Should You Use Credit Card Rewards to Fund a 529 College Savings Account?
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For parents worried about the looming cost of college tuition, certain credit cards advertise a partial solution: rewards that get deposited directly into a 529 college savings account.
You spend on everyday purchases as you normally would, but your rewards are automatically funneled into your child's college fund, rather than you cashing them in.
While this can be a convenient and seamless way to build up savings without thinking too much about it — and it's certainly better than not saving for college at all — most families are unlikely to accumulate enough earnings from credit card rewards alone to fund college tuition.
Here’s what you need to know about using credit card rewards to fund a 529 college savings account:
Credit cards that offer college savings benefits
If this feature sounds appealing, here are some cards to consider:
The Upromise Mastercard earns 1.529% cash back on every purchase when you link your account to an eligible 529 college savings plan. In addition, cardholders have the option of rounding up purchases to the nearest dollar to earn additional cash back.
The Fidelity® Rewards Visa Signature® Card earns 2 points per dollar spent, and cardholders have the option of turning those points into cash back rewards when they are deposited into a Fidelity account, including a 529 account. That translates into 2% cash back on purchases going directly into college savings.
The CollegeCounts 529 Rewards Visa Card earns 1.529% back on spending, which then goes directly into a 529 college savings account. (This card is associated with Alabama’s 529 fund. It has no residency requirements, but Alabama taxpayers are eligible for a tax deduction.)
Products like these reflect card issuers’ efforts to stand out by offering specific benefits targeted to a subgroup of consumers.
“People want benefits that are more applicable to their lives,” says Mike Berinato, vice president of research and consulting for Escalent, a financial services research and consulting company, and 529 savings meet that demand. “For people saving for college, it could be a differentiating benefit,” he adds.
» MORE: 529 plan rules
How much money will you accumulate?
Let's say your credit card earns 2% back on all purchases. If you spend $10,000 annually on the card, that adds up to $200 per year. If you start with $200 a year when your child is born and add an extra $200 each year while earning 6% interest annually, then by the time she is 18 you will have more than $7,000 saved.
That could be a significant chunk toward one year’s worth of tuition at a public university today. The College Board pegs the average published tuition and fee price at just over $10,000 annually for full-time in-state students at public four-year universities.
But if your child plans on attending a more expensive state or private school, then credit card rewards should just be one of many ways you’re saving for that, says Paul Curley, director of college savings research for Strategic Insight, a management consultancy.
For instance, if you’ve already set up and contributed to an existing 529 plan, credit card rewards can be a nice supplement for that fund. Curley does this for his own family, which includes children ages 6 and 3. “It helps to accelerate overall savings,” he says.
And if you have no college savings account otherwise, Curley says that choosing a card that offers these kinds of rewards can at least help you get started.
“One of the biggest hurdles to saving is setting up a dedicated account. Then once you have it, you have to keep up the momentum,” he says.
» MORE: 529 plan vs. Roth IRA
More lucrative card alternatives (for a little more work)
For parents willing to take a few extra steps to put money into their 529 accounts, there are other options.
“There are clearly higher-value cards, like straight cash back,” says John Grund, managing director in the payments practice at Accenture, a firm that provides consulting services for banks and payment providers.
Examples abound: The Discover it® Cash Back card and the Chase Freedom Flex℠ both offer 5% cash back on rotating categories that you activate on up to $1,500 in spending per quarter (1% back on all else). The Bank of America® Customized Cash Rewards credit card offers 3% cash back on gas or your choice of one of five other popular categories, 2% back at grocery stores and wholesale clubs (up to $2,500 in combined choice category/grocery store/wholesale club quarterly purchases), and 1% on all other purchases.
Those are clearly higher rates, but in order to get those cash back earnings into a college savings account, parents would need to make the transfer themselves. The real value in the 529 rewards cards, perhaps, is that the money goes into your college savings account automatically. “It can be simple and easy,” says Grund, and a useful complement to existing savings.
Is a card with college savings benefits right for me?
It could be, as long as it's not your only source of funds for your child's college tuition.
“The best candidate for the 529 reward card is not someone who is only funding their 529 account with credit card rewards,” says Ron Shevlin, director of research at Cornerstone Advisors, a banking consultancy. “It’s someone who has already made significant contributions and has significant funds in a 529 account. It’s a way to top it off."
Alternately, if you've yet to set up any kind of college fund and need a nudge, these cards could be a relatively easy way to get you started on one.
"There is definitely a segment of consumers who find this valuable because it’s a way to force them to save for their children’s or grandchildren’s college education," Shevlin says.
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