Higher Ed Utah

Dear Ray,

I want to put some money aside for when my sons go to college. One is graduating from high school next year, and the other is graduating in 2015. What are the best short-term and long-term investments right now for these two situations? Thank you.

Isabel B.

Dear Isabel,

First, I wouldn’t consider either of these time horizons long term when it comes to investing money. One horizon is immediate and the other is intermediate. Because of that and the relatively compact number of years over which the savings will be liquidated (four years or more to pay for tuition costs), your investment objectives should include safety, liquidity, and a current rate of interest at the top of the list. For the “Now” time horizon, that would not include stocks. But since the other time horizon is in 2015 with the final payment to be made in 2018, a conservative investment allocation balanced among stable value, short term bonds, and stocks could be suitable.

In addition, there are several types of plans or accounts worth considering for short- or intermediate- term college savings. These include Prepaid Education Arrangements, 529 plans, and Roth IRAs. Here’s the short story on prepaid plans (I’ll cover 529 plans and Roth IRAs in my next post later this week):

Prepaid college tuition plans- These are also called Prepaid Education Arrangements (PEAs), and allow folks to buy all or part of a public in-state education at present-day prices. The value of the prepaid amount is usually guaranteed by the state with a promise to equal or exceed annual in-state public college tuition inflation.

Given that the typical annual inflation rate for tuition at state schools is around four to six percent, locking in tuition at today’s costs is tantamount to investing that money in a one year CD that pays five percent…where can you get a one year CD today that pays five percent?

This option could be suitable for folks looking to pay college costs in the next one to five years, but the big limitation is that you should be reasonably certain that your student will be attending one of the state’s participating public colleges. If your student attends a school out of state, then the PEA may either pay out the amount it would have paid to an in-state public college, or you might have to cancel your participation to receive a return of your money, which could involve a cancellation fee and loss of interest.

http://moneywatch.bnet.com/retirement-planning/blog/what-works/prepaid-college-tuition-plans-when-to-use-them/209/?tag=fd-bundle-1;bundle-river-item

For more information on the Utah Educational Savings Plan, please visit uesp.org