According to the College Tuition and Fees price index maintained by the U.S. Bureau of Labor Statistics, the cost of tuition was 1,490% higher in 2023 than it was in1977. Between 1977 and 2023, tuition — the largest component in the cost of attending college — experienced an average inflation rate of 6.2% per year. In other words, what $20,000 in tuition bought in 1977 would have cost $318,000 in 2023. Compared to the general inflation rate in the American economy of 3.6% during this period, inflation in the cost of college tuition has been shockingly high. In fact, inflation in tuition since 1990 has increased 130% after adjusting for the rate of general inflation in the economy.
Curiously, most financial experts attribute the sudden increases in college tuition that started in the late 1970’s with the enactment of Federal laws and the consequent funding of new programs designed to make college more affordable. The colleges simply raised their tuition prices, knowing that students could borrow additional funds cheaply from the Federal government to make up the difference. The colleges devoured the newly available Federal student aid funds.
The rate of growth in the cost of attending college has been, and continues to be, an issue of national concern. It was difficult for most families to afford college in 1977 and it is far more difficult in 2024. Families should start saving for college early in the life of a child. They are well-advised to seek investments that will keep pace with further rises in tuition while protecting the safety of principal. The CollegeSure CD (CCD) serves both purposes.
What Is the CCD
The CCD was originated by the College Savings Bank and is still issued by that institution, now a division of NexBank, under license to the College Board. In a study of FDIC-insured 529 College Savings Plans, College Savings Bank ranked first based on Annual Percentage Yield (APY) for CD’s. Several other institutions offer CD’s similar to the CCD, but the CCD was the first of its kind to be issued.
The CCD is not like a conventional CD in which funds are deposited for a set period of time and then may be used for any purpose. It’s a specialized product that earns interest at a rate directly tied to the increase in the cost of attending college. The CCD is a way to invest to keep pace with the rising cost of tuition over time.
Other investments may grow faster than the inflation rate of college costs, such as individual equities or growth-oriented equity mutual funds. But these investments also run the risk of loss. With a CCD, like any CD, there’s no risk of loss. Most parents are reluctant to forfeit any part of what they have saved for college, and CCD’s appeal to families who prioritize the avoidance of risk.
The CCD website describes the benefits of CCD’s as follows:
- FDIC-insured up to $250,000.
- No fees.
- May be in 529 Plans, Roth IRA’s, or Coverdell Education Savings Accounts (ESA’s).
- Offered directly to U.S. residents without intermediaries.
- Contributions are state tax-deductible for residents of Montana, Arizona, Maine, Kansas, Pennsylvania, and Missouri when held in 529 Plans, Roth IRA’s, or ESA’s.
- A result of a range of recurring deposit options make CCD’s more affordable.
- Guaranteed annual interest rate minimum of 2%
- Maturities ranging from 3 to 22 years to match a family’s needs.
The Independent College 500 Index
The interest rate paid on a CCD is not set by market rates. It is tied to the change in the Independent College 500 Index, and is calculated and published annually by the College Board. The Index measures the change in tuition, fees, and room and board incurred by full-time freshmen at five hundred four-year colleges. The money invested in a CCD will increase linearly with the increase in the cost of attendance at the colleges in the Index.
The CCD interest rate is adjusted each July 31 when the Independent College 500 Index is updated. The APY over the term of each CCD is the college inflation rate less a 3% issue margin assessed on the date of issue, known as the Contribution Date. Because of the 3% interest rate margin, the purchase price of a CCD exceeds the value of the Independent College 500 Index on the Contribution Date.
Terms and Conditions of CCD’s
CCD’s are FDIC-insured for up to $250,000 and are top-rated by Standard & Poor’s. Maturities are available from three to twenty-two years. A CD purchaser may withdraw interest without penalty. However, a penalty will be incurred by the withdrawal of principal prior to maturity. The interest paid by a CCD is taxable unless it is owned within a 529 Plan, Roth IRA, or ESA.
CCD’s are sold in whole or partial units. At maturity, one whole unit will pay for one year of tuition, fees, and room and board at the average cost of the 500 four-year colleges in the Independent College 500 Index. The annual cost as measured by the Index was $37,200 in 2023, so a full unit equals this value. If a partial unit is purchased, it will be worth that portion of the value of a whole unit at maturity.
Since the interest rate is based on average college costs, a college is likely to require less or more than one unit to cover one year. Based on recent data, 44% of one unit pays for the average public college at in-state rates and 128% is required to pay for a U.S. News & World Report top 10 national university.
If the student beneficiary does not go to college, the investor recovers the entire principal and interest calculated at the agreed-upon rate when the CD matures. It can then be used for any purpose with no strings attached. However, if an investor chooses to cash in the CD before its maturity date, he or she will owe a penalty of 10% of the principal during the first three years of its term. The penalty drops to 5% for the remainder of the term except for the last year, when it drops to 1%.
Drawbacks of CCD’s
While CCD’s can play a role in college savings, they’re not always the best investment due to their relatively modest return and lack of tax benefits. The following factors should be considered before opening a CCD account:
- Modest return. A CD of any kind is a low-risk way to earn a return, so they typically offer lower returns than riskier investments such as stocks or stock mutual funds.
- Early withdrawal penalties:Accessing funds from the principal of a CD before it reaches maturity incurs a penalty. However, the penalties on CCD’s that are held for at least three years are lower than the flat 10% penalty on regular CD’s
- No tax benefits:Unless they are part of a 529 Plan, Roth IRA, or ESA, CCD’s don’t offer tax-free growth or withdrawals even if the money is used for educational expenses. The interest earned is subject to Federal income tax, and, in most cases, state income tax.
- Locked interest rate:A CCD locks in the interest rate agreement describes above at time of purchase. This means if market conditions cause interest rates to rise substantially, an existing CCD won’t benefit from higher rates or additional returns.
- Issue Margin and Interest Rate Caps: The yield over the term of a CCD is affected by the issue margin assessed on the Contribution Date. This means that, although there are no fees associated with CCD’s, the margin charged at issue is, in effect, pre-paid interest.