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Tuesday, 19 February 2008 17:00 |
You are probably well aware that college costs are soaring and
that the need for parents to build college savings has never
been greater. You may also be aware of various loyalty reward
programs (such as Upromise and BabyMint) that pledge to help
build your college savings by paying back a small percentage of
the amount you spend using their credit card and/or buying
certain products. Companies offer these programs because, in the
aggregate, they know they will lead to higher spending on their
products or services. Smart consumers learn to maximize earned
rewards without altering their spending habits.
Reward programs can help build college savings. That"s
the good news. The bad news is that these programs have grown in
number and become very complex. It is very difficult for parents
to take time to fully understand, compare and select the program
best suited for them. This article aims to cut through the
morass and lay out a clear strategy for parents to follow to get
the most from college reward programs.
The Basics
The various college savings reward programs fall into two broad
categories: credit card rewards and savings
clubs. The distinction gets blurry because many of the
"savings club" programs also sponsor a credit card under the
same name. Nonetheless, you can better understand and optimize
your use of the programs if you categorize them in this manner:
A college savings reward credit card is a regular MasterCard
or Visa card that - in lieu of frequent flier miles or cash back
bonuses - makes a 1% or 2% contribution to a college savings
account based on purchases made with the card.
A savings club (or loyalty program), on the other hand, is a
membership club through which a network of merchants offers
members special rebates for buying their products or services.
Rebates are directed to the member"s college savings account.
Some savings clubs have membership fees or require that you have
their affiliated credit card to be a member. Others are free and
permit the use of non-affiliated credit cards.
| College Rewards Credit Card | Associated Savings Club |
| BabyMint College Credit Card | Baby mint |
| Baby Center Credit Card | Baby Center Savings
Program |
| Being Developed | edexpress |
| Fidelity/MBNA College Rewards | NONE |
| futuretrust Credit Card | futuretrust |
| Savingforcollege Credit Card | NONE |
| The Education Plan Credit Card | The Education
Plan | | Citi Upromise Card |
Upromise | - Select the College Rewards Credit Card Paying the
Highest Rebate on All Purchases - Typically, credit card
rewards will generate greater college savings than the savings
club programs. This is simply because the rebate (1% or 2%) is
paid on the value of all purchases made with the card (subject
to the card"s limits). Savings club rebates, on the other hand,
are paid only on the value of purchases from specified
participating merchants (although often at higher rates than the
credit cards). Most of the college reward credit cards - pay a
1% rebate. The sole exception is the Fidelity/MBNA College
Rewards MasterCard that pays 2% (up to $1,500 per year). You can
find more detailed information about the various college reward
credit cards by visiting www.529rewards.com.
- Use the College Rewards Credit Card as Your Principal
Method of Payment - Your aim should be to keep spending at
current levels (i.e. within your income) but to replace checks,
cash, and other credit/debit cards with the rewards card as your
principal method of payment.
- Maximize Use of the Credit Card But Always With a Goal
of Paying the Balance in Full Each Month - Credit card
acceptance is becoming more universal each day. This means new
opportunities to earn 529 rewards - e.g. car and homeowners
insurance payments, municipal water and tax bills, groceries,
tuition, etc. For each $1,000 of monthly costs that you can
shift to the rewards card, you"ll earn $10 - $20 of free cash
for future college expenses.
Use the credit card as an intermediary payment vehicle for large
purchases. For example, if you borrow to make home improvements,
pay contractors and suppliers first with the rewards card and
then pay the credit card with your home equity loan. This will
earn you additional points.
However, it is very important that you pay your statement
balance in full each month. Rewards earned at 1% or 2% will
quickly dissipate if you are paying 10% to 13% interest on even
a small balance. For rewards to accumulate effectively, it is
essential that you use your reward credit card as simply a
substitute for cash payment and not as a source of additional
credit.
- Use the Free Upromise and BabyMint Savings Clubs -
Chances are that you frequent some of the grocery and drugstores
included in the Upromise network and that you already buy
products offering Upromise rewards. Since participation costs
you nothing, there is no reason not to participate and earn
additional rewards. Sign-up for "loyalty cards" offered by
grocery stores and drug stores you use. Register these cards on
Upromise and then use them every time you shop. The amount you
earn will depend on your family"s product preferences. As an
example, Coke products earn Upromise rewards while Pepsi
products do not. Resist becoming too loyal to brands just
because of the Upromise rewards. If either Coke or Pepsi can
satisfy your palette, and Pepsi is on sale, it may be the better
buy despite the lure of Coke"s Upromise rewards.
The BabyMint merchant network is not as extensive as Upromise.
Still, the program is free and there may be significant
opportunities (especially for on-line shopping) to enhance your
rebates. There are other college savings club programs available
in addition to Upromise and BabyMint. However, for the most part
these are "copycats" and appear to not offer any distinct
advantages over the original Upromise or BabyMint plans.
One exception is the edexpress plan which does provide
generally higher rebate percentages than the other savings club
programs. The trade-off is that edexpress has a $24.95 annual
membership fee. It"s a worth taking a look at edexpress to
determine if your family"s spending habits are such that the
additional earned rewards will offset the annual fee.
- Recruit Other Family Members and Friends -
Following the strategy outlined here, you can earn significant
college rewards on your own. But building a network of family
and friends willing to direct rewards to your child"s college
savings account can greatly accelerate your college savings
program. According to Finaid.org, 60% of grandparents say that
they would contribute to a section 529 college savings plan if
asked, especially since they know the money will be spent on the
child"s education.
Ideally, grandparents and others will use a college rewards
credit card and direct reward earnings to your college savings
account. However, with the large number of other credit card
reward programs available, you may not feel comfortable asking
them to give up frequent flier miles to put additional cash in
your child"s account. On the other hand, registering family and
friends grocery/drugstore loyalty cards through Upromise will
cost them nothing. Typically, the card user will get in-store
discounts for buying select items. Behind the scenes, Upromise
rebates accrue, but there are no alternative uses for these
rewards. Often, the use of loyalty cards also generates rewards
for churches or charitable organizations designated by the
cardholder. This should be pointed out as encouragement to use
the cards.
Following this strategy a savvy, disciplined family can reap
sizable rewards from college reward loyalty programs with
relatively little effort. As an example, my middle-income family
has generated slightly over $1,000 in rewards in the last twelve
months. Certainly you cannot expect to pay for a full college
education with loyalty rewards alone, but savvy users can build
a sizable nest egg to help ease the burden of college costs.
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