It sounds like just a new twist on the all-too common Nigerian scams or Madoff-style Wall Street bait-and-switch. But it's true: Some states, businesses, and colleges are really handing out free cash to help build up parents' college savings accounts.
There are a few catches, of course. Nobody should sign up for anything that sounds suspiciously good without doing a little homework. And most of the grants and rebates are comparatively modest: The typical family might reap a few hundred dollars. Few parents will get enough free cash to make up for the average 20-plus percent decline in 529 college savings plans over the past year. (Tax-protected education savings accounts are called 529s after the part of the Internal Revenue Service code that created them.)
Still, those who collect the grants when their children are young or who are diligent about maximizing rebates could generate several extra thousand dollars.
No wonder those handing out the grants say interest is booming. More than half a million people have signed up for at least one of the rebate or grant programs since the beginning of the year. "You may as well get free money," says Joseph Hurley, founder of savingforcollege.com, who says his credit card and shopping rebates have added thousands of dollars to his family's 529.
There are six sources of free cash for college savings:
States: In at least nine states, government agencies or charities offer grants for college savings to local residents. Maine, for example, in 2009 started handing out $500 to babies born in the state for whom an adult opens a Maine 529. In states such as Arkansas, Colorado, Michigan, Minnesota, Rhode Island, and Utah, the matching grants go only to low- and middle-income families. Louisiana, New Jersey, and a few other states offer different kinds of grants or scholarship programs to encourage savers.
The catches: Each state has its own deadlines and red tape. Some require parents to fill out long forms early each year, for example. Utah's grants are so new and limited that only 19 families had qualified in the first three months of the program, which started January 1. And the Utah Educational Savings Plan, which awards the money, will stop accepting applications for the year on May 29.
Employers: In 2008, Unum started giving new parents grants of $700. The catches: Parents have to open a 529 savings account before the baby's first birthday, and the bonus is taxable.
Credit cards: Fidelity offers an American Express card that will rebate 2 percent of all purchases to a Fidelity 529. Upromise just launched a Mastercard that will send rebate checks or funnel rebates to a Upromise 529 account or to reduce Sallie Mae educational loans. The new card will rebate at least 1 percent on all purchases, 10 percent on groceries at selected stores, and—if consumers choose—additional rebates on certain gasoline or restaurant purchases. Babymint, Futuretrust, and FreshmanFund offer credit cards that rebate at least 1 percent to any 529 account. The catches: Spenders who carry balances or pay bills late will most likely pay more in interest and fees than they will save for college. Travis Plunkett, spokesman for the Consumer Federation of America, notes that credit card companies are not charities; accordingly, they are probably making more money from their borrowers than they are giving back.
Websites: Babymint, Littlegrad, Futuretrust, Upromise, and other rebate websites will send cash back to shoppers who click through their sites to partner retailers. The catches: Some of the websites make you jump through a few hoops to collect your cash.
Colleges: Several hundred colleges are offering matching grants for parents who sock away college savings. A marketing company, Sage Scholars Inc., has persuaded 230 private colleges to guarantee "Tuition Rewards" scholarships to students from families who invest or shop with Sage's business partners. And 274 private college members of the prepaid Independent 529 plan give parents at least a half-percentage-point discount if they buy tuition for a youngster at today's cost. Dickinson College upped the discount ante last year, adding an extra 4 percent to its inflation discount. That means a family with a 10-year-old who puts about $29,000 in the plan today will have paid a year's tuition in 2017, even though a year's tuition in 2009 is nearly $40,000 and, at the current rate of inflation, will probably reach $60,000 in eight years.
The catches: Plenty. Both the Independent 529 and Sage Scholars networks of colleges are limited to a few hundred comparatively expensive private colleges. There's no guarantee members' children will apply to or be admitted to the member schools. Both programs require parents to sign up several years before they tap their money. And both cover only tuition, not room, board, books, or any other college-related expenses. Sage members build up Tuition Rewards only by investing or shopping with Sage partners, some of whom charge more for their products and services than competitors not affiliated with the firm. In addition, parents of students who don't attend a member school don't get a penny of the promised scholarships back. Sage rules allow colleges to count "rewards," which average about $1,700 a year, against scholarships they were going to give the student anyway, so students may not really get any extra money. If a student doesn't end up attending a member of the Independent 529 network, parents who withdraw their money can receive no more than 2 percent more than they contributed. (But they are also limited to 2 percent less than they contributed, which makes the prepaid plan comparatively attractive right now, when the stock market is weak.)
Relatives and friends: Freshmanfund.com and Ugift offer electronic tools to make it easier to ask relatives and friends to donate to your college savings account in lieu of, say, a birthday or graduation gift. The catches: While Freshmanfund will funnel gifts to any 529, Ugift will work only with Upromise 529s. Some relatives and friends might find requests for donations to be, well, tacky. And, let's face it, you might not have many wealthy relatives. Ugift says that half of the birthday or other event donation requests result in total donations of no more than $100.