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parents: bonds for education

Some Perspectives for Parents Saving Money for College

by Jan M.

College savings programs are a necessity for parents to help cope with the escalating college costs.  However, there are so many savings options for families to consider, it seems like an overwhelming task to select the best savings program for your family.  An important thing to consider is to start saving early.  A college saving program that is started early in a child’s life allows money to accumulate in your child’s college savings fund. MSN Money’s Savings Calculator is a great tool to help parents understand the impact of time and taxes on accumulated savings.  

Need a simple option to get started?   
 
Use Celebrations to Jump-Start a College Savings Fund for Your Child 

Allocate baby gifts and birthday cash while your child is small to their savings fund. Want to celebrate your anniversary or a job promotion put a little money into their savings fund.  Instead of purchasing that extra toy or CD, consider locking in savings for your student by investing in a tax-free¹, time-based deposit such as US “EE” or “I”  Savings Bonds. Ask family members to join in the celebration and contribute to the fund. Bonds can be purchased in $25 increments.  

Every year my kids knew they could count on their grandparents sending a savings bond at Christmas and on their birthday. We carefully tucked away the bonds in a safety deposit box to be saved for future college funding needs. The bonds grew to maturity and sometimes beyond without any further attention. These little gems turned into valued cash at college.  

Unfortunately tracking investment growth or cashing in the bonds at maturity was an issue, because they were in the safety deposit box with limited access.  It would have been fun and educational to be watching the bonds grow over time. If you have paper-based US Savings Bonds and know their maturity date, use the new online calculator to determine the current value. However, a new web service called Treasury Direct has eliminated several downsides to savings bonds gifts.  This service is an online web-based account management system. The program formally keeps track of the savings bonds in the account without requiring the paper bond anymore, your student can watch the investment grow and money can be easily deposited into a bank account at the appropriate time.  After you have set-up a Treasury Direct account, consider converting your paper-based savings bonds to simplify your recordkeeping. 

US EE Savings bonds are a safe investment and can be held for up to 30 years. The bonds need to be held for at least 5 years to avoid an early withdrawal penalty. These bonds are US government backed, so they are very low risk.  The interest rate is based on market yields from treasury securities. US EE Savings Bond interest rates are updated every six months in May and November.

Another government-backed investment for tax-free college savings tool are US I Bonds.  I Bonds are sold at face value and earn a guaranteed rate of return. Interest is paid at maturity, but accrues monthly, so your savings growth is reflected on your statement.  These bonds can be held up to 30 years, but it is important to hold I bonds at least 5 years or you will forfeit 3 months interest as an early withdrawal penalty.

Be sure to compare the rates and differences for EE and I bonds. I bonds rates are currently higher; they are tied to CIP which provides protection against inflation.  EE bonds rates are based on market securities.

Both types of savings bonds can grow tax-free if the funds are to be used for qualified college expenses in the year the bond is cashed.  It is very important to make sure you meet all the eligibility requirements before you purchase the bonds.  For example: “ When using bonds for your child's education, the bonds must be registered in your name and/or your spouse's name. Your child can be listed as a beneficiary on the bond, but not as a co-owner.” There are also income restrictions.  

Start Your Student’s College Saving Fund Today! 

Be sure to discuss your unique situation with your accountant or registered financial advisor before making this or any other investment. The purpose of this article is to provide information, you are responsible for your investment choices. 

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