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Ask Dr. Don

Affinity programs for college savings plans

Dear Dr. Don,
What do you think about the Upromise college saving plan? Is it trustworthy? I have four children to put through school in a few years, and I'd like your opinion about this program.
Quinta Quest

Dear Quinta,
Several affinity programs have sprung up to help parents find everyday ways to put money in their Section 529 college savings plans. Upromise is one such plan, BabyMint is another. Upromise is the larger of the two; both are reputable.

Registering your credit cards, using affiliated merchants or both earns you points that translate into contributions to a college savings plan account. The money can later be withdrawn tax-free from a Section 529 account when used for qualified education expenses. You can also get friends and relatives to set up accounts that can be used to finance your children's college expenses.

In addition to these plans, several individual credit card companies and financial institutions have set up similar plans: Buy a quart of milk with your credit card, and a few pennies go into your 529 account. MBNA, Visa and Fidelity are among the institutions that are involved in such offers for some 529 plans.

My concern isn't that the firms aren't trustworthy, since the money is being put into your college savings plan account; it's that consumers stop making good purchase decisions because they get caught up in the idea that they're earning points for the children's college fund.

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We've all heard stories about how people have altered their behavior or travel plans to earn frequent flier miles. Affinity programs try to build loyalty and influence behavior to increase business for the firms affiliated with the program. There's nothing wrong with that, as long as you understand and manage the process. But if you end up spending an extra 10 percent on a purchase to earn 4 percent in points, you've lost money by making that decision.

You're also making a lot of your transaction information available to the company, and need to be aware of how that information might be used. That means you really need to read the privacy policy, agree to its provisions and be aware of any changes to that policy over time.

Spending to accumulate college savings is a much longer path to reach your financial goal than to just establishing a college savings program. Spending $40 on a dinner out may put $2 in a college savings account, but spending $8 on dinner at home allows you to invest the $32 difference.

Think of these programs as the frosting, not the cake, in funding your children's college expenses. I joined one of these plans in October and have a whopping $10.86 in the account. I'll admit that I haven't been very aggressive about finding new ways to earn points.

My only child will be college age in seven years. The college textbook for the course I taught last semester cost my students $105. This shouldn't be your only plan for funding the children's education.

Another concern is that in the current (2001) tax year you couldn't contribute to both an Education IRA, now named the Coverdell Education Savings Account (CESA), and a Section 529 college savings plan for the same beneficiary.

That won't be a problem after 2001, but some people were bound to be disappointed with the limitation this year.

Contributions to both types of plans will result in the contributions to the CESA being considered excess contributions and subject to penalty. See for more information on this limitation.

-- Updated: Oct. 18, 2006

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See Also
Prepaid college plans
Putting money away for baby's future

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