College Financing Questions

Answer By Roger Sorensen, Investing Page

QuestionMy children are six, three and almost one. I am financially stable and have some money available each month to set aside for my children’s college tuition. Should I put it in EE bonds, the I-Bond or would the stock market be better?

Answer: The key is how many years until your children need the money for college. With 12 years until the first one heads off to college, you can afford to take on more risk in an effort to gain more reward. Historically, the stock market returns greater rewards than bonds, though you will want to research and decide if you want to invest in individual stocks, mutual funds, or other ways of participating in the stock market.

A state 529 plan allows you to invest in a mix of stock and bonds tax deferred. Bonds are a safe way to invest, being backed by the United States government. The biggest problem with bonds is their low return. If you buy a Series EE bond, you can expect to receive something like 3.25% interest at this time. With inflation running nearly 4%, you will actually be losing purchasing power with this investment.

I-Bonds are inflation indexed, meaning you will currently receive set percentage above the current inflation rate (this changes every six months). A better plan than Series EE, plus if you use the money from either bond for college you pay no taxes at all if your income is low enough that year.

Talking with a qualified investment professional that you pay by the hour is a good idea. They will be able to work with you and create the best investment mix to meet the goals you have set for paying for your children’s college tuition.