Can you fund a 529 college savings plan with credit card rewards?

Most have heard of credit cards offering rewards for travel, cash back and other categories. But did you know there are cards offering rewards that deposit earnings into a 529 college savings plan? It may sound like a win-win for the cardholder saving for college: You make a purchase, the credit card rewards program adds money directly into the savings account, and you can build up funds with little effort.

On closer inspection, however, these cards may not offer as comprehensive of a savings solution for college as you might like. Here’s what to know about credit cards designed for college savings, and alternatives that can help boost your contributions to a greater extent.

Should you use a rewards card to fund a 529 college savings plan?

Using a rewards card to fund a 529 college savings plan offers a simple way to save toward education expenses. But how much you can earn depends on what age your children are when you start using the credit card for rewards and how many purchases you put on the card each year.

By far, the biggest advantage these types of cards offer is an effortless way to save for college “behind the scenes.” This can offer a great help to parents experiencing the common issue of not having much money in the budget each month to put toward college savings.

Yet while a rewards credit card may make a dent in your savings for college, it likely won’t cover the increasing costs of college tuition entirely. The average cost of in-state tuition is now $9,678 a year, while out-of-state tuition has soared to $27,091, according to the Education Data Initiative. Private institutions are even more expensive, averaging $38,768 for tuition and fees per year.

Rewards cards options

Credit cards with 529 savings rewards typically reward purchases with a percentage back on your spending, deposited into an eligible 529 savings account. For example, the Fidelity® Rewards Visa Signature® Credit Card earns you 2 percent back on all purchases, and you can choose an eligible 529 savings account to deposit your rewards into.

Rewards cards for college savings typically require that you have a 529 savings plan in place to deposit into, and the reward automatically deposits into the savings account. Compare this to traditional reward credit cards, where you also earn a percentage of cash back, miles or points for each purchase, but you typically have multiple redemption options for rewards, including statement credits, gift cards and travel rewards.

Rewards cards that help you pay for college

You’ll find multiple rewards cards marketed for parents and loved ones to save toward college.

How much can you earn?

Let’s say you sign up for the Fidelity® Rewards Visa Signature® Credit Card to save toward your 1-year-old’s college tuition. If you use the card for $18,000 in everyday purchases per year, the card’s 2 percent rewards rate would earn you about $360 in annual reward.

Multiply that amount by 17 years, and you could potentially earn $5,760 in rewards simply for using a card on purchases you were already making. This total doesn’t account for any interest your 529 savings plan earns annually either.

Stronger rewards cards alternatives for college savings

If you like the thought of using a rewards card for contributing to educational expenses and are willing to put in more effort, you’ll find stronger savings alternatives with a traditional rewards card.

Many cash back rewards cards feature earning potential that’s higher than the typical 1.529 or 2 percent offered by a card designed for college savings. With these cards, you can earn the higher rates and deposit any rewards into a college savings account.

Here are three rewards cards that offer flexible redemption options, so that you can easily transfer your money into your college savings account.

• Wells Fargo Active Cash® Card. Earn an unlimited 2 percent back on all purchases, plus a $200 cash reward after $500 in purchases within the first three months of opening your card. This no-annual-fee card also comes with a 0 percent introductory APR offer on both purchases and balance transfers for the first 15 months.
• Discover it® Cash Back. Earn up to 5 percent cash back in rotating categories each quarter, with activation required, and 1 percent on all other purchases. The card’s Cashback Match™ means Discover automatically matches what you earn in your first year. You can choose numerous redemption options too, including direct deposit or a check.
• Citi Custom Cash® Card. Earn 5 percent cash back on up to $500 each billing cycle (then 1 percent) on your top spending category each billing cycle. Plus, you earn a 20,000 ThankYou Point cash back reward (worth about $200) if you spend $1,500 in purchases in the first six months. You can convert ThankYou Points to cash back and set up direct deposit.

Bottom line

Saving for college tuition costs can feel overwhelming for any parent. Using a rewards credit card that automatically deposits rewards into a college-saving fund can make it a tad bit easier. While any amount set aside for college is worthwhile, the amount you earn can only provide a supplement and not a substantial contribution. To save even more money, look for a top cash back rewards card that earns stronger rewards, and then devote the rewards to your savings account on your own.

Issuer-required disclosure statement
Information about the Fidelity® Rewards Visa Signature® Credit Card, Upromise Mastercard, CollegeCounts 529 Rewards Visa® Card, Fisher-Price College Savings Mastercard, Bank of America® Customized Cash Rewards Credit Card for Students, Wells Fargo Active Cash® Card, Discover it® Cash Back, Citi Custom Cash® Card has been collected independently by Bankrate. Card details have not been reviewed or approved by the card issuer.