New Loyalty Program Awards Diplomas, Not Trips

uPromise Helps Deliver on Promise of Higher Education.

April 24, 2001 - uPromise (http://www.upromise.com) is NOT a frequent flyer program.

And yet uPromise is a program which begs to be discussed in the same breath as frequent flyer 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 launched on April 24, refers to itself as a "college savings accelerator." What that means: uPromise members earn rebates from participating companies which grow tax-deferred in a college savings account until withdrawn to pay for college tuition and related expenses.

That rather overstuffed formulation unpacks into three distinct parts:

1. Earning
2. Investing
3. Withdrawing

Here's how each works--

1. Earn Rebates

After signing up with uPromise, members earn rebates for purchases at participating merchants. According to Jeff Bussgang, the company's president and COO, uPromise will at a minimum have onboard the leading one or two market-leading companies in all 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 4% rebate for residential charges), Citibank (rebating 1% of credit card charges), GM ($150 rebates for car purchases), CVS pharmacy (rebating $1 for every $25 spent), Borders and Waldenbooks (rebating 2%), Gateway (3% rebate for computer purchases), 7,000 restaurants (each rebating 10%), plus a host of e-tailers rebating between 1% and 12%. Plus realty and home-loan companies. And toy companies. The list goes on and on.

The rebate-earning mechanism varies. In some cases (credit cards, phone bills, e.g.), 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 the uPromise site to receive rebates.

A significant benefit of the uPromise program, and one which 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. As can friends-of-the-family Mike, Julia, Jane and Billy-Joe. If Sally is a popular kid, with persuasive parents, she could 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 downpayment on Sally's college education.

2. Rebates Grow Tax-Free

So far, we have a network of consumers, all earning rebates, which are deposited into 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-to-withdrawal.

uPromise members will have the option of having their 529 plans managed by Salomon Smith Barney or Fidelity 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.>/p>

Five-Twenty-What?

If you've never heard of a 529 plan, you're not alone. But, just as there was an awareness curve for IRA's and 401(k)'s, so too are 529's poised to come into their own.

Joseph Hurley, CEO of SavingForCollege.com (http://www.savingforcollege.com), predicts that 529 savings plan holdings will quadruple during 2001 alone, increasing from $2.5 billion at the beginning of the year to $10 billion on January 31.

That growth will be fueled by the Bush administration's emphasis on self-reliance, as well as the promotional efforts of companies like uPromise and its many corporate partners.

3. Withdraw 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% 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--a mid-career MBA, for example, or technical training required to enhance or change careers.

Plays Well with Others

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 gnashing of teeth as consumers struggle to coordinate their priorities.

The airlines and hotels participating in uPromise (limited to Starwood at presstime) will not be offering rebates, it should be noted. 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 insinuate themselves into 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 recommend, strongly, 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...