Investments to Avoid when Saving for College

The price tag for a college degree is always increasing.  It seems that the news is full of stories about college graduates that are so deeply in debt that the yearly income from their chosen career (even if it is traditionally a high paying job such as a doctor or lawyer) is not high enough for such graduates to make payments on their student loans.  Due to this fact, it is important to try to save as much money as possible if you intend to pay for college.

Although you, your children, or whomever you are saving for, may receive some kind of scholarship or grant to pay for some or all of the college expenses, it is still a smart move to save money for college expenses in the event that no such scholarship or grant is offered or obtained.  Simply hiding money under your mattress or stashing cash into an envelope is not a good college savings strategy.  Additionally, putting saved money into risky stocks is not a wise college savings strategy.  When saving for college, you want to look for low risk, or preferably, no risk investments that yield some sort of payment, whether such payment is interest or a dividend.     

The safest (but not necessarily the most profitable) way to save for college is to put your saved money into a savings account, money market account, or certificate of deposit.  These investment accounts have no risk and yield an interest rate.  Keep in mind that because these accounts carry no risk, the interest rate will be low and thus, your return on investment will be low.  For example, some savings accounts have annual interests rates as low as 0.10%.  Therefore, for every $1,000 you save (excluding compounding interest), you will earn $1 per year.  Obviously, this is a minimal amount of money.  Therefore, if you choose one of these investment options, shop around at different banks and savings institutions to find the best interest rate possible.

If you want to incorporate a little risk into your college savings, mutual finds or an exchange traded fund (ETF) are your answer.  These funds can trade like stock without the amount of risk traditionally associated with stocks.  These funds can increase in value as well as pay dividends.  Therefore, your return can potentially be much higher than the 0.10% annual interest rate that you may receive on a savings account.  However, even though you may get more money, there is a risk that your fund may decrease in value.  As such, you have to consider whether you want to risk losing money in an attempt to increase the return on your college savings.

Remember, saving for college will be very beneficial.  You can choose to either put money in a no risk savings account that will yield small returns, or you can choose to put your money in a riskier investment with higher potential gains.  Either way, remember that you are saving for college.  As such, do not be super aggressive with your investment strategy as you may lose money for your college education.