By John Wasik
CHICAGO, May 25 (Reuters) - Despite saving for the past decade and a half, I know I‘m nowhere near covering projected college bills for my daughters, who are now teenagers. So I’ve been employing an investment strategy to try to make up the difference so that tuition doesn’t sink my kids into a loathsome amount of debt.
The basis of our plan is that we invest our college funds in an age-adjusted 529 college savings plan that reduces market and interest-rate risk the closer the girls get to matriculation. Every state offers these funds with major mutual-fund companies managing them.
In our case, we started investing in the Upromise plan that links my business credit-card purchases to contributions to college-savings accounts for both of my daughters. Depending upon the item purchased, the company, owned by Sallie Mae, will contribute from 1 to 5 percent of the purchase price into our college accounts. There is a similar program called BabyMint.com, which is also worth exploring.
Of course, any credit-card purchasing program is designed to get you to use your card and purchase from specific companies. But we were more interested in the linked savings accounts, which have received more than $2,000 in purchase-related contributions since we opened them - in addition to other money we have added. (Note: I am not specifically endorsing this plan. I originally signed up when the low-cost Vanguard Group was the manager. State Street Corp’s State Street Global Advisors took over management earlier this year.)
I have little quibble with the management of our college funds, which can serve as a workable model for anyone doing this on their own. The accounts are invested in low-cost SPDR College Date exchange-traded fund portfolios managed by SSgA.
Since they are automatically rebalanced every year between stock, bond and money-market funds, I don’t have to do a thing - except put more money in them. My older daughter’s account, for example, is in the 2015 portfolio (she is 15 now). The annualized rate of return over the past year has been 4.2 percent. While that does not sound impressive, it is roughly four times what I could earn in an insured certificate of deposit. Keep in mind that our portfolio is still exposed to some risk, but it is very low at this point. Her portfolio is now 81.25 percent in global fixed-income funds and 18.75 percent in a money-market fund.
Two major drawbacks of 529s are that you generally have only a few choices of fund managers within state plans, and the layered expenses are higher than what you would find in non-529 funds or ETFs. While the costs of State Street’s funds are lower than average because they are ETFs, you should generally avoid plans that are sold by brokers, which may charge you commissions and higher management fees.
Most states offer similar age-adjusted plans. While you can do this yourself by investing in individual mutual funds or ETFs, it can be a risky hassle. If you neglect the annual rebalancing, you could be overexposed to market risk and needlessly lose money. Unless you are a sophisticated investor or working with a fiduciary adviser or money manager, don’t even try to invest on your own.
Another option - one that doesn’t get as much attention as 529 plans - is a certificate of deposit linked to college costs. The CollegeSure CD, offered by the College Savings Bank, is available in maturities from 1 to 22 years. The yields of the variable-rate CDs are indexed to the College Board’s College 500 Index and are federally insured up to $250,000 per account owner.
Of course, like most investments, the true cost of college is not what you paid yesterday, it is what you will pay in the future. So the biggest key to successful investing for college, especially as your kids approach the age of using the money, is to keep pouring money into the funds. In this regard, regular savings is a bit like homework or learning a language - consistency is the key to success.