Do you need to use credit card rewards to fund a 529 college savings account?

For parents worried about the impending cost of tuition, some credit cards offer a partial solution: rewards that are deposited directly into a 529 savings account.

You spend on everyday purchases as you normally would, but instead of racking up your rewards each month, you automatically direct them to your child's college fund.

While this may be a convenient and fluid way to accumulate savings without much thought – and it's certainly better than not saving for college – most families are unlikely to accumulate enough money. income with credit card rewards to finance their education.

Here's what you need to know about using credit card rewards to fund a 529 savings account:

" MORE: See more university savings strategies

Credit cards offering education savings benefits

If this feature looks attractive, here are some maps to consider:

• The Upromise Mastercard card generates a cash back of 1.25% on every purchase, plus a 15% bonus on this discount when you link your account to an eligible 529 college savings plan. In addition, cardholders have the option of rounding their purchases to the nearest dollar for an additional refund.
• The Visa® Signature Rewards® loyalty card earns 2 points per dollar spent and cardholders have the option to convert these points into cash back points when they are deposited into a Fidelity account, including a 529 account. This translates into a 2% cash back on purchases directly into college savings.
• The CollegeCounts Visa 529 Rewards card earns 1.529% on expenses, which are then paid directly into a 529 college savings account. (This card is associated with the Alabama 529 Fund.) It has no obligation of residence, but taxpayers of Alabama are entitled to a tax deduction.)

Such products reflect the efforts of card issuers to stand out by offering specific benefits to a subset of consumers.

People want benefits that are more applicable to their lives. For people saving for college, [these kinds of credit card rewards] could be a differentiating advantage.

Mike Berinato, Vice President of Research and Consulting for Market Strategies International

"People want benefits that are better for their lives," said Mike Berinato, vice president of research and advisory for Market Strategies International, a financial services consulting and research firm, and 529 savings in response to this. request. "For people who save at college, it could be a differentiating advantage," he adds.

" MORE: 529 rules of the plan

How much money will you accumulate?

Let's say your credit card earns 2% on all purchases. If you spend $ 10,000 a year with the card, that's $ 200 a year. If you start with $ 200 a year at the birth of your child and add $ 200 more each year while earning 6% interest annuallyAt the age of 18, you will save over $ 7,000.

This could be a significant part of a year's tuition at a public university. College Board TongsThe average price of tuition and published fees, just over $ 10,000 a year, is published for full-time students at four-year public public universities.

The best candidate for the 529 reward card is … someone who has already made significant contributions and has significant funds on a 529 account. It's a way to top it off.

Ron Shevlin, director of research at Cornerstone Advisors

But if your child is considering going to a more expensive public or private school, credit card rewards should be just one way to save for that, says Paul Curley, Director of Savings Research in the United States. Colleges of Strategic Insight, a management consulting firm.

For example, if you have already implemented and contributed to an existing 529 plan, credit card rewards can be an attractive addition to this fund. Curley does it for his own family, which includes 6 and 3 year olds. "It accelerates the overall savings," he says.

And if you do not have an education savings account, otherwise, Curley says that choosing a card offering this type of reward can at least help you get started.

"One of the biggest obstacles to saving is creating a dedicated account. Then, once you have it, you must maintain momentum, "he says.

" MORE: 529 plan vs. Roth IRA

More lucrative card alternatives (for a little more work)

For parents wanting to take some extra steps to put money into their 529 accounts, there are other options.

"There are clearly more valuable cards, such as cash back," says John Grund, general manager of payment practices at Accenture, a company that provides banking and payment services consulting services.

There are cards with higher rates, but for these earnings to be deposited into an education savings account, parents must make the transfer themselves.

Examples abound: the Discover it® Cash Back card and the Chase Freedom® both offer 5% cash back on rotating categories that you activate up to $ 1,500 per quarter (1% on everything else) ). The Bank of America® Cash Rewards credit card offers a 3% discount on gasoline or any of the other five popular categories, 2% in grocery stores and wholesale clubs (up to 10%). to $ 2,500 by combining the elective category / grocery store / quarterly wholesale club) and 1% on all other purchases.

These are clearly higher rates, but for these earnings to be paid into an education savings account, parents must make the transfer themselves. The real value of the 529 reward cards may be that the money is automatically paid into your education savings account. "It can be simple and easy," says Grund, and is a useful addition to existing economies.

Is a card with education savings benefits right for me?

This may be the case, as it is not your only source of funding for your child's tuition.

There is certainly a segment of consumers who find it valuable because it is a way of forcing them to save for college education for their children or grandchildren.

Ron Shevlin, director of research at Cornerstone Advisors

"The best candidate for the 529 reward card is not someone who only finances his account with credit card rewards," says Ron Shevlin, director of research at Cornerstone Advisors, a consulting firm. banking advice. "It's someone who has already made significant contributions and has significant funds on a 529 account. It's a way to top it off. "

Alternatively, if you have not yet created college funds and need a boost, these cards could be a relatively easy way to get started.

"There certainly is a segment of consumers who find it valuable because it's a way to force them to save for their children's or grandchildren's university education," says Shevlin.