Education Bonds and CDs
For the past ten years or so, anxious parents have had the option to invest in safe, guaranteed college investment vehicles — specifically education bonds and college CDs — and they've largely passed them by. After all, when the stock market was going higher every day, it was easy to ignore options that simply plodded along without bringing back super high returns. Now that the markets have seen big dips and the credit crunch has hit home, safe (but boring) investments suddenly have a lot more appeal.
They should, and not just because other investments have lost their allure. These college savings vehicles deserve a place in your college savings portfolio in every market. They serve as a safety net for your college savings, and they do provide returns — not exciting returns, but guaranteed steady returns. What you see is what you get.
Education Bonds
The U.S. Treasury wants your children to go to college, and to help you along they created an Education Bond Program, which is very similar to their plain old savings bond program. It's not just the name that sets these bonds apart, though; it's their tax treatment.
When you specifically buy an education savings bond (Series EE or Series I, as long as they were issued after 1989), your interest earnings will be at least partially (but usually completely) exempt from federal income tax. To be eligible for that favored tax treatment, which effectively ramps up your earnings, you have to jump through a few hoops.
You have to pay for qualified education expenses with all of the bond proceeds (principal and interest) in the same year that you redeem the bonds.
You have to be at least twenty-four years old when you buy the bond.
You have to register the securities in your name if you plan to use them for yourself.
You have to register them in your name or your spouse's name if you plan to use them for your children.
If you're married, you have to file a joint tax return to get the tax break.
You cannot list your child as a co-owner of the bond, only as a beneficiary.
On top of all that, the tax benefit is subject to income caps — if you make too much money, no tax-free interest. Your income is evaluated in the year you redeem the bonds, not the year you purchase them. For 2008, the tax break disappears for single taxpayers earning at least $82,100 and joint taxpayers earning at least $130,650. Only single taxpayers earning less than $67,100 and joint taxpayers earning less than $100,650 qualify for the full benefit. These income thresholds are adjusted every year, so the levels by the time you pay for college expenses will likely look substantially different.
College Certificates of Deposit
You already know about regular bank certificates of deposit, (CDs), but what you might not know is that there are special CDs whose sole purpose is education investing. More than ten years ago, the College Savings Bank created and introduced these targeted accounts called CollegeSure CDs. In some ways, they work just like regular CDs: For example, you deposit a lump of money for a specific long term and you can't take that money out early without paying a penalty. However, CollegeSure CDs have something you won't find in plain old bank CDs — a college-oriented interest rate.
Unlike other types of college investments, CollegeSure CDs are guaranteed in two ways. First, these CDs are covered by FDIC insurance, so your money won't disappear. Second, your rate of return is guaranteed, so you don't have to worry that your returns will decline or disappear.
Interest on CollegeSure CDs is based on the Independent College 500 Index (created by the College Board). The index, as its name implies, tracks the average cost of 500 private schools. And the CollegeSure interest rate equals the average cost increase in those colleges. In fact, the rate is guaranteed to be no lower than that average, but it can be higher.
Here's how college CDs work as a college-savings vehicle. The big lump you deposit is the amount you would need to pay to send your kid to college now. Each “unit” (these CDs are measured in units) equals one year of all-inclusive college costs. Of course, you don't have to deposit the full amount all in one shot — you can buy pieces of units. The minimum deposit to open a unit is $500, and you can add to it in increments of $250 or more ($100 increments if you use an automatic monthly savings plan). Then, thanks to the index-based interest rate, that deposit will grow at the same rate as college costs.
