Families Exploring New College Savings Options

By CityTownInfo.com Staff
November 11, 2009

Families whose 529 college savings plans took a beating last year are now looking into safer ways to save for higher education. As a result, banks and financial advisers are beginning to offer more conservative college savings options.

"Any new money going to my kids' college education is going into something that I manage myself," said Michael Singer of Coral Springs, Florida, who lost about half of his 529 savings and was interviewed by The Wall Street Journal. "I know I could do better and I can be safer."

For many years, the 529 plans were considered to be a wise way to invest money to pay for higher education costs. The accounts offer a range of investment options, and distributions and earnings used to pay for college are tax-free. But many families reconsidered investing in 529s after last year's market collapse.

Grace Giso, a travel agent in Boston, told the Journal that she decided to buy real estate instead of investing in her son's 529 college plan. She bought a house for him near his university, and hopes to recoup the losses after the real estate market turns around.

Some families are even saving for college by placing their money in fixed-income funds, money market accounts and certificates of deposit, reports Bank Investment Consultant. Citizen Bank in Providence, Rhode Island, for example, this year launched its CollegeSaver account, which guarantees $1,000 if families agree to deposit $25 each month until their child reaches 18.

According to Martin Bischoff, who runs consumer and business banking for Citizens Financial Group Inc., the program has been so successful that an average of 750 new CollegeSaver accounts are opened every week. "People have been impacted by recent events," he told Bank Investment Consultant, "so they are now wanting a level of certainty."

He noted that the program is not intended to replace 529 plans but to supplement them so that investors can diversify their investments. However, he said that some customers are choosing the CollegeSaver account instead of investing because they are being cautious about the stock market.

More conservative 529 funds have also recently been created to address investors' caution. The Denver Post reports, for example, that the new CollegeInvest Smart Choice College Savings Plan in Colorado is being backed with federal deposit insurance protection.

Angela Baier, a spokeswoman for CollegeInvest, told the Denver Post that according to a Gallup survey, nearly six out of 10 households save for college using certificates of deposit and money-market funds. The new program, she said, is meant to offer investors the security of more conservative investments while providing added tax benefits.

The plan permits deposits at any time and has no minimum balance. But while the plans guarantee that investors won't lose their principal, they also won't earn much interest: Rates range from 0.40 percent to 1 percent, depending on the type of plan and the size of the account.

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