Investing for College

You can count on one thing from a college education: It’s going to be more expensive next year than the last. A Los Angeles Times article reported that public school tuition increased by 7.9 percent, while private school tuition increased by 4.5 percent in 2010. With tuition at an all-time high and showing no signs of decreasing in price any time soon, you’re going to need more than a savings account to pay for college. Low-risk investments with modest returns can help you to sock a little something aside for Junior’s college education.

First Things First

Before you begin investing for a college education, you should consider some hard truths about college. First of all, it’s not always the best investment. Liberal arts degrees are not currently in demand on the job market. For the moment, the best investment for college is in a trade or hard sciences degree. Still, even public trade colleges cost money. Further, a liberal arts degree and the learning experience that goes along with it, has a value over and above dollars and cents. Perhaps you consider the cost of exposing your child to new ideas and points of view well worth the cost — you wouldn’t be the first. Finally, consider the budget when you start saving for college. Are you looking for Ivy League savings or state college savings? Remember that there’s nothing wrong with sending your kid to a top-notch public school, or even a modest one. Whatever hopes you have for your child’s future education, you need to know what it’s going to cost.

What Not To Do

The biggest thing not to do is to just throw money in the bank because it won’t keep up with the cost of tuition inflation. The second mistake people make is tapping into their 401(k) to pay for college education. A 401(k) plan is set up specifically for investment in retirement. You can incur steep penalties from withdrawing money from your 401(k) and borrowing against it isn’t a good idea, either. So, what does that leave?

Where To Invest For College Education

A 529 investment plan is specifically designed for those seeking to save and invest for a future college education. 529s offer a number of benefits including:

-The account’s earnings are tax-free.
-If your child doesn’t want to go to college, you can roll the money over to another family member’s education.
-Anyone can put money in the account, making it a perfect baby shower gift.
-People of all income levels are eligible.
-There is typically no age limit for the money to be used by.
-If scholarships offset the cost of education, you can withdraw the money without a penalty. You do, however, have to pay taxes.

Still, 529s have one very important drawback: They offer a very low return on investment, meaning that you might be back to the same old problem of a dollar saved for education buying 75 cents of education tomorrow.

Coverdell Education Savings Accounts are another option. This is a more flexible option than a 529. You don’t have to withdraw money just for college tuition. For example, you can take money out to get your child a computer while they are in high school to benefit their studies. CESAs have many of the same tax benefits as a 529, as well. Although, the biggest problem with CESAs is that they have a $2,000 annual contribution ceiling.

Other Investment Options For College Education

While 529s are safe, the low yield might understandably put you off. Still, you want to go with a relatively safe investment. Some options include:

-Bank Certificates of Deposit: Perhaps one of the least “sexy” forms of investment, CDs are reliable and can offer a respectable yield.
-Short-Term Bond Funds: Short-term bond funds have the benefit of stable returns, as opposed to longer-term bonds. With terms of five years or less, you can reinvest the yield several times over as your child reaches college age.
-I-Bonds: Savings bonds linked to inflation are another safe bet for college investing. This type of investment offers a tax benefit: You can defer paying taxes on the yield until the bond matures. You can also redeem the bond after a year.
-Treasury Inflation-Protected Securities: Also known as TIPS, this investment offers a fixed return adjusted for inflation. From a tax point of view, TIPS are not necessarily the best investment, as the IRS treats Treasury Department inflation adjustments as income.

None of these investment opportunities are right for everyone saving money for college. However, they all provide attractive alternatives to savings accounts or even a 529.

The Best Education Money Can Buy

Help your children get the best education money can buy by investing in their future. 529s and Coverdells are safe, traditional options for college spending, but they aren’t the only ones. Your specific financial situation will dictate which plan is best for you.

Nicholas Pell is a freelance finance and business writer based out of Los Angeles, CA. He loves the thrill of a good deal and living well on a budget.