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Save for college with CDs or savings bonds?

By Sheyna Steiner · Bankrate.com
Friday, July 23, 2010
Posted: 9 am ET

My grandparents bought me savings bonds when I was born. I spent the money the second it was in my grubby little mitts, which was around 16, if I recall correctly. Since then I've struggled with my innate tendency to burn through money like water with varying degrees of success.

Rather than giving me the money, it might have been wiser to save the bonds for college tuition. As this Bankrate story explains, interest produced by savings bonds, the I bond specifically, can be exempt from federal taxes if it is used to pay tuition or other qualified education expenses the year the bonds are redeemed.

These days parents do have other options for a safe, tax-advantaged college savings account, the 529 plan. And as Christina Couch details in this Bankrate story, Congress recently passed legislation that will allow 529 plans in all states to include CDs in their investment options.

According to the article, state 529 plans lost between 20 percent and 50 percent over the past two years which would definitely make anyone with a looming tuition bill antsy for safe and steady returns.

CDs do have some drawbacks in 529 plans, most notably, early withdrawal penalties.

For people with children, will you be investing in CDs for their college savings?

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3 Comments
JZ
August 02, 2010 at 12:16 pm

I think everyone should be warned about college "investing". Some college plans can be misleading, or even be outright fraud.

Lisa
July 27, 2010 at 4:22 pm

When my daughter's father died (we were not married) nearly 12 years ago, he left a couple vehicles that passed to her. I then invested the funds from selling those pickup trucks, about $17,000, into conservative mutual funds with Merrill Lynch. In less than two years almost $7000 was lost! I pulled that money and put it in a long term, high interest rate CD with State Farm Bank. I let the CD renew only adjusting the term as rates fell these past two years. My daughter went on a trip to Europe last summer and was able to use part of the interest she earned in that CD to finance her trip, without penalty of withdraw and maintaining the original deposit amount plus a little of the interest. A savings account would not have provided the amount of interest she earned on the money. A 529 still risked losing money, no matter how conservative you invest. A CD may earn a decent interest rate in some years and a minimal amount in others, but never is the money "lost". The money in the CD is hers to use as she decides. It looks like some of it will be used for a car when she turns 17 later this year and for school after next year. I also had purchased savings bonds for her before she turned 5 years old. That money also has not earned a lot in some years, but did alright in other years - again with nothing lost. I can't afford a private college education for her, but she will be fine taking community college courses before transfering to a state college. If I had kept the money in that Merrill Lynch account it would have been long gone! CDs and savings bonds are the safe choices for me!

Shantique
July 23, 2010 at 12:12 pm

I have 2 small children (both under 3) and I would not invest in CD's for their college education! Short term interest rates are dismal and long term rates lock you in at not such great rates, when the only place rates can go are up! Then of course, the dismal interest is taxable! 529's for me. My kids are in age based portfolios that have fluctuated, but over time I suspect will do better than a CD saver!

Now, of course if my kids were 15 I would rethink this because they don't have time to recover from big hits. 529's can also carry hefty fees, if you are not careful!

My little ones have been given savings bonds by their old school grandparents, and that is fine. I just won't be putting them in their hands! Those will be used to pay for school as well!