529-linked credit cards help make college more affordable
By Emily Starbuck Gerson
With college expenses growing ever more astronomical, most parents and soon-to-be moms and dads are wondering where they'll come up with the funds. Student loans are helpful, but they can burden a graduate for decades. Not everyone will receive scholarships. Thankfully, a new generation of credit cards may make paying for college a little less painful.
How do they work?
One popular way to save for college is by starting a 529 savings plan, in which money grows tax-free. The funds can be withdrawn tax-free when used at any accredited college, university or trade school for tuition, room and board, books or other school-related costs. Three new credit cards can be linked to 529 plans and function like cash-back credit cards, except instead of the rebates coming back to you, they go straight into the college savings plan.
The Futuretrust MasterCard
The Futuretrust MasterCard is issued by Barclays Bank and can be linked to a new or existing 529 plan. One percent of every purchase is contributed to the 529 account, though for the first nine months, cardholders receive 2 percent back. Up to a 15 percent contribution is given when shopping with a preferred network of partners, which includes major retailers and restaurants. There is no cap on how much can be earned. The card has no annual fee and has a 0 percent introductory APR for balance transfers and convenience checks, effective for the first six billing cycles. The regular APR is variable and ranges from 12.99 percent to 18.99 percent.
Fidelity's 529 Rewards AMEX card
Fidelity Investments and American Express are another pair that have teamed up to create a 529 college rewards card with the Fidelity Investments 529 College Rewards American Express card. With this card, your reward points, which are converted to cash, are deposited into your Fidelity-managed 529 plan account. For every purchase, 1.5 percent is automatically contributed to your 529. Family and friends can also get one of the cards and link it to your account. The annual contribution limit is $1,500 and there is no annual fee. For the first 12 billing cycles, there is a 0 percent APR on balance transfers and cash advance checks. However, there is a balance transfer fee of 3 percent, with no less than $10 charged. The purchase APR is 16.99 percent, so this card is best for those who do not carry a balance.
Citi's Upromise MasterCard
The Citi Upromise MasterCard is another option. Cardholders sign up with a 529 plan through Upromise or link an existing 529 plan to the account. With regular purchases, cardholders earn 1 percent toward college savings, though they can earn 2 percent from certain gas stations and 10 percent from participating grocery stores, drug stores and restaurants. Friends and family members can also apply for the card and direct their rebates to a loved one's account. A maximum of $300 can be earned each calendar year from the 1 percent rebates, though there is no limit as to how much can be earned from the other rebates. The card has no annual fee. It comes with a 13.24 percent variable purchase APR and a 0 percent APR on balance transfers for 12 months. One major drawback: The money doesn't immediately go to the 529 account. It is transferred to your 529 on a quarterly basis, and there is a fee for each transfer, generally ranging from $15-$50. These fees can add up, so do some math to see if the savings outweigh the fees.
Why a 529 plan?
Andrew Gray, a financial planner with Bell Financial Planning in Austin, Texas, says 529-linked credit cards are great tools, especially considering the high cost of higher education. "My colleague and his wife have one, and they don't even have kids yet," Gray says with a laugh. A 529 account is a lot like a Roth IRA, he says. "You have the same tax-deferred growth so you never pay tax on the investment income."
Gray also finds 529 plans to be ideal for gifts and estate planning benefits. If grandparents want to contribute to a grandchild's college fund with their taxable estate, they can contribute up to $60,000 individually, or $120,000 as a couple, per beneficiary. "It's a unique opportunity to remove assets from a taxable estate without giving up ownership. If something happens with one of the grandchildren, the grandparents can transfer the money to another beneficiary -- and they don't have to pay federal gift taxes," Gray says.
Things to avoid
When looking for a 529 plan, Gray advises consumers to look for low-cost investment options and low-cost administrative fees. "If 529s have gotten a bad rap, it's because of adviser-sold ones, because you might have to pay a front-load fee, which you should avoid," he says. Gray also says it's also advisable to first look at the 529 plan your state offers, and to find out if it has any tax benefits. If the plan is high on administrative costs, you may want to look elsewhere -- you can usually invest in a 529 plan offered in any state you want. "We advise a lot of our clients to invest in Utah's 529 plan because they have the lowest fees," Gray says. The funds in 529 plans typically can be spent on colleges and universities across the country -- not necessarily in the state where the fund is held.
While a 529 account can be an invaluable asset come college time, it's important not to tap into the account early or use it for other means. "If you were to take it and spend it for something other than a qualified expense, it would be like withdrawing money early on IRA, so you pay a penalty along with taxes on the investment gains at your tax bracket," Gray says.
One of the best tools
"529 plans are one of the best tools out there along with 401(k)s and Roth IRAs," Gray says. "It's a great tax vehicle. If I had just had a baby, I would definitely get one of these cards just because it's an easy way to start saving for education." If you plan to apply for a 529-linked credit card, read all the fine print first. Some come with very particular rules for earning points, especially with partnering merchants. While the rebates from these college savings credit cards will not earn enough to fully fund four years at a university, they will certainly help. Making regular contributions to a 529 plan is a given to growing the fund over the years, but with the added bonus of 529-linked credit card rebates, the gift of giving just got a little easier.
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Published: February 25, 2008