College CDs

Most people are familiar with bank certificates of deposit (CDs), as a general savings vehicle. What many people don't know is that CDs are part of a program that can be used to invest specifically for educational purposes. The College Savings Bank introduced CollegeSure CDs more than a decade ago. How are these CDs different from other bank CDs? The main difference is that the interest rate on these CDs is tied to the average cost of 500 private colleges that make up the College Board's Independent College 500 Index. The interest rate is guaranteed to be at least equal to the average increase of the cost of attending these colleges. Let's walk through exactly how these CDs work.

The basic premise behind CollegeSure CDs is that you buy CDs in the amount you would need to pay for college in the present. These CDs then earn interest that eventually results in enabling you to pay the amount required for college when the CDs mature. You buy CollegeSure CDs in units or parts of units. Those units translate to a year's average cost of college tuition, fees, and room and board when they mature. Remember, this holds true no matter what the actual cost of the college at the time the CD matures. There are no fees or commissions to pay if you want to invest in CollegeSure CDs. Also, your investment is FDIC insured up to $100,000.

How do you figure out the cost of the units you need to buy to finance your child's college education? Once again, you can't start too early because the farther away your child's start date for college, the farther away the dates of maturity for the CollegeSure CDs, and therefore the magic of compounding interest lowers the cost of the units you are buying now. The other piece of the equation you need to consider is that the price of the units you will need to purchase depends very much on the school at which you want to use the CD proceeds, since obviously some schools are a lot more expensive than others. You can check the cost of the units for various institutions by going to the College Savings Bank web site. If you know which school your child will attend (or you hope they will attend!), the College Savings Bank will even figure out the cost of the units you'll need to purchase to reach your goal.

Depending on the cost of the unit you will be required to buy, you may have to or want to buy each unit in parts. The minimum amount you can buy a CollegeSure CD for is $500, but you make additional CD purchases of at least $250 whenever you want to. It's also possible to have a minimum of $100 a month or $250 every quarter automatically transferred from your bank account to purchase CollegeSure CDs. Another option is having a minimum of $100 a month automatically deducted from your paycheck to go toward buying CDs.

CollegeSure CDs mature on July 31 and range in maturity periods from 1 to 25 years. The interest on the CDs compounds annually and is credited annually on July 31. The annual percentage yield (APY) over the term of each CollegeSure CD is not less than the college inflation rate less a 3 percent margin. The APY of each CollegeSure CD will not be less than 2 percent. What happens if you don't use these CDs to pay for college for whatever reason? You'll be happy to hear that you will get your entire investment anyway, principal as well as all the interest earned, at the dates of maturity. However, if you decide you want your money early and you don't wait until the CDs mature, the news isn't so good. In that case, you will pay a penalty of 10 percent of the principal during the first three years of a CD's term, which drops to 5 percent for the any remaining years, except for the last year of the CD's term, which carries a 1 percent penalty.

Still undecided if this is the right education investment vehicle for you? Like any investment, CollegeSure CDs have their good and bad points. On the plus side, there is no limit on the amount of CollegeSure CDs you can purchase, and the CDs are federally insured for up to $100,000, making them a safe, low risk investment. Another great feature is that, if your child becomes Joe or Jane Rock Star and doesn't go to college, or you don't use your CollegeSure CD investments to pay for college, you still get your principal and interest back, just as it works with other CDs. What's the downside of CollegeSure CDs? Well, their rate of return isn't exactly something to write home about. The cost of an education is high and there are investment vehicles that you can use, particularly when you're investing for educational purposes and have a good number of years to watch your investment grow, that are not high risk and allow a reasonable chance of amassing enough to finance a college education.

If you're interested, you can enroll in the CollegeSure CD investment program by going to the College Savings Bank web site or calling 1-800-888-2723.