Financing kids' college with bonds

Question

The rates of treasuries went up in the US. I would like to save for college for my children so I know that in 10 years when they need to pay for college I will have the funds. Could I buy 10 year treasuries? Would that be a good choice?

Basically I want to avoid stock market fluctuations and ensure I will have the funds at that time. What are the drawbacks of it? Or what else could I invest it to benefit from higher rates and get the funds back in 10 years? (In 2023 money I would like to have 1 million or so saved).

Answer 1

Could I buy 10 year treasuries?

Sure

Would that be a good choice?

Well it would be safe (meaning you would definitely get exactly the yield you bought into) but college costs have risen much more than current 10-year treasury yields and inflation, and are likely to keep doing so, barring major regulations or overhauls of college costs. So you would need to base how much you contribute not on current college costs, but what you expect costs to be in 10 years, which would mean you'd need to save more than current college costs. Plus, unless you plan to save all of the money at once (which would be unusual) you'll have to buy more bonds over time, reducing the tenor as you go.

With a 10-year investment horizon, you can afford to take more risk that will on average give you more return than risk-free treasuries. It doesn't necessarily mean you have to buy risky stocks - there are other "safe" investments like corporate bonds that give higher yields than treasuries with less risk than stocks.

You might also check on 529 plans in your state. Many states offer state income tax deductions on contributions, and earnings are tax-free (there is no federal tax deduction for education savings at this point). The 529 provider can also give you a decent number of investment options ranging from risky equity finds to safer bond funds, and might even have plans that reduce the risk the closer you get to college. That would be a decent choice if you're not comfortable picking your own investments and managing risk over time.

Answer 2

This may not be an answer, but it's more than a comment:

Have you looked at the related questions?

• What is the best approach to save money for College for three kids?
• College funds - is it too late to open a 529?
• How much money should a "fully-funded" 529 account contain to pay for a student's education?)

Ten-year treasuries are currently returning 3.514%. Compounded over 10 years, if I'm doing the math right, your initial investment for $1M result would need to be about $706,000 if you bought 10-year bonds today.

To get better return -- to hit $1M with less initial investment -- you'd have to accept greater risk.

Longterm, the stock market as a whole has historically averaged about 8%. Again assuming my calculation is correct, that means an appropriately diversified mixture to follow that return would lower your investment to $463,000 if you put it all in now, more if you can't invest it all up front and need to accumulate the money over time. But as you note, there is risk associated with this; if there's a dip such as the past year's you might have to wait for it to recover, or take student loans and repay them after recovery though that has its own flavors of cost and risk.

I don't have much to offer beyond those observations, I'm afraid...

Edit: Actually, I do have one addition: I paid for a BS at one of the more expensive schools mostly with scholarships and student loans and on-campus jobs, and I've known a few folks who worked for more serious income before and during college to cover it. Admittedly costs have gone up a lot since the year I instigated the Annual Spontaneous Tuition Riot ("$7400! Too Damn Much!"), and everyone would prefer to be able to pay their kids' tuition to get their careers launched... but if you come up short of being able to cover it completely, that isn't necessarily a disaster. "Where will wants not, a way opens."