Editorial Policy

Rebate Credit Cards Can Boost College Savings

Eva Norlyk Smith Ph.D.

September 19, 2012

Parents, on average, plan to pay for more than half of their children’s college costs, according to the most recent College Savings Indicator study from Fidelity Investments.

For most families, however, the question is how. With multiple competing expenses, it can be difficult to put money aside into a college savings fund.

Yet parents might find some help from a surprising source — credit cards.

Some specialized cards are tied to educational rebate programs. These programs are similar to credit card rewards programs — yet, instead of racking up cash and points for airfare, a portion of your spending can be redeemed for education-related expenses.

How rebate programs work
It’s a simple concept: Each time you spend, you save. Cash-back earnings can be as little as 1 percent to 2 percent (and as high as 25 percent if you spend in certain categories). Over time, that cash builds up — especially if you get other relatives in on the action — and, depending on the program, it can be redeemed for a contribution into a 529 college savings account, a tuition payment or a check that can be used for college expenses.

College savings rebate programs may not look like much. It’s difficult to collect on the higher redemption rates, and a 2 percent rebate on $10,000 of yearly household expenditures will produce just $200 a year.

However, if you put those earnings in a 529 account, and they grow tax free at 5 percent a year for 18 years, they can accumulate to more than $5,800. If two sets of grandparents get involved at about the same level of spending, that amount could get multiplied by three and turn into well over $17,000. Use this compounding interest calculator to see how much you could accrue in college savings based on your family’s average yearly household spending.

“It’s not the whole answer, but it certainly can contribute something,” says Mike Sullivan, director of education at Take Charge America. “You’re not going to pay for someone’s college education through college savings rebate programs, but over 18 years, it can add up.”

Rebate program options
There are two main scenarios for college savings rebate programs. One involves a cash-back credit card linked to a college savings account. The other involves a shopping network that helps you earn cash for college expenses. Here is the low-down on each type of program:

Cash-back credit cards: Like the idea of having cash-back earnings automatically deposited into a college savings account for your child or grandchild?  A few credit cards will let you do just that. All cash-back rebates are deposited directly into a 529 savings plan, where the money grows tax free. Once it comes time for college, the money can be withdrawn tax free as well, as long as it is used for tuition or any other college-related costs.

In principle, you could use any cash-back credit card and simply deposit the cash-back earnings into a 529 savings plan yourself. However, having the process automated will save you both time and temptation.

One card that lets you automate this process is the Fidelity Investments 529 College Savings Rewards American ExpressCard. This card lets cardholders earn 2 percent cash back on all expenditures. There are no caps on yearly earnings, and the card has no annual fee.

Family members can also link their Fidelity rewards cards to the same 529 account, so that the whole family can contribute cash rebate earnings automatically. If you have more than one child, rewards earnings can be divided among up to five accounts.

The Fidelity Investment Card is also available as a Visa Signature card, but cash-back earnings on this card are only 1.5 percent for the first $15,000 of yearly spending, and 2 percent after that.

Tip: Want to not just save money toward college, but also reduce the amount junior has to pay? According to Sullivan, you may be better off linking your Fidelity cash-back card to a Fidelity Roth retirement account. Just like 529 accounts, Roth account savings can be used to help pay for higher education. However, unlike a 529 account, holdings won’t reduce the amount of financial aid your child is eligible for.

Rebate shopping networks: Unlike with regular cash-back cards, you won’t be rewarded for all your spending. You’ll have to shop at stores and websites that partner with the program. In return, your rewards can be as high as 25 percent on certain purchases.

Who pays for these rewards? Think of it this way: The partner stores save money on advertising when selling to members in the shopping network, and these savings help pay for the rebates. So the rebates you receive, at least in principle, should not increase the cost of the goods and services you buy.

The two leading college savings shopping networks are UPromise and  BabyMint. Merchants in their networks include major department stores, restaurants, cruise lines, airlines and hotels.

As with Fidelity’s card, cash-back earnings can be deposited directly into a linked 529 college savings plan. UPromise allows for a few more options as well. Cash-back rewards can go toward payments on Sallie Mae student loans. Or, the UPromise account holder can request a check and use it to pay directly for course books or tuition.