College is expensive – everybody knows that nowadays. In 1986, the average price of a college education at a public university was $10,000 – about $20,000, adjusted for today’s inflation. However, the average cost of a college education has skyrocketed to nearly $60,000 – nearly 2.5x the rate of inflation.
While there are a multitude of reasons behind this, the bottom line is simple – it’s costing people more money than ever to go to college, and it’s becoming more and more difficult to finance doing so.
The most popular method, of course, is with student loans – and the average amount owed by students graduating has risen to an astounding $37,172 in 2016.
The staggering amount of debt owed by graduating students has prompted outrage among many, and most students are having difficulty paying back their debts. More than 40 percent of all borrowers are postponing payments, and nearly 12% of all students are in loan default.
Clearly, the educational system is in need of some reform – but until then, there are plenty of companies who are innovating, and finding new ways to address the issue of student debt.
One example of this is the rising prevalence of a unique type of new gift card – the “college gift card”. The first such gift card was the Gift of College gift card, first available for purchase at retailers Toys R Us and Babies R Us.
The idea behind such a gift card is simple – rather than give a young person a gift card that will be gone within days of purchase, a lasting contribution can be made toward furthering their education, through a purchase that goes directly to a 529 college savings plan.
What Is A College Gift Card?
The concept of a college gift card is very new – the Gift of College gift card only came onto the market in late 2016, first becoming available on Nov. 7.
The idea behind the card is simple – making it easier for friends, family, and loved ones to give the gift of higher education by providing the recipient with an easy-to-use gift card that can have a lasting impact on a younger child who is interested in a college education.
It has long been traditional for some people to give children, money for college – many of us, perhaps, have memories of opening envelopes with checks marked “for college expenses” during holidays or birthdays. However, it has never been easy to do so – and these new cards make it much more simple.
Simplicity is the primary benefit of a college gift card. Perhaps it would be awkward to send a check for college expenses to someone you don’t know very well, or to bring cash for “college expenses” to a baby shower or a young child’s birthday party.
College gift cards could alleviate this awkwardness, and allow the giving of money towards higher education to become accepted – or even commonplace. Just buy a card, send it to your recipient, and their parents can use it to pay directly into a tax-advantaged 529 college savings plan.
For students who have already begun their college career, a college gift card such as the Gift of College card can be used to pay down student loans, reducing their lifetime debt burden significantly.
Let’s take a deeper look at the two basic ways that this gift card can be used now.
529 Savings Plan Contribution
529 college savings plans are tax-advantaged plans that are specifically designed for saving for higher education. These plans allow money to be saved for higher education, and are exempted from federal taxes, as well as most state taxes. Some states also offer income tax deductions or matching grants for eligible 529 plans.
These plans allow for the easy investment of funds that can be used for future college expenses – tuition, room and board, textbooks, and other essentials. It’s important to note, however, that withdrawals used on ineligible purchases will be subject to taxes and penalties.
In the past, these savings plans were not easy to donate to – most parents, grandparents, or relatives interested in giving the gift of a higher education simply had to write checks, give cash, or buy government-issued savings bonds – none of which are very satisfying gift giving experiences.
College gift cards have sprung up to fill this gap. By providing consumers with an easily-recognizable form of payment that can be purchased either online or in person, it has become easier than ever to give the gift of an education.
The preponderance of college gift cards could have another important contribution – raising awareness of the 529 plan. Despite the fact that every single US state has a 529 plan, most parents remain unaware of these plans – nearly 72%, according to a study conducted by Edward Jones.
This means that a huge majority of Americans are totally unaware of the advantages that can be gained by starting a 529 account for their children when they’re young, and paying into it as they grow. If college gift cards become more commonplace, awareness will certainly rise – and parents will be able to use these vital financial instruments to ensure a better future for their children, and be more able to deal with the rising costs of higher education.
Paying Down College Debt
According to Gift of College, approximately 22% of all purchased gift cards are being used to pay down existing student debt. While this, perhaps, doesn’t offer the same impact that a tax-free 529 account would have, it means that there is certainly a market for gift cards that allow college students to reduce their debt load, and presents some interesting possibilities for the future.
