Thursday, November 21, 2024

Saving for Your Child's Education: Can using a credit card today help you to avoid debt in the future?
by Rebecca Lindsey
Rebecca Lindsey is a staff writer for Credit Ratings.com. CardRatings.com offers a consumer report of US credit cards and instant online approvals. Named among the 'Web's Best Sites' by SmartComputing magazine! The site is courtesy of Citizens for Fair Credit Card Terms, Inc.

Rebecca Lindsey

Here's a news flash: children are expensive. Never mind diapers, food, clothing, computers, MP3 players, trips to the mall, etc. One of the biggest expenses your child(ren) will incur is college tuition. The cost of further education is ever on the rise, and even with scholarships the costs can be staggering. The amount of federal financial aid granted to undergraduate students in the form of loans is shocking as well: according to one study by the National Center for Education Statistics, 71 to 93% of middle-income students attending 4-year schools in one study received some type of financial aid during the academic year 1999-2000.

As they say, the first step is admitting you have a problem! So if you have thought about or have even started a savings mechanism specifically for your children's college education, you are ahead of the curve. If you haven't, right now is the time to start.

One of the best methods of saving for education is a 529 College Savings Plan. Named after Section 529 of the Internal Revenue Code, 529 College Savings Plans are tuition savings programs exempted from taxation. They were created to encourage families to save money for college and are operated by a state or educational institution. Participants invest after-tax money into the account and the earnings from the money invested are tax exempt.

529 plans are so popular that many incentive programs have been created to help the consumer take advantage of them. Credit cards don't typically come to mind when it comes to saving money, but just as there are credit cards with cash back incentives or air miles programs, there are some credit cards that have incentive programs geared specifically toward educational savings.

Read further to find out how these programs work and for tips to maximize your savings.

The ABC's of 529's There are two types of 529 plans, savings or pre-paid. Both are managed, meaning that a fund manager invests the funds for the account. 529 Savings Plans are operated by states (and all states have one) with the purpose of saving money for any college, even out-of-state schools, your future student wants to attend (although some state plans do place stipulations that the money can be used only for schools in that state, so you should do your research). Pre-paid accounts are run by institutions and allow participants to save and invest money that will go toward tuition at that institution.

The advantages of opening a 529 plan are obvious: it's a tax-exempt fund that helps you put money back specifically for future educational goals. As with any investment fund, the sooner you start the more compounded interest you'll earn. Consumers can research plans nationwide and invest in the one that meets their criteria as far as best return, lowest fees, etc. An excellent resource for conducting research into the various 529 plans available is SavingForCollege.com.

Spending in Order to Invest To grow healthy investment accounts, you have to invest in the first place. Start small if you have to, as even a small amount invested each month can build into a good foundation.

If your investment strategies could use a little help, or if you're the type who loves a good incentive program, there are rebate programs available to add a little more to your fund.

Frequently in the news are two such programs: BabyMint and UPromise. The premise of each revolves around program-affiliated vendors or products who have agreed to rebate a percentage (which range from 1% to 10%) of the purchase cost to program members. The rebates are credited to a member's account, which can in turn be invested in a 529 savings plan. As an added bonus, each program also offers a credit card that will provide members with additional rebates on all purchases made, not only qualified products.

A similar credit card is affiliated with Fidelity Investments. Rather than join up with a program, cardholders receive a flat 2% rebate on all qualified purchases.

As far as rewards cards go, each of these has reasonable rates and incentive returns. However, when you speak of saving and credit cards in the same sentence, you must use care, otherwise you defeat your purpose by spending more money-either on purchases or interest fees-than you save. Therefore, a few tips to using credit cards with the purpose of saving for college.

1) Take a thorough look at each of the incentive plans to ensure that it has the "more bang for your buck" quality. You should choose the one that is affiliated with vendors you already use or products you already buy, otherwise, you'll most likely spend more money than usual.
2) Take a look at the number of credit cards you already have in your wallet. If you are serious about saving money, think about replacing one of your existing cards with one that works with a 529 College Savings Plan rather than adding an additional card to your collection.
3) If you are using a credit card's incentive program to save money, be sure that you pay off your balance each month. If you don't, the money spent on interest fees is money that could have been contributed to savings. 
4) Be aware that the card rebates are not meant to replace your individual contributions. Even if you make every effort to max out the amount of rebates added to your 529 account every year for 18 years, at the very most you'll earn enough for a few semesters. And remember that to achieve rebates, you have to use the card for purchases. Purchase judiciously, and rather than saying to yourself "oh, if I buy that, I'll get a rebate toward our education account," think about the money you can save if you don't make the purchase. Before signing on, make a commitment to make your own contributions to the 529 account to see maximum growth. This will help you to spend and save wisely.
5) Start early, say when your child is starting to master crawling, if possible! That way you have the advantage of time to help your savings grow. If your child is starting to master calculus and plans to enter college in a year or two, investigate a different method of saving, and fast!

With wise spending habits, you can utilize any of these programs to assist you in your quest to save for education.. Investigate each of these cards and their programs to find out if one has a program that will help you start. But always keep in mind that they are meant to assist, not replace, your savings.

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