College savings clubs like Upromise and BabyMint offer a way to use everyday purchases to save some money for college. While details vary depending on the program, the general principle is the same: if you spend money at the companies affiliated with the program, these companies will deposit a small percentage of the purchase price into your college fund.
These programs allow you to accumulate rebates in a 529 college fund, where they will accumulate and grow tax free. Some offer the alternative of simply receiving the funds directly in cash.
Keeping things in perspective
There are some caveats worth noting before you sign up. First, don’t expect these savings alone to pay for your child’s entire college education. The amount you’ll accumulate will depend on how much you spend, how long before college you start the plan, and what type of investment returns you receive on your particular college fund. Realistically, look at these plans as a painless way to make a modest contribution to your child’s college fund.
Second, be careful not to drastically alter your spending habits just to accumulate rebates. Remember, companies offer these rebates primarily to boost sales and make you loyal to their products. Spending more than you otherwise would just to accumulate a small portion of the purchase price as a rebate ends up costing more in the end.
How to evaluate a college savings club
You should evaluate several factors when considering these clubs, and if you decide to sign up, choose one based on your specific circumstances. Look at the participating companies to see if they include those whose products you often buy. Then look at the rebate percentages, which can vary widely depending on the club and the affiliated retailer or manufacturer. Also find out if the club charges any fees for joining. In terms of receiving the rebates, find out if you have the option to receive the cash directly as well as which 529 plan choices are offered.
Know which 529 plans are available
Some college savings clubs offer a wide choice of 529 plans, while others offer a narrower selection. Evaluate the available 529 plans on their own merits, including performance, fees, and the option to invest in an in-state or out-of-state plan (this could potentially have tax implications). If the available 529 plans are not compelling on their own, then perhaps this college savings club is not right for you. On the other hand, if the program gives you the option of simply having the funds paid directly to you, you don’t need to worry about what 529 options are available. However, if you take the cash, you won’t receive the benefit of having the earnings on these funds grow tax free in a 529, unless you deposit that cash in your own 529 plan that you establish outside the college savings club.
Credit cards with rebates too
Some clubs also offer credit cards, which allow you to get rebates on your purchases. You should evaluate the card on the rebate percentage it offers as well as on its own merits, including the interest rate and fees. Be aware that if you tend to carry a balance on your credit card, your rebates will be offset by the interest you’ll pay on the balance. Finally, check to see if the card has a limit on the total annual rebate.
Find out more
For more information, contact Upromise and BabyMint. In addition, Fidelity Investments offers the Fidelity 529 College Rewards Card. Rebates from purchases made with this credit card are deposited into a Fidelity 529 plan.