It’s important to note that Gift of College has not yet partnered with all student loan providers in the US – so it would be wise to check the list of student loan providers that accept payment through their gift cards before purchasing a gift card that’s intended for a student who would use it to reduce their debt burden.
However, the list of student loan providers that accept payments through this gift card is constantly growing – and according to the company, they have not yet been turned down for a partnership with any student loan provider.
Clearly, student loan providers are also in favor of this new product. It offers a new, unique way in which debt burdens can be reduced, and if the popularity of college gift cards continues to grow, it’s entirely possible that these unique gift cards could become a major contributor towards relieving the debt burden of today’s students.
Imagine it – instead of a new video game console or some other unnecessary item, a loved one can help a student reduce their debt burden – potentially saving them hundreds or thousands of dollars in interest over the timeline of their debt repayment.
That’s a win-win – loan providers get paid more quickly, and students with heavy debt burdens are able to more quickly pay down the principal of their loan, reducing the amount they will have to pay over their lifetimes.
Though paying down college debt may not have the same financial impact as early and regular contributions to a 529 college savings plan, the fact that so many loan providers and consumers are interested in these unique gift cards is certainly a positive sign for the future, even for students who are already in debt.
Given time, these sorts of gifts could become commonplace for college students – at graduations and other celebrations, as well as for birthdays and other important life events.
The Pros And Cons Of College Gift Cards
College gift cards are still quite a new market, so it’s a good idea for us to give you a detailed look at the pros and cons of these innovative cards – in case you’re in the market for one, or interested in learning more about them.
PROS
- Makes giving the gift of an education easy – Of course, it’s possible to donate directly to a 529 plan, or simply give the parent of a child, a check or cash. But a college gift card offers a much simpler way to do so, and the gift card form factor may help it feel more personalized and unique.
- Simpler to use – Contributing to a 529 plan online can be extremely complicated, and if you try to contribute to a 529 plan by check, you’ll often need information like 529 account numbers – which can ruin the surprise of giving your gift.
- Can be used both to pay for current debt, or to pay into a 529 plan – 529 gifts couldn’t be used to pay for student debt – but college gift cards allow for the payment of most major student loan providers, which can allow students who are already in debt to reduce their payments.
- More personal than giving cash or a check – Cash and checks can be good gifts, but they sometimes feel impersonal. A college gift card proves that you’ve put some serious thought into your gift, whether it’s being used to pay down debt or pay into a 529 plan.
- College gift cards can’t be misused – when you give the gift of a college gift card, you don’t have to worry about students or parents spending cash or checks on something other than educational expenses – these cards can only be used to pay into 529 plans or to pay down student loans, so you know that your gift is going to its intended purpose.
CONS
- More expensive than a direct contribution – Naturally, it’s not free for college gift card companies to create their cards and partner with 529 plans, brokers, and student loan providers. These cards will generally cost a flat fee of around $5 to be purchased. And while that’s not exactly a staggering sum, it is more expensive than a direct contribution to a 529 fund – though the ease-of-use of a gift card would certainly make it worth the price of entry to most.
- Doesn’t have a huge direct effect on student debt – You can give a college gift card to a student who already has debt, but it won’t have as much of an effect on their debt burden, as compared to a 529 plan contribution. Of course, there isn’t a student out there who would turn their nose up at a college gift card that helped them pay their debts – but it may be worth prioritizing these gifts for younger children who can reap the full benefits of a robust 529 plan contribution.
- Not yet commonplace – some recipients may be confused – The first college gift cards only began hitting the market in late 2016, so if you give one to a loved one, they may not really realize what it is – and could misplace it, or fail to redeem it. This can be avoided by explaining what the card is and what it’s for – but it’s still important to note.
So, with these pros and cons taken into account, you’ll be able to more easily choose whether or not to try out one of these interesting new gift cards – or to give more traditional gifts. It’s up to you, but we’re certainly excited to see how this market segment continues to grow in the future.
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