An Easy Way to Save for College

When we had our first child this year, we started to think about saving for college expenses. Neither of us had any college savings to speak of, and while our parents helped out as best they could, after two degrees (undergraduate and Masters) each we were left with quite a pile of student loan debt. We think having our child work to pay for part of her education someday teaches a valuable lesson, but at the same time we want to be prepared to lend a hand as well. After the baby was born, we switched our primary credit card to the Fidelity Investments 529 College Rewards American Express Card.

For those unfamiliar with 529 plans, basically you contribute after-tax money to the savings plan (although some states offer a state tax deduction for contributions). The growth of the plan assets is not taxable, and when you withdraw the funds, as long as they are used for qualified education expenses they are nontaxable. Essentially you receive tax-free growth on the plan assets -- which can mean a heap of tax savings especially if you begin investing when your child is still far from college. You can learn more about 529 plans at Wikipedia.

We don't carry a balance on our credit card; it is paid off every month. We do use it for all of our monthly purchases like gas and groceries though. The way the 529 College Rewards American Express works is that 1.5% of your purchases are deposited into your Fidelity 529 account. The deposits are made quarterly, as long as you have a balance of at least $50 in rewards. In order to earn $50 in rewards, it is necessary to spend $3,334 over three months.

Fidelity manages the 529 plans for a handful of states; you can see more details here. If Fidelity does not manage the plan of the state you live in, Fidelity suggests using the New Hampshire plan, but you can choose any of the plans they manage. We live in a state where we get no extra income tax deduction from investing in our state's plan, so based on the recommendation of MONEY magazine, we chose the California Scholarshare Savings Plan (I can't find a link to this year's rankings). Also important to note: you have to open a Fidelity 529 account for the rewards program to work, but you don't have to fund it with anything. Also, even if you don't have children but plan to someday, you can open the account with yourself as the beneficiary and change it at anytime. You could even use the rewards to pay for your own college!

Another benefit of signing up this credit card as soon as the baby was born was that we were able to charge most of our out-of-pocket costs related to the birth to the card, which gave us more rewards than our normal spending.

So far, we're really happy with our American Express; it is not accepted as widely as VISA or Mastercard, but it is accepted at 95% of the places we shop and we still have a Mastercard debit card just in case.

If you've had success with other rewards credit cards, please comment below so everyone can compare different options.