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 can not only be part of a state tuition program, but that they can be used to invest specifically for educational purposes. Investments of this type are offered exclusively through the College Savings Bank.

CollegeSure CDs. The College Savings Bank introduced CollegeSure CDs over 20 years 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 $250,000.

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. 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 units 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 $250, and you can deposit additional amounts of $25 a month or per pay period towards the purchase of CollegeSure CDs.

CollegeSure CDs have a wide range of maturity dates and the interest on the CDs compounds annually and is credited annually. The annual percentage yield (APY) over the term of each CollegeSure CD is not less than the college inflation rate less a specific percent margin. 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 a CD matures, you will pay a penalty with the percentage varying based on when during the CD's term you decide to cash it in.

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 $250,000 per depositor, 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.

InvestorSure CDs. InvestorSure CDs are variable rate CDs indexed to the Standard and Poor's 500 Composite Index. These CDs have safety features that make them attractive investments for those who want to avoid risk. The InvestorSure CD does not risk principal and is insured by the FDIC up to $250,000 per depositor. Also, if the value of the Standard and Poor's 500 declines over the investment period, you will receive your full investment back at maturity.

There are no fees or commissions to pay if you want to invest in InvestorSure CDs. It takes a minimum of $250 to purchase an InvestorSure CD and you can make minimum deposits of $25 monthly or per pay period towards the purchase of the CDs.

The downside of InvestorSure CDs as an educational investment vehicle is similar to the the disadvantage of investing in any type of CDs--the trade-off of a safer, less risky investment for lower returns.

Fixed Rate CDs. As their name implies, Fixed Rate CDs earn a fixed rate of interest for the entire one or three-year term of the CD. The interest rate and annual percentage yield (APY) are determined at the time the CD is opened. There are no fees or commissions to pay if you want to invest in this type of CD. The minimum initial contribution to open a CD and subsequent CDs is $250, but you may contribute $25 per month through direct deposits from your bank or brokerage account or through payroll deductions towards the minimum amount needed to purchase a CD. Anyone can contribute to a child's account and the principal and interest are FDIC insured up to $250,000 per depositor.

The only real disadvantage of using Fixed Rate CDs as an educational investment vehicle is the lower returns due to the risk-free nature of the investment.

Enrollment information. If you're interested, you can get more information and/or enroll in the College Savings Bank's CD investment programs online or by calling the College Savings Bank at 1-800-888-2723. You can also check with your state's tuition program to obtain information about CDs as investments for education.