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How To Use A CD To Save For College

With the average cost of attendance for a public college hitting $26,590 for the 2019 school year, parents are searching for options to help them prepare for education-related expenses. One alternative that can be used to save for college is a certificate of deposit (CD). 

A CD is a savings product that requires you to invest your money for a certain period of time. During this time, you'll receive a specified interest rate. At the end of the term, you get your initial investment back plus your earned interest. CDs are safe investments that will never lose their value, and you can use the money in the CD for any purpose. Keep reading to learn more about how you can use a CD to save for college expenses.

Figure Out When You'll Need to Access Your Savings

CDs come in a variety of term lengths that vary anywhere from a few weeks to five or more years. In general, CDs with longer terms have higher interest rates. This is due to the fact that you're agreeing to keep your money tied up for a longer period of time.

Decide when you need to access your college savings and use these details to guide the selection of your CD terms. For example, assume your child will enter college in two years. You have $60,000 in savings and you estimate you'll need $20,000 a year for college expenses. Since you don't need the entire $60,000 all at once, you can open a 24-month CD with $20,000.

You won't need the next chunk of money for three years. To get a higher interest rate, you might put $20,000 in a 36-month CD. For the remaining $10,000, open a 48-month CD. This approach is called a CD ladder. A CD ladder consists of multiple CDs that mature at different times.

Shop Around for the Best CD Rate

To get the best return on your college savings, you need to shop around so that you get the best interest rate possible on your investment. As previously mentioned, banks usually offer higher rates for longer CD terms. However, some banks may also offer a higher interest rate if you deposit a minimum amount in the CD.

Other financial institutions may offer a great CD rate to new customers who are willing to deposit money from another bank. You might be able to get a better rate if you also open a checking account or other banking product. Make sure to ask potential banks about special and introductory offers when researching different CD offers. 

For more information, contact a bank or credit union that can advise you on CD rates and investments in your area.