Diapers and formula. Bicycles and soccer camp. Braces and prom dresses. And just when you think that little bundle of joy couldn't get any bigger or more expensive, the time comes to pay for college.
Imagine, however, if the investment you made in feeding, clothing, housing and entertaining your child over his lifetime yielded dividends (and we don't mean hugs or thank-yous, we mean cold, hard cash). What if you could build your kid's college fund the way you accumulate frequent flyer miles, through loyalty programs that reward you for buying certain products and services?
Well, you can.
At Upromise.com and BabyMint.com, two of the leaders in this emerging industry, parents, grandparents, friends — anyone who wants to contribute to your child's college fund — can help you pay for college by doing nothing more than their everyday shopping. Sign up for the services online, and every time you patronize one of their retail partners or service providers a small percentage of that purchase will go into the account.
"The rebates are prompting families to open investment accounts they normally would not have," said Upromise Vice President Jim Doyle. "We help people get started."
Upromise and BabyMint don't promise to mint big bucks, but today's young parents could find that by the time their infants and toddlers head off to college, they've accumulated funds for books, travel or a year's worth of spending money without really saving anything extra at all.
"It can provide a meaningful supplement," said Bill Koleszar, Chief Marketing Officer at Baby Mint. "You're shopping at a lot of these stores anyway, and getting rebates you would not have seen otherwise."
While loyalty programs may be the newest and most innovative way to save college money, parents today have a nearly endless number of options to make saving for college less painful:
529 Saving Plans: (search) Investments in these state-sponsored accounts are exempt from federal taxes. Earnings are also exempt from state and local taxes in most states, and in some states contributions are tax deductible. Withdrawals are tax exempt if used for qualified education expenses. Depending on the number of years until your child attends college, investment strategies start out aggressive and become more conservative as the big day arrives. On the downside, 529s can be fee heavy and offer limited investment options.
Coverdell Education Savings Plans: (search) Investments and withdrawals for qualified education expenses are exempt from federal taxes, but CESAs are not protected from state taxes like 529s. Annual contributions are limited to $2,000, and eligibility is tied to income. A major downside to CESAs is that, unlike a 529, the assets are owned by the beneficiary. Financial experts advise against putting money in the name of your child for college purposes. Student assets weigh heavily in financial aid eligibility while parent assets count much less.
529 Pre-Paid Tuition Plans: Falling under the same section of the tax code as 529 saving plans, these state-sponsored plans allow parents to pre-purchase units of tuition at today's prices to be used tomorrow, even if tomorrow is years away. These plans offer many of the same tax advantages of 529 savings plans. A similar plan for private colleges, the Tuition Plan Consortium, launched in September.
CollegeSure CD: Offered by the College Savings Bank and FDIC-insured, this is a certificate of deposit indexed to college costs.
Retirement Funds: Withdrawals from traditional or Roth IRAs are exempt from penalties or taxes if used for qualified education expenses. You can also borrow against your IRAs or 401Ks, though the loan must be repaid in five years. If you’ve got a child heading to college within the next few years and don’t have significant college savings on hand, this is an option.
The Hope Scholarship: A $1,500 tax credit per full-time student for the first two years of college.
The Lifetime Learning Credit: Picking up where the Hope Scholarship ends, this tax credit can be used for an unlimited number of years. In 2002, this credit equaled 20 percent of expenses.
Other Tax Breaks: Up to $2,500 of interest paid on student loans is deductible. Up to $3,000 of college expenses can also be deducted, but not in the same year the Hope or Lifetime Learning credits are claimed.
MyRichUncle.com: A group of investors pays tuition in exchange for a small percentage of the graduate's future earnings his first 10 years out of college. This is not a loan. These investors are betting on the student's future earnings. But whether the student turns out to be a blue chip or a tech stock, his debt is done in 10 years.