CD’s, savings accounts may not be best for college savings
Consumers who are looking for new ways to save for their kids’ education may opt to open CDs and savings account. Unfortunately, a recently published report shows that this may not be the best solution after all. The report did not attempt to offer an alternative solution but instead, studied why CDs and savings accounts are not the answers saving for future education.
The main reason cited in the report is the continuously rising tuition and miscellaneous fees at private and public colleges. Financial analysts say that these increases in school fees have been very common in the last couple of years. In fact, tuition and miscellaneous fees have been increasing regularly, with no signs of relenting in the next few years.
Such a scenario then of course poses difficulty to savings account and CD owners since profits from the CDs and traditional savings account are very low. Aside from this, before profits can be earned, some financial institutions require their client to keep their money untouched for a certain period of time – this could mean that parents cannot use their CD and savings accounts in times of emergencies, or they risk losing the interest they are supposed to earn.
Financial Analyst Paul Brume says that because CDs and savings accounts have the same (low) interest rates, growing your money can take a long time. It is possible that the interest you earn is not enough to cover your child’s college tuition and other expenses. Unlike other investment tools such as stocks and bonds, CDs and savings accounts have fixed rates; hence you’ll need to wait for your investment to mature before you can see your earnings. Of course, an advantage to CDs and savings accounts is that your money is safe – you are sure to get it back, unlike in stock trading where you can end up losing your hard earned savings. The inflation in these investments take more time compared with the tuition and other fee increases at public and private colleges. The traditional savings account and CDs then make it more difficult for their owners to immediately cope with the fast increasing education costs or other expenses, Brume adds.
A Bloomberg report cites that for a four-year program at a public college or university, tuition fees have increased by 7.9% with the current costs amounting to as much as $7, 605 per year. Thos studying in private colleges have to cope with a 4.5% increase from the year 2009. A 4 year course in a private college can cost as much as $27,000 annually. On the other hand, Bloomberg reports growth in the rates of CDs and savings account at 5.6%, with annual interest rates ranging from 0.99% to 4% annually.
BlackRock Director Stephen Jobe relates and concludes by saying that the inflation rate in CDs and savings accounts is actually just half of the rate of increase in tuition and other fees. With tuition increases pegged at a rate double that of the inflation, Brume says that CDs and savings account may never really outpace the demands of education costs.