By Althea Chang
If a sharply lower 401(k) balance has made saving for your kids’ college education the furthest thing from your mind, automatic college savings plans could be key.
Like racking up airline miles for every purchase, a credit card linked to a college savings account, or 529 plan, can help you earn and automatically invest money—and let it grow tax free—until you’re ready use it for a qualifying higher educational expense.
Here’s how to start:
1. Pick a plan. There are a number of 529 plans to choose from, including direct plans and those sold by investment advisors. As with a mutual fund, you can decide to invest aggressively when your kids are young, and less aggressively over time, or choose a target date fund where allocations will be automatically adjusted over time.
Hot tip: Use online calculators to get your bearings. To fine-tune your overall savings plan, check out our college savings calculator at BankingMyWay.com.
To compare plan fees, expenses, taxes and other criteria, try this comparison tool at SavingForCollege.com.
2. Pick a card. To choose the college savings credit card that’s right for you, take a look at your everyday spending habits including how much you spend on groceries, dining out and online shopping. Keep in mind that certain cards require you to set up a 529 plan and choose from funds offered by a specific investment advisor.
Here are some examples:
• For average shoppers: With a Fidelity Investments 529 College Rewards American Express Card (Stock Quote: AXP), you can earn 2% back on purchases to invest in a Fidelity 529 account. Each time you make $2,500 in purchases, you earn a $50 deposit for your designated Fidelity 529 account. There’s no annual fee and no limit to the rewards you can earn, but you’ll have to open a Fidelity-run 529 Plan to earn cash for college with this card.
• For online shoppers: In addition to a flat percentage back on your credit card purchases, the FutureTrust college savings credit card through Barclays (Stock Quote: BCS) Bank Delaware gives you up to 10% back on purchases at more than 500 online partners when you shop through their web site, plus an extra 1% back on your first $5,000 of purchases in the first nine billing cycles after your account is opened. You can link your FutureTrust account to any 529 Plan, including state-run plans, which may have lower expenses than those managed by firms like Fidelity.
Hot tip: To calculate the costs associated with specific 529 Plans, use this tool from the Financial Industry Regulatory Authority.
• For big families and big spenders: A Upromise World Master Card Credit Card, through Bank of America (Stock Quote: BAC) might be the best option for big-spending families. With this card, you’ll get 1% back in college savings, plus an additional percentage back on certain grocery and drug store purchases or outings at participating restaurants.
Even without the credit card, you can still get 1% to 25% cash back through more than 600 online retailers if you shop through the Upromise web site, up to 8% back from more than 8,000 restaurants and 1% to 3% back on specific grocery and drug store items when you scan your discount card at checkout. To receive your cash back to invest for college, you’ll have to link your Upromise membership with a 529 plan through Upromise Investments.
If you’re more concerned now about paying off your student loans, you can use your savings to pay down Sallie Mae student loans (Stock Quote: SLM) through Upromise’s free Loan Link service instead.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.