When parents wrestle with that most vexing of investment challenges--financing their children's education--they increasingly turn to that most prosaic of investments, Series ee U.S. savings bonds. Recently, buyers have been lured in record numbers by a guaranteed rate of 6%--as well as, for many, a tax exemption.
But are bonds the crackerjack college-saving vehicle they're cracked up to be? That depends on your risk tolerance, the age of your child--and, not least, the vagaries of Congress. Keep in mind that investment pros maintain you get the best returns over the long term not from bonds, but from a diversified portfolio of stocks or mutual funds. But many people don't have the discipline to stay with stocks during times of market volatility.
For the risk-averse, savings bonds are a worthy alternative to equities. By guaranteeing, after five years, to pay the greater of 6% or a variable rate pegged to 85% of the yield of Treasury securities maturing in five years, they provide some protection from inflation. And the 6% minimum will be useful if interest rates stay down. "The 6% rate sounds low relative to the returns of stocks and bonds over the past 10 years," says Hutch Vernon, a money manager at T. Rowe Price Associates. "But compared to what you're likely to get over the next 10 years, it's pretty good."
CUT THE CAPS. It'll be even better if Congress or the new Clinton Administration extends to all taxpayers the federal income tax exemption for savings bonds used to finance educational expenses. Currently, only married couples with adjusted gross incomes of under $66,200 qualify. The exemption is phased out proportionally for couples with agis up to $96,200 and is unavailable above that amount. (Savings bonds are exempt from state and local taxes; the federal taxes are paid only when the bonds are redeemed.) On Nov. 4, President Bush vetoed a bill that would have eliminated the income limits.
If limits for the tax exemption are overturned, savings bonds would be an irresistible way to sock away money for college. Even if the income limits remain--or the kids opt for beachcombing instead of school--the riskless, tax-deferred yields of savings bonds make them a worthy addition to any portfolio.
SAVING FOR YOUR FUTURE SCHOLAR College Projected Monthly begins cost* investment** 2000 $129,893 $1,052 2004 170,263 806 2008 223,180 692 2012 292,544 630 *Four-year private college, including tuition, housing, expenses **Based on 6% compounded annual return DATA: T. ROWE PRICE ASSOCIATES