After the mortgage, everyday expenses and retirement plan contributions, there may be little left for a college savings plan except good intentions. But every family has, if not a rich uncle, an Uncle Sam. And his primary college savings plan, the 529, just became a lot more attractive. Even better, the budget-busting expenses that hinder saving, can actually be used to generate regular contributions to these plans.
First, the plan: named for the section of the tax code, which sanctions it, 529 plan earnings accumulate free from taxes. While contributions are not tax deductible on a federal level, they often are for state purposes. The big pay off, though, is at withdrawal. Withdrawals are tax-free when used to for higher education related-expenses, including books and post-graduate studies. If a child decides not to go to college or receives a scholarship, another beneficiary may be named to the plan. There is no deadline for taking the withdrawals.
The biggest drawback to these plans was the 2010 expiration of their federal tax benefit. But with the signing of the Pension Protection Act of 2006 in mid-August, anyone using the expiration date to justify not participating needs a new excuse. The tax benefits are now a permanent entry in the tax code.
New excuses will be hard to come by. The states, which run 529 plans, have been beefing them up to improve their attractiveness and effectiveness. (See SavingforCollege.com for a comparison of each state’s plans, features and ranking versus other plans.)
Though 529 plans have had a reputation for being complicated and requiring the services of a financial advisor to open up, they recently become pretty straightforward and can be opened up online in short order. Even the minimum opening balances and contribution levels defy the excuses of all but the most budget-strapped.
The minimum opening deposit for Colorado’s low-fee CollegeInvest Plan, for instance, is just $25. That means funding a 529 plan can be as simple as redirecting Nana’s next birthday gift. It will not exactly pay for four years at Harvard, but it does make the plan and its benefits accessible. The only real hurdle left is finding additional money to add to the plan.
Raising a child may take a village, as Hillary Clinton observed, but finding extra cash for that child’s future college expenses may just take a few shopping carts.
Thanks to a number of rebate programs, parents, grandparents, godparents, family friends, even the students themselves can link their everyday purchases to a college savings plan — or, for those already in college, a student loan account — and let the nation’s retailers, grocers, and gas pumps help offset their education expenses, one thin rebated dime at a time. Small change? Yes, but over time it can result in big savings.
For Mary Yager of Lakewood, Colo., it has added up to $4,700 so far. Five years ago she opened a 529 plan and linked it to the Upromise program.
“When I first heard about Upromise I had a new baby and my husband and I were still paying off our student loans. We don’t want our children carrying that kind of debt when they are our age. I figured since Upromise was free to join, why not,” she explains.
“We are designed to be a catalyst for college saving,” says James Fadule, president of Upromise Investments, which is located in Boston. “The program demonstrates that even small amounts deposited regularly can accelerate savings.” Upromise has lined up companies like Chiquita, Beech-Nut and Coca-Cola, along with oil companies and several hundred retailers for its rewards program. Members can register their preferred customer cards from stores like CVS, Albertson’s or Jewel, along with their gas cards and bank credit cards. When their purchases trigger a rebate, their college savings plan automatically receives the credit. The rewards program does not interfere with other programs tied to the cards — the air miles can still pile up along side the Upromise rebates.
“If a family were to open a 529 plan [or any other savings account] with $1,000, for example, and through the rewards service earn $200 a year in rebates, it represents a 20 percent return before they see any actual return on their plan’s investment,” says Fadule. Typically, the plans are invested in mutual funds.
Or if a family like the Yagers, who originally planned to save $50 a month from their budget for college, finds they can’t, their savings goal need not drift off course. “We actually have about $75 a month going into our 529 plan through Upromise,” says Yager. The Yagers also have Citibank-issued Upromise-linked charge cards, which supercharges the rate at which they earn rebates.
“Participating in a rewards plan is like icing on the cake. It is fun and keeps saving front of mind,” says Peter D’Angio, a certified financial planner in Denver, who recently joined CollegeInvest as their advisor relationship manager. As an advisor, he found his clients really liked the idea that their spending habits could kick in toward their college funds.
While Upromise turns grocery and retail purchases along with mortgages, realtor’s commissions and travel expenses into rewards, it is not the only fee-free college savings company around.
“We found people who are concerned about saving for college tend to be online shoppers,” says Suzy DeLine, the chief marketing officer for San Francisco-based Little Grad. Little Grad collects cash-back rebates from over 1,300 online retailers and automatically deposits them into designated accounts, including 529s. Instead of having members log on to its site then travel to other sites to shop its downloadable program follows users around the web while they shop. “This way if our member is browsing and decides to buy something at Gap.com, for instance, the Little Grad Savings manager automatically captures the rebate,” adds DeLine. According to the company, the average Little Grad member — typically in concert with two other family members — will rack up $300 annually in store rebates. It calculates that with an account invested to earn 6 percent annually, over sixteen years that will add $10,000 to savings.
BabyMint.com is another shopping option. Here members sign onto the Web site gaining access to several hundred participating merchants. But BabyMint members can also sign up for a Tuition Rewards benefit. This adds an additional dollar-for-dollar tuition credit to their account, which may be redeemed at affiliated colleges if the beneficiary eventually chooses to attend them. BabyMint has signed up over 175 schools for this program, many of them smaller private liberal arts schools.
With these plans, there is no ‘either or.’ A consumer conceivably could sign up with all three —automatically getting the weekly trips for gas and groceries to ante up to the college savings pot through Upromise, then capturing the virtual purchases through whichever of the three has lined up the online retailer of choice or offers the highest rebate for that retailer.
Sure, it is a nickel-and-dime strategy.But these programs offer hope among the sales receipts and potentially a few extra thousand dollars for college tuition.
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