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How to Use Certificate of Deposits as Part of Your College Savings Strategy

The cost of college education increases at a rate that far exceeds inflation. It is also much greater than the average rate of return your savings and investments are getting, which makes it difficult to save enough money to keep up with the ever-increasing costs of higher education.

Saving for your child's higher education is a challenge faced by most families regardless of their income levels – but the money you save now will help prevent your son or daughter from graduating under a mountain of school loans they will struggle to pay for many years after leaving college. If you want to help your child graduate in something other than debt, here are some tips for developing a strong college savings strategy that includes certificate of deposits:

Start Saving for College As Early As Possible

The key to saving for college is to start when the children are young. The earlier you start saving the more time your money has to grow. Many people invest in riskier options when their children are young in an effort to increase their earnings, and figuring they have more time to recover if their risks don't pay off financially. As children get older and approach their college years, your choice of savings and investment vehicles are likely to move to less risky options in order to prevent the loss of money.

Risk Free Savings Strategy: Certificate of Deposits

Once you've saved up a sizable amount of money for your child's education, you might think about using fixed-rate certificate of deposits to give those savings a chance to grow risk-free until you need to use them to pay for college expenses.

When you open a certificate of deposit with your college savings, you will earn interest in exchange for agreeing to leave your money alone for a specific period of time. Once the money is in a CD, you don't have easy access to it. It's not completely impossible to withdraw money from a certificate of deposit before it matures, but it's certainly not recommended to take it out early because you will pay penalty fees and lose money in the process.

Depending how many years your child has before starting college, you can select a certificate of deposit with as little as three months to five years (or more) until it reaches it's maturity date. The longer the CD term, the higher interest your savings will earn. You may find using certificate of deposits as part of your college savings allows you to diversify and increase the amount of money your savings earns. While your saved money is held in a certificate of deposit waiting for it to reach it's maturity date, you can continue saving money in money market funds, high interest savings accounts, 529 plans, or Coverdell Education Funds to increase the amount of money you have when your child approaches their college years.

CD Laddering Increases Saving Potential and Access to Funds

Creating CD ladders may be a reasonable college savings strategy, as well. Once you have saved enough money through other means, you can withdraw it and open multiple certificate of deposit accounts with different maturity dates. By staggering the maturity dates of the certificate of deposit products you open, you can gain access to the money at pre-determined intervals. Plan it right, and you can have certificate of deposits maturing right before each of your college semesters begin, and gain access to money to pay for tuition and expenses right as you need it each semester.

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