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Can credit cards help save for college?

By , CardRatings contributor
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    Credit card tips for recent grads and studentsThe average annual tuition and fees for a private four-year college is more than $32,000 - and that doesn't include books, meals, and room and board. A public four-year college is nearly $24,000 for out-of-state students.

    That's just for one year.

    Add up four years' worth of tuition, fees, books and room and board, and you're looking at more than $120,000 for your degree at a private college. That's what it costs today. When it's time for your son and daughter to go to college, it will likely cost even more.

    All this begs the question: How in the world do you save enough for college expenses?

    Now, for the good news: There are myriad ways to save for college and at least one of those ways will allow you to save without ever adding a line item to your monthly budget.

    "How is that?" you ask.

    Well, with credit cards.

    We'll explain, but first, a bit of information about 529 college savings plans.

    529 college plans

    Named for Section 529 of the Internal Revenue Code, these college savings plans are intended to help you, as the name implies, save for college. Neither contributions nor earnings are subject to federal taxes, and you usually don't pay state tax on the plans. (Check with the rules in your individual state for full details as well as caps on what you can annually contribute tax-free).

    Funds saved in 529 plans must be spent on qualified education expenses, such as tuition, certain room and board costs, books, supplies and required fees. They're a tax-sheltered way to put some money aside, but you do have to actually set the money aside in the account… except when you don't.

    There are a variety of programs, including a credit card that lets you put your cash-back rewards directly into a 529 plan, that will allow you to grow your college savings without shrinking your own bank account.

    Fidelity® Rewards Visa Signature® Card

    The Fidelity® Rewards Visa Signature® Card provides unlimited 2 percent cash back on all your purchases and that cash back can be redeemed directly into an eligible Fidelity account to spend or invest.

    Managed 529 plans are among the eligible accounts where you can redeem those rewards meaning that you can save for college without actually putting a penny into the account. Rather, your everyday purchases will accrue cash-back rewards that can do directly toward college savings. For the record,your cash-back rewards can also go into brokerage accounts, IRAs and cash management accounts.

    You'll want to make sure that your 529 account is with Fidelity Investments if you decide to use the Fidelity® Rewards Visa Signature® Card.

    "If you don't already have a 529 account with the favored provider, you'll have to decide if it's worth the hassle to sign up with another plan," says personal finance columnist Liz Pulliam Weston.

    A bonus to the card is that it allows family and friends to contribute to 529 savings plans.

    For instance, people with a Fidelity Rewards Visa Signature Card can deposit their rewards into the same 529 accounts.

    "If you have aunts, uncles or grandparents willing to do that, it's something to check into," says Atlanta-based Beverly Harzog, credit card author and consumer advocate. "You can accumulate more money faster with everyone contributing."

    Upromise

    Upromise by Sallie Mae is a program that allows members to accrue cash back on eligible purchases and transfer that money to a college savings plan, use it to pay down a student loan or request a check. Barclay Bank used to offer an Upromise-affiliated credit card that allowed you to earn cash back for a 529 plan similar to that described above. Though the bank discontinued that card, Upromise is still a great way to save for college.

    Here is the cash back you can get when you use any credit card and participate in the Upromise program:

    • 5 percent cash back by shopping in the Upromise online mall.
    • 5 percent when booking a partner hotel through Upromise.
    • 2.5 percent on dining purchases at participating restaurants.
    • Varied cash back for flights, car rentals, entertainment, grocery and drugstore purchases.

    Check Upromise to see if you shop at Upromise partners and let those purchases help save for college.

    It's just one tool to save for college

    Using credit card rewards to help fund a 529 account is one way to save for college, but you shouldn't consider it the only way.

    "You're certainly not going to be able to fund your kids' college education this way," says Harzog, explaining that even if you charge $12,000 a year, at, for example the 2 percent offered by the Fidelity Rewards Visa Signature Card, that's only $240. "Enough to buy a book, maybe, two," she adds.

    Still, Harzog continues, every little bit helps.

    "It's not bad. It's just another tool you can use to fund your child's college education. And if it's money you're spending anyway, why not?"

    Avoid interest charges

    One important caveat - and this applies anytime you use a credit card, but particularly if your goal is to rack up rewards - make sure you're not paying interest on the credit card each month. Try to pay off your bill monthly.

    "If you're paying 12 percent to 20 percent interest on your purchases, you're more than wiping out your rewards," says Harzog. "It's not free money when you're paying interest."

    Using rewards cards without a 529 plan

    If you don't want to open a 529 savings account, you can still use credit card rewards to save for college.

    For example, Discover it® - Cashback Match™ allows you to earn 5 percent back in specific categories each quarter you activate up to the quarterly cap and 1 percent after that and on all other purchases. You could take the cash back you earn on Discover it® - Cashback Match™ or any cash-back credit card and deposit it into a savings account specifically for college expenses. Remember that the account likely isn't going to be tax-free, though, unless it's a 529.

    No matter which option you choose to save money for college, it's important to get started early and take advantage of compounding interest.

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