created to encourage families
to save money for college and are operated by a state or educational
institution. Participants invest after-tax money into
the account and the earnings from the money invested are tax exempt.
529 plans
are so popular that many incentive programs have been created to help the consumer
take advantage of them. Credit cards don’t typically come to mind when it comes
to saving money, but just as there
are credit cards with cash back incentives or air miles programs, there are
some credit cards that have incentive programs geared specifically toward
educational savings. These credit cards are commonly known as 529 rebate credit cards or college savings credit cards.
Read
further to find out how these programs work and for tips to maximize your
savings.
The ABC’s of 529’s
There are
two types of 529 plans: savings and pre-paid. Both are managed, meaning that a
fund manager invests the funds for the account. 529 Savings Plans are operated
by states (and all states have one) with the purpose of saving money for any
college, even out-of-state schools, your future student wants to attend
(although some state plans do place stipulations that the money can be used
only for schools in that state, so you should do your research). Pre-paid
accounts are run by institutions and allow participants to save and invest
money that will go toward tuition at that institution.
The
advantages of opening a 529 plan are obvious: it’s a tax-exempt fund that helps
you put money back specifically for future educational goals. As with any
investment fund, the sooner you start the more compounded interest you’ll earn.
Consumers can research plans nationwide and invest in the one that meets their
criteria as far as best return, lowest fees, etc. An excellent resource for
conducting research into the various 529 plans available is www.savingforcollege.com.
Spending in Order to Invest
To grow
healthy investment accounts, you have to invest in the first place. Start small
if you have to, as even a small amount invested each month can build into a
good foundation.
If your
investment strategies could use a little help, or if you’re the type who loves
a good incentive program, there are rebate programs available to add a little
more to your fund.
Frequently
in the news are two such programs: BabyMint and Upromise. The premise of each revolves around program-affiliated
vendors or products who have agreed to rebate a percentage (which range from 1%
to 10%) of the purchase cost to program members. The rebates are credited to a
member’s account, which can in turn be invested in a 529 savings plan. As an
added bonus, each program also offers a credit card, such as the Citibank Upromise Platinum MasterCard® (featured card),
that will provide members
with additional rebates on all purchases made, not only qualified products.
A similar
credit card is affiliated with Fidelity
Investments. Rather than join up with a program, cardholders receive a flat
2% rebate on all qualified purchases.
As far as
rewards cards go, each of these has reasonable rates and incentive returns.
However, when you speak of saving and credit cards in the same sentence, you
must use care, otherwise you defeat your purpose by spending more money—either
on purchases or interest fees—than you save. Therefore, a few tips to using
credit cards with the purpose of saving for college.
Take a thorough look at each of
the incentive plans to ensure that it has the “more bang for your buck”
quality. You should choose the one that is affiliated with vendors you
already use or products you already buy, otherwise,
you’ll most likely spend more money than usual.
Take a look at the number of
credit cards you already have in your wallet. If you are serious about
saving money, think about replacing one of your existing cards with one
that works with a 529 College Savings Plan rather than adding an
additional card to your collection.
If you are using a credit
card’s incentive program to save money, be sure that you pay off your balance
each month. If you don’t, the money spent on interest fees is money that
could have been contributed to savings.
Be aware that the card rebates
are not meant to replace your individual contributions. Even if you make
every effort to max out the amount of rebates added to your 529 account
every year for 18 years, at the very most you’ll earn enough for a few
semesters. And remember that to achieve rebates, you have to use the card
for purchases. Purchase judiciously, and rather than saying to yourself
“oh, if I buy that, I’ll get a rebate toward our education account,” think
about the money you can save if you don’t make the purchase. Before
signing on, make a commitment to make your own contributions to the 529
account to see maximum growth. This will help you to spend and save
wisely.
Start early, say when your
child is starting to master crawling, if possible! That way you have the advantage
of time to help your savings grow. If your child is starting to master
calculus and plans to enter college in a year or two, investigate a
different method of saving, and fast!
With wise
spending habits, you can utilize any of these programs to assist you in your
quest to save for education. Investigate each of these cards and their programs
to find out if one has a program that will help you start. But always keep in
mind that they are meant to assist, not replace, your savings.
Rebecca Lindsey is a Senior Staff Writer for CardRatings.com. She began writing
articles about consumer credit issues for CardRatings.com in September 2000.
Posted March 22, 2004
Important Note! The information in this article is believed to be accurate as of the date that the article
was written. Please keep in mind, though, that
credit card offers and terms change frequently. Therefore, we can not
guarantee the accuracy of the information in this article. Please verify
all terms and conditions of any credit card offer prior to applying.
You are welcome to print a copy of any of our articles and distribute them freely for educational purposes.
If you are a webmaster, you are also welcome to post any of our articles on your site provided that you include a link to our site between the title and the body of the article (stating that we produced the article).
If you would like to use the article for any other purpose (i.e. for a publication, newsletter, etc.),
you are welcome to do so provided that you cite CardRatings.com as the source for the article.
We would also appreciate if you told us how you plan on using the article.
Please click here for more information about article distribution, including a list of other articles that
may be of interest.
Rebecca Lindsey is a Senior Staff Writer for CardRatings.com. She began writing
articles about consumer credit issues for CardRatings.com in September 2000.
