|
|
|
|
| The Basics | You can save for college by spending
|
Upromise was one of the first affinity shopping programs to tie itself to 529 savings plans. Now it's getting some competition from the likes of BabyMint and EdExpress.
By Jennifer Mulrean
It sounds like good financial fantasy: save money for college without changing your spending habits. But a small number of Web sites are trying to make this a reality.
Register with them, and a percentage of your purchases are automatically sent to a college savings account whenever you shop at participating retailers or use a designated credit card. Who knew filling up your gas tank or buying that fleece pullover could be so darned savvy?
Affinity shopping programs have been around for years -- think frequent flier miles and Web sites such as Ebates that allow you to get cash back on purchases. But Upromise, founded in January 2000, was one of the first to synch up with state-sponsored college savings plans known as 529s. Contributions to 529 plans grow tax-free and can be used at any accredited college in the United States. Starting in 2002, withdrawals became tax-free, making the plans an attractive college savings vehicle. (To read more about the 529 plans, click here.)
But Upromise isn't the only college-focused kid on the block. BabyMint and EdExpress offer variations on the shop-to-save theme. Just don't count on these as your sole savings solution.
How you save
All the Web sites work in a similar manner. You earn rewards, usually a percentage of your purchases, which are deposited into your Upromise, BabyMint or EdExpress account when you do one of the following:
- Shop with a registered credit card, debit card or preferred shopping card.
- Shop at participating retailers.
- Use a BabyMint or Upromise-branded credit card (EdExpress doesn't currently offer a branded credit card)
- Sign up for services with participating providers (e.g., Internet access or phone service).
- Register your existing phone number (for AT&T clients at Upromise, MCI clients at BabyMint).
Each plan has different variations on the opportunities for earning rebates, which aren't limited to the above list or to online retailers. At this writing, you could also earn $3,000 on a home's sale price with Coldwell Banker through Upromise, 5% back at Blockbuster Video through BabyMint and 10% at Sharper Image through EdExpress. At Upromise, you can even redeem frequent flier miles for cash (but at a stiff rate of $50 for 10,000 American Airlines AAdvantage miles).
BabyMint and EdExpress' participating retailers offer up to 20% of your purchases back, while those partnered with Upromise tend not to offer more than 10%. BabyMint and Upromise also offer branded credit cards that rebate 1% of new purchases. (To compare their current credit card offers, click here). BabyMint's "Tuition Rewards" program also allows you to double your rewards at 150 participating private undergraduate colleges.
The college-savings hook
Potentially most interesting to parents of college-bound kids is how most of these sites allow you to automatically deposit your rewards into 529 plans. At Upromise, you can choose from among 529's that are managed by Salomon Smith Barney (for the states of Illinois and Colorado) and Fidelity Investments (for New Hampshire, Massachusetts and Delaware, among others. You don't need to live in a state to invest in that state's plan.) Not all 529s are created equal. You can learn more about each state's plan -- including any investment options and fees -- at SavingforCollege.com (use the link at left).
You will be able to link both 529 plans and Coverdell IRAs to an EdExpress account. Otherwise, your "EdBuck$" will be automatically invested in short-term municipal bonds through an independent investment firm.
Currently, BabyMint's program is the most flexible and thus gives you the most control over how your money is invested. You're not limited to the 529 plans of its partners or to a specific fund, and you can link any number of other accounts (including 529 plans you already have). Or, you can opt to redeem your BabyMint rewards in the form of a quarterly check so long as your balance is more than $25. Upromise says it will also allow you to link 529s that are not among its partners and receive rebates by mail.
The plans also differ in fees: BabyMint and Upromise don't charge them, while EdExpress charges $24.95 each year, which is deducted from your rebates. And they differ on whether you must meet a minimum before your rewards are actually invested (yes at Upromise and BabyMint, no at EdExpress).
How much you save
A couple of the sites have calculators to help you estimate the savings potential. The one at Upromise reports that a family with an annual income of $70,000 and a 5-year-old daughter could save $7,150 by investing their Upromise rewards over 15 years. This assumes a 7% rate of return and includes $546 in monthly spending with the Upromise Card, buying 2 GM cars for $20,000 each, buying or selling a $210,000 home with a participating realtor and refinancing twice. This may or may not match your spending habits, but it points out that rewards-savings alone are probably not going to cover a large percentage of your future college bill.
What happens to your money if one of these companies goes under? It should be fine -- subject, of course, to how you've invested the cash. The money would be under the control of a financial services company.
Similarly, racking up rewards from the branded credit cards can be difficult. If you only were getting the 1% rebate (meaning you're not shopping at participating retailers), you'd have to spend $30,000 with a Upromise card to max out its contribution limit of $300 a year. BabyMint has no limitations on its credit-card rewards.
A couple of other things to note on the credit cards: You don't earn rewards on any fees you accrue, and if you don't pay off your bill in a timely manner, you could pay more in interest than you get back for using the card to begin with.
Tips and caveats
Once you've registered with any of these sites, saving money truly becomes easy, even if it doesn't produce the windfall you'd hoped. For those wanting extra credit, here are a few ways to make the plans pay:- Start early. The longer your time horizon, the better. You don't even have to have kids yet, whether you link a 529 plan to these programs or not. You can use the savings for your own college costs, or you can open an account and change the name at a later date, when junior is more than a twinkle in your eye.
- Make it a friends-and-family thing. You're not restricted to making contributions in your own kids' names at Upromise, BabyMint and EdExpress. Friends and grandparents -- anyone -- can sign up and direct their rewards to you and yours. Getting more people involved could be a way around the $300 annual credit-card reward limitation at Upromise.
- Double your rewards pleasure. For branded credit-card holders, using the card to shop at participating retailers is the obvious way to go. Not only do you get the 1% for using the card, but you get the retailer's rebate, as well. Or, register your existing frequent flier cards with the programs. You won't get the extra 1% when you use them instead of the branded card, but you can earn miles while simultaneously saving for college.
And for those of you trying to get really creative with your math, here are a couple of myths to dispel:- The more you shop, the more you save. Not quite. While increasing your shopping at participating retailers indeed puts more money into your linked accounts, don't forget your bottom line. If you're spending on things you wouldn't normally be buying, you're likely diminishing the savings you could accrue on your own. That $50 dinner may mean an automatic $5 in a 529 plan, but you could easily add most of that $50 to your account yourself by opting to eat at home.
- These plans will solve all your college-savings needs. True, you may have many family members and friends willing to designate your kid's account for all their rebates. But the cost of attending a 4-year in-state college may top $130,000 in 18 years, if you figure a 5% annual increase in the College Board's reported 2003-2004 average cost of $12,841. So, thinking these programs will generate the only savings you'll need is likely unrealistic, and possibly risky.
Still, why not sign up and start saving? You don't even need to have the kid yet.
| Comparing the plans' branded credit cards | | Credit card | Rate* | Annual Fee? | Percentage back on any/all card purchases | Contribution limitations | What you need to spend in a year to earn the most credit card rewards | | Citi Upromise Card | 10.99% | No | 1% | Up to $300 per credit card account per calendar year | $30,000 | | BabyMint Platinum MasterCard | 9.99%** | No | 1% | None | NA |
|
|
*As of Jan. 2, 2004
** If you don't qualify for a credit limit above $5,000, you will likely have a different APR.
Source: Staff research
|
|
|
|
