College Savings Reward Plans - Making Them Work for You

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.

Optimizing Rewards

A few of the college savings clubs require that you have their branded credit card to participate in the savings club. We suggest you avoid these programs in favor of a "best-of-breed" strategy that lets you pair the best rewards credit card with the best savings clubs. Here's a five-point strategy that can help you maximize college reward earnings:

1. 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.
   
   
2. 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.
   
   
3. 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.
   
   
   
4. 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.
   
   
   
5. 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.