By now everyone has heard the same college savings horror story. The one about the parent who has scrimped and saved for years for college for their kids, only to see the stock market decline wipe out 40% of their college savings. And right before they needed the funds. These parents suffered bad luck with their timing, but as college gets closer parents need to take luck out of the equation. Finding a bank with a good CD rate may be a good option when college is less than two years away. Bank CDs can even be set up in a minor's name, which can have some tax benefits.
Risk vs. Return
Not many parents can save enough money for college by only earning 1% or 2% a year. Compounding savings at higher returns (especially in the early years) is critical to meeting our savings goals. There have been few 18-year periods in history where CD rates have outperformed the S&P 500 Index. But, as when a child's college years loom closer most financial experts suggest allocating a lower percentage of assets in stocks and mutual funds. This is accomplished automatically for many parents with age-based 529 plans, but parents saving for college independently will have to make the allocation change on their own. College savings should decrease in risk-based investments for at least the last five years before the first year of tuition bills hit. CDs are an easy way to decrease that risk and assure a parent the money will be available when they need it. CDs offer FDIC-insurance up to $250,000 per depositor along with their fixed rates of return. This is a great combination for a sum of money that you need on a specific date like you do with college tuition savings.
Another great aspect about certificates of deposit issued by banks is that they can be opened for specific terms. Some banks will only open a CD at regular intervals like 90 days, 180 days, and one year; but there are many other banks willing to open CDs for odd-terms like 209 days or 613 days or any term you want. The ability to pick your exact maturity date for your CD, helps make CDs a good short-term option for your kid's college funds.
Banks pay higher rates, in general, on CDs than they do on money market accounts, savings accounts, and checking accounts. Because a college savings account is not the type of for which anticipate needing liquidity, locking your funds up in a CD should work. The higher rates paid on a CD also protect your funds from declining interest rates unlike other bank accounts.
The FDIC insures bank savings accounts up to $250,000 per depositor. If you have concerns about a bank account that you find online, check FDIC.gov to verify details and information about the bank.