Spending Your Kids into College
Saving money to send their children to college is a big worry for most American families. And for good reason. While the tab for four years of college has ballooned to $50,000, on average, for public universities--and $110,000 for private ones--half of the nation's parents say they have salted away $1,000 or less. With college costs outpacing inflation, within a few years, "40% of the kids who want to go to college won't be able to, simply because of lack of money," warns former New Jersey Governor Thomas H. Kean, now president of Drew University.
Now a new company wants to help parents save more. On Apr. 24, Upromise Inc., a Brookline (Mass.) startup, will launch an ambitious nationwide scheme that's a twist on the ubiquitous airline frequent-flier program. In this case, parents who buy from Upromise's network of companies--from General Motors Corp. to local restaurants--will get rebates ranging from less than 1% to 10% of their purchases. The money will be deposited directly into a tax-deferred college savings account set up for the buyer's child. What's more, anyone can sign up for a child's account, so parents can recruit grandparents or friends to help turn their purchases into contributions. Parents will be able to track the account on Upromise's Web site.
The company, which is privately held, will profit by collecting administrative fees from participating companies on each transaction. Upromise will also receive payments from the financial firms that will manage the savings accounts, including Fidelity and Salomon Smith Barney. "It's the most innovative idea I've ever seen," says former Senator Bill Bradley (D-N.J.) who has joined Upromise's board, along with Kean, Harvard University Business School Dean Kim Clark, and David Rockefeller Jr.
What gives Upromise instant credibility is its blue-chip roster of participants. In addition to GM, the company has signed up AT&T, CVS, and Citibank, plus more than a dozen others to be unveiled on launch day. They have been joined by many smaller companies, from Brooks Brothers and landsend.com to some 7,000 restaurants. The idea has also captivated Wall Street: At a time when venture capital has slowed to a trickle, Upromise has raised $90 million from venture firms. "It's a unique idea that will attract many millions of customers," says Bill Ford, general partner at investor General Atlantic Partners, which helped fund E-trade and Priceline.com. and was a lead investor in Upromise.
JUST PEANUTS? It's no sure thing, of course. Parents may become disillusioned if the promise doesn't live up to the hype. A family earning $60,000 a year--the median income for households with children--would accumulate just $6,000 over 15 years by spending with participating merchants, according to Upromise's calculations. The company argues that savings could reach $24,000--but only if the family also bought a house through real estate agents affiliated with Upromise and got family members to chip in.
In addition, parents may get more bang for their buck from frequent-flier programs. Most of Upromise's rebates are less than the 5% to 9% fliers receive when they use an airline frequent-flier credit card. As a result, "I don't think it will be an overwhelming success," warns Randy Petersen, editor of InsideFlyer magazine, which tracks the frequent-flier industry.
Still, if it works, Upromise could become the biggest innovation in loyalty marketing since American Airlines Inc. invented frequent-flier miles in 1981. Upromise is trying to make a profit out of what amounts to a grand social experiment. Its purchase plan is intended to lure parents into doing what economists have been recommending for years--saving more. Paying with an air-miles credit card may add up to a better deal, but Upromise wants to win parents over to the idea that a little less short-term gratification is worth swapping for their child's education.
Upromise is the brainchild of Michael Bronner, a whiz-kid who built a company called Digitas into a leader in loyalty marketing by coming up with innovative programs for clients such as AT&T. In 1999, after selling most of his stake to private investors for more than $100 million, Bronner, now 42, began looking for a way to help kids pay for college. The issue had been an obsession ever since he was forced to drop out of Boston University when his money dried up. After coming up with the Upromise concept, Bronner used his gold-plated Rolodex to take it directly to Citigroup Chairman Sanford I Weill, AT&T Chairman C. Michael Armstrong, and GM Vice-Chairman Harry Pearce, among others.
"MIRACLE." Bronner persuaded them that Upromise could promote a socially worthy cause while building customer loyalty. For example, once customers see 4% of their AT&T long-distance spending going into their college accounts, "they won't change their carrier just to save a few pennies," enthuses Howard McNally, co-president of AT&T Consumer, which will be the only long-distance carrier to offer Upromise. If parents can stay hooked for 10 or 15 years, until their kids graduate from college, adds Richard G. Barlow, CEO of Frequency Marketing Inc., a consulting firm, "it will be a marketing miracle."
The key target for Upromise will be the 37 million families with children under 18. Lance and Kelly Walker of Potomac Falls, Va., have a 1-year-old daughter named Anna. Lance, 26, earns $65,000 as a business analyst, while Kelly stays home with Anna. Because there's not much discretionary income left after they pay the bills, the couple leapt at the chance to try out a pilot program Upromise started last winter. "This is a pretty slick way to start saving for college," says Lance, who says they plan to switch to AT&T and to a Citibank credit card. Citi will pay a 1% rebate on everything the Walker's charge, in addition to any rebates from participating companies.
Of course, making college affordable to average Americans will require greater efforts to restrain the growth in college costs, as well as more scholarship money, argues Kean. Still, in a country in which the average family with children has just $12,900 in financial assets, Upromise just might help make saving look as easy as spending.
By William C. Symonds in Boston