Ask Money

Saving for college

Chris Farrell Jul 1, 2010

Question: My husband and I are at our 50’s, have high levels of education, finally are virtually debt free (except for home), have some retirement. Our son and daughter are going to college in 4 & 6 years. We are finally in a position to save for their college. What can we do in such a short time? Yezmin, NC

Answer: You still have time to set aside some money for college. However, it isn’t long enough to take much risk with the money.

I would recommend sticking with high-quality short-term investments, such as federally insured online savings accounts and Treasury bills. One reason to stay with short-term securities is that you aren’t getting paid enough to take the risk of owning long-term bonds. For example, the yield on the 10-year Treasury note today is a measely 2.9%.

Of course, your getting essentially nothing on short-term investments. But I imagine (hope) that over the next 5 to 6 years interest rates will climb higher, reflecting a stronger economy. You’ll be able to to reinvest your money at higher rates when it happens.

You could save the money in a well-managed low-fee 529 college savings plan. Again, I would stick with very conservative investment options within the plan. The advantage of saving in a 529 is that you won’t pay any tax on interest earned or on capital gains so long as the money goes toward qualified educational expenses. Every little bit helps.

One last suggestion: It isn’t too early to start thinking about what kind of college education you’d like your children to have when the time comes. Your ideas could affect how much you try to save. Will they go to an in-state public university or to an out-of-state competitor? How about a private independent college? Do you think they would do better at a big school or a small one?

Of course, they’ll have their own ideas and say–and they should–when the time come to apply to college. But establishing some parameters always helps.

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