Nickel and Diming Your Kids to College
Small rebates from retailers are just another way parents can fund ever expanding 529 plans
When it comes to your 529 college savings plan, it's the little things that count. Just ask Randy McCready. The Milwaukee father is saving money in his daughter's tax-deferred 529 a penny at a time—literally.
McCready signed up with Upromise, one of a handful of rebate programs that let parents save for college every time they shop. He earns 1 cent per gallon when he fills up his gas tank at Mobil or Exxon stations. What's more, because McCready uses his Citibank Upromise MasterCard, he gets an additional 1 percent rebate.
In August, the gas rebates netted his 6-year-old daughter, Molly, $2.77 for her 529 account. "I know, it doesn't sound like much," says McCready, financial aid director at the University of Wisconsin-Parkside. "But it's surprising how quickly it all adds up." In five years through Upromise, McCready has saved more than $1,600 in Molly's 529. In the grand scheme of things, $1,600 is probably a drop in the bucket of what's needed to pay for many colleges. But parents who use 529 plans—and the states that sponsor these tax-deferred savings and investing accounts—are coming to realize that it's the little things that matter.
In the decade since 529 plans were launched, these accounts, which are offered by virtually every state, have soared in popularity. About $105 billion is invested in the 80 or so 529 plans that parents can choose from (you aren't limited to just your in-state plan), about double the 2004 level. And 529 assets are expected to double again by 2010, according to a Financial Research Corp. estimate.
The growth follows major improvements to 529s, named for the section of the tax code that gave birth to the 401(k)-like accounts in 1997. Withdrawals from 529s used to be taxed at the child's rate. No longer. First, the federal government temporarily made withdrawals for qualified educational expenses completely tax free. Last year, Congress made tax-free withdrawals permanent.
Stacking Up the College-Savings Rebates
Three major college rebate programs help shoppers save for school, a few pennies at a time.
| PROGRAMS | RETAIL PARTNERS | PROS | CONS |
|---|---|---|---|
| Upromise | 637* | Offers the biggest network of bricks-and-mortar partners, including grocery stores and gas stations. Also offers a rewards credit card to add to savings. | You must request a rebate check by letter. While you can have money deposited automatically into a Upromise-administered 529 plan, similar arrangements can't be made with other 529s. |
| BabyMint | 540 | Can save through online and bricks-and-mortar retailers. Members can also earn tuition reward credits at nearly 200 independent colleges. | Has the fewest partners, and you must go through the BabyMint website to enjoy rebates at retail sites. |
| Little Grad | 2,000 | Will automatically deposit rebates into any 529 or financial account. Allows you to save at any retail partner, without going through Little Grad's website. | No bricks-and-mortar retail partners to save through. |
*Does not include rebates at more than 7,000 restaurants.
Source: USN&WR
What's more, assets held in 529s and most college savings vehicles aren't considered the child's, even if the student beneficiary technically owns the account. That's a major help when it's time to apply for college financial aid, since the federal aid formula considers up to 20 percent of a child's assets as fair game for paying for college (versus 5.6 percent for a parent).
"The big battles have been won," says John Heywood, a principal with the Vanguard Group who heads up the mutual fund company's education savings plans. Now, states and parents must focus their attention on smaller issues:
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