Finances can be confusing and stressful, especially for new parents. College tuition is an important investment in your child’s future, but a lot of families don’t know where to start. Standard savings accounts typically provide low rates of return; stocks are risky and returns variable. So might a CD for college savings be right for
A Certificate of Deposit (CD) is like a savings account except it has a fixed maturity date. This means funds can’t be withdrawn before the maturity date without a substantial penalty. Due to this restriction, banks offer higher interest rates on CDs, allowing for greater earnings and faster growth of the investment. A five-year CD can grow twice as much as the same amount in a savings account.
CDs are called share certificates at credit unions, but the concept is identical. Banks and credit unions will reward you for giving up the ability to use your CD until the maturity date. What’s more, the interest rate for a CD is guaranteed to remain constant through the maturity date, while that for a savings account is variable.
Although CDs won’t offer the same potential return upside as an investment in the stock market, they’re much less risky. Stock investments are subject to substantial market and other risks, whereas CDs aren’t. Like a standard savings account, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) (or the National Credit Union Administration for credit unions) up to $250,000 per depositor per FDIC-insured bank. They’re as secure as a regular savings account, and unless withdrawn too early, CDs sit in the bank quietly increasing in value.
“The unique attributes of CDs make them an excellent option for families saving for college,” Marie Snyder, CPA, tells Parentology. They have higher interest potential but are just as secure as a savings account and substantially less risky than a stock market investment.
Further, maturity dates can be set for either short or long-term to provide flexibility. The maturity date can be set for a shorter term to provide for greater financial flexibility in the interim or set to coincide with when your child starts college so the funds are available when needed.
If selecting a longer maturity, Snyder says, “It’s critical to review personal finances and existing emergency funds beforehand to ensure that the CDs will not have to be liquidated early, which will result in a penalty, to cover emergency expenses.”
Most CDs run for one to five years, but you can set yours for 10, or perhaps even longer. Capital One recommends long-term CDs in particular for a child’s college expenses. But some short-term CDs, for three months to a year, can have higher interest rates, too — Speak with your family, bank