Choosing a college fund rewards card



Dear Joe, Which credit cards contribute to a 529 plan? Thank you. -- Craig


Dear Craig,

Among the proliferation of "rewards" credit cards, you'll find a few that are tied to 529 plans. For families with children, these appear at first blush to be no-brainer deals: Use a 529 rewards card instead of cash to pay for all your purchases, then just sit back and wait for the rebates to drop automatically into your 529 college-savings account.

Of course, this strategy works best if you pay off the entire balance on your statement each month. Otherwise, the interest you pay is likely to exceed the amount of rebates earned. You should also consider which particular card is going to produce the highest reward. (If you're planning to purchase a General Motors Corp. vehicle, perhaps you should make the GM 5-percent rewards card the first piece of plastic you pull out of your wallet or purse, and not your 529 rewards card.)

Some of the 529 rewards cards are linked to specific 529 plans while others allow you to designate just about any 529 plan, or other type of investment account, to receive your rebates. With all of them, you can request that the balance in your rebate account be sent directly to you instead of to your investment account, but there might be a time delay and additional requirements, such as a signature guaranty, before you get your money.

Here are the most popular 529 rewards cards, none of which charge an annual fee:

The Fidelity 529 College Rewards Card from MBNA earns a generous 2-percent rebate on your purchases, with a maximum annual rebate of $1,500. Suppose you have a child attending a private college charging $20,000 in tuition. Using the card to pay this year's tuition will get you $400 toward next year's bill. You can set it up so that the rebates from this card are automatically deposited into any of the Fidelity-managed 529 plans. Fidelity has programs in Arizona, Delaware, Massachusetts and New Hampshire.

The Citi Upromise Card offers a 1-percent rebate on general purchases, with an annual rebate cap of $300. When used at certain retail locations, however, the rebate is boosted to 2 percent (Exxon or Mobil stations) or 10 percent (grocery and drug stores) with no annual caps. The card can be linked to any of the 529 plans managed by Upromise Investments Inc. (New York's college savings program being the largest).

The GHESP/Futuretrust MasterCard from Juniper Bank is linked to Georgia's Higher Education Savings Plan, managed by TIAA-CREF. It offers a 1-percent rebate on general purchases and no annual cap. If you don't want to use the Georgia 529 plan, you might consider Futuretrust's self-branded rewards card. It has the same terms and can be linked to most investment or bank account, including 529 plans.

Finally, there's the BabyMint College Savings Credit Card from MBNA, offering a 1-percent rebate and no annual cap. Like the Futuretrust card, you can set up your rebate account to have the dollars swept into the 529 plan or other investment account of your choice.

It's easy to confuse the 529 rewards credit cards with the various 529 rewards purchase programs. Upromise, Futuretrust and BabyMint all operate purchase rebate programs that do not require the use of their branded credit cards, although paying for your purchase with the credit card might produce bonus rebates. Another 529 rewards service, but one that currently does not offer a credit card, comes from Little Grad.

In any of these purchase rewards programs, you simply make your online or offline purchase through the program-affiliated merchant network, and you earn a rebate for that purchase. (Upromise and Little Grad make available a software download that captures rebates from your online purchases even when you do not first log onto their sites.) The amount of rebate will vary among the participating retailers. It pays to compare the rewards services when making major purchases, because the same item could earn different rebates depending on the particular reward service.

Rebates deposited into your 529 plan are treated the same as direct-cash contributions, and you have to count them for gift-tax purposes. For most families that should not be a problem, since the $12,000 annual exclusion will be sufficient to cover the additional gifts. Having added over $2,000 to our own 529 accounts over the past few years with rebates on items we normally buy, I can personally attest to the benefits of 529 rewards programs.