uPromise Helps Deliver on Promise of Higher Education
uPromise (http://www.upromise.com) is not a frequent flyer program, yet it begs to be discussed in the same breath as such programs. Why? Because like a frequent flyer program, uPromise is about loyalty, earning, and redemption. And yes, participating in uPromise could affect your mileage balance.
The uPromise Proposition
uPromise, which officially launches on April 24, refers to itself as a “college savings accelerator.” This means that its members earn rebates from participating companies in special college savings accounts. These rebates grow, tax-deferred, until withdrawn to pay for college tuition and related expenses.
There are three key components to this process:
Let’s explore each in greater depth.
After signing up with uPromise, members earn rebates for purchases at participating merchants. According to Jeff Bussgang, president and COO of uPromise, uPromise will at a minimum, partner with the leading one or two companies in each of the most popular consumer spending categories: credit card, telecommunications, automobiles, travel, gas, books, toys, computers, etc.
At press time, uPromise has the following companies signed up to participate: AT&T (offering a four percent rebate for residential charges), Citibank (rebating one percent of credit card charges), GM (rebates for car purchases), CVS pharmacy (providing a rebate of one dollar for every 25 dollars spent), Borders and Waldenbooks (rebating two percent), 7,000 restaurants (each rebating 10 percent), plus a host of e-tailers rebating between one and 12 percent.
The rebate-earning mechanism varies. In some cases (e.g., credit cards, phone bills, etc), rebates are automatically earned and posted for qualifying transactions after a link to uPromise has been established. In the case of most online transactions, the member must link through to the retailer’s site from uPromise.com to receive rebates.
A significant benefit of the uPromise program, and one that distinguishes it from most other loyalty programs, is its earning restrictions. Basically, there are none. Once an account has been established, anyone can contribute. So grandpa and grandma can have their rebates applied to granddaughter Sally’s college fund. Uncle Bob can do the same, along with friends-of-the-family Mike, Julia, Jane, and Billy-Joe. If Sally is a popular kid, with persuasive parents, she can develop an extensive network of family and friends, all motivated by varying degrees of love, guilt, and financial self-interest. And that network could generate a substantial down payment on Sally’s college education.
Investing: Rebates Grow Tax-Free
So far, we have a network of consumers, all earning rebates, which are deposited in college savings accounts.
What really differentiates uPromise from other loyalty or rebate programs is what happens to the earnings: they are automatically invested in a 529 savings plan.
So-called 529 savings plans, named after Section 529 of the Internal Revenue Code, are often likened to 401(k) plans. Once an account has been set up, contributions grow free of federal taxes until withdrawn. And when earnings are taxed, it will be according to the tax bracket of the student, which is likely to be lower than the rate of the student’s parents. In addition, depending on which state sponsors the savings plan, and which state the account holders reside in, there may be tax benefits at the state level as well.
Also like a 401(k), 529 plans typically offer a range of investment options, depending on the account holder’s risk tolerance, investment philosophy, and time until withdrawal.
uPromise members will have the option of having their 529 plans managed by Salomon Smith Barney or Fidelity Investments initially. Both offer extensive menus of 529 investment alternatives.
In addition to the rebates, uPromise members can fund their 529 plans with cash contributions, either on an ad hoc basis, or through automatic bank transfers.
Withdrawing Savings for College
When the time comes, the money can be withdrawn (again, with earnings taxed at the beneficiary’s tax rate) and used to pay for tuition and school-related expenses.
The plans are refreshingly free of fine print. Most accredited secondary schools, including trade and vocational schools, are included. And there are no onerous restrictions on what constitutes “related expenses.”
If the plan beneficiary decides not to attend college, the account can be re-designated for an alternative college aspirant. And, in a worst-case scenario, the earnings can be withdrawn prematurely or used for ineligible expenses, subject to state and federal taxes at the account owner’s tax rate, plus a 10 percent penalty for a nonqualified withdrawal.
While 529’s will be of interest primarily to parents faced with the daunting prospect of funding their children’s education, an adult could legitimately establish an account for himself, as a way of funding his own further education? for example, a mid-career MBA or technical training required to enhance or change careers.
uPromise and Your Mileage?
Parents who are also frequent travelers will want to know how participating in uPromise will affect their quest for frequent flyer miles.
There is overlap at the margins. For most frequent flyers, the principal conflict will be credit card-related: Should I earn frequent flyer miles for credit card charges; or should I earn rebates for charges through uPromise? It’s a zero-sum game, and there will be some difficult choices as consumers struggle to coordinate their priorities.
It should be noted that the airlines and hotels participating in uPromise will not be offering rebates. Rather, their participation will take the form of allowing uPromise members to redeem their miles or points for cash contributions through uPromise. So uPromise will be a redemption option in some travel programs.
The Movement Begins
If ever there were an issue that cuts across all boundaries?political, age, gender, race?it’s education. And education is as expensive as it is desirable. uPromise, by combining cash contributions from a comprehensive rebate program with the power of tax-free compounding provided by 529 savings plans, helps make the desirable affordable; and it does so painlessly.
Assuming that 529 plans manage to become a part of the national consciousness, which seems likely, we’re on the cusp of a veritable “529 movement,” as Bussgang calls it. Hurley of SavingForCollege.com estimates that there are currently 70 million school-aged children. Even if only half of those kids opt to attend college, it’s still a respectable number. And multiply the college-bound by four (assuming two parents plus two other family members or friends), and very quickly you have half the U.S. population involved with 529’s.
Closer to home, this writer has two sisters, each of whom has two children. That’s four college educations 10 or more years in the future. Knowing what I do about 529’s, I would be remiss if I didn’t strongly recommend, that they start down the 529 road immediately. And they no doubt will return the favor by insisting that I sign up with uPromise to have rebates credited toward my niece and nephews’ higher education. Which, notwithstanding my mania for frequent flyer miles, I will do. Gladly.
Let the movement begin…