You Can Grow Your Kid's College Fund This Year With This One Simple Trick

You've spent all their lives saving for college, and you finally have a pretty hefty sum -- but now that interest rates are high enough to be worth considering, you wonder if there are more ways you could be growing your kid's college fund.

My friend was in this pickle last year after getting a windfall from selling a rental property. She didn't see the value in putting the money into a 529 plan so close to her kids starting college, so she was looking for other ways to make the money grow without putting it at risk.

Choosing a savings vehicle

I got a rather surprising message out of the blue from this friend, who had been keeping this money tucked away in a traditional savings account that was paying almost nothing in interest. She'd noticed that certificate of deposit (CD) rates had increased dramatically after the federal funds rate's harrowing rise, and she was considering investing in one.

"What's the catch?" I remember her asking me.

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"They keep your money for a year, but they tell you that upfront," I told her.

"So there's no catch?"

"Nope. They just need more funds so they can loan their own money out to make more money with it. As long as you leave your money in the CD for a year, there's no catch."

We discussed that withdrawing money from CDs early can come with very steep penalties. But considering that this money had a very specific purpose and her oldest son would be in high school for another year, there was exceptionally little risk involved.

And so that was how my friend decided to buy her first certificate of deposit. She didn't shop around, and she didn't compare rates. She just set one up from the boys' savings account online. It was all very easy, and she told me that after the taxes are paid, she'll have realized about a 3.5% gain on the money that was just sitting around doing nothing.

Are CDs right for your college savings?

My friend's kid got into a really amazing school with a full scholarship, so most of his money will be put away until he truly needs it. She plans to roll most of this existing CD into a new one when it matures this summer, since rates are pretty much unchanged from last year.

She was very pleased with her experience. But that doesn't necessarily mean CDs are the right vehicle for you. If you have a bunch of money sitting around that you absolutely do not want to touch, though, they could be an awesome solution.

Choose a certificate of deposit if:

• You have money that you know you will not need to touch for the CD's term.
• You need to preserve your principal above all else.
• You are risk-averse.
• You want to get what is essentially free money for doing nothing.

It's that last factor that appealed to my friend. She wanted to grow the college fund as much as she could without putting any of it at risk. And since it was under the FDIC limit of $250,000, even if something happened to her bank while the money was in the CD, it would all come back in the end thanks to FDIC insurance.

How much can your college fund make in a year?

Even in just one year, a college fund can make a fair amount of money when left in a certificate of deposit. You'll owe tax on your earnings, of course, but that's based on your income. You'll need to calculate that for your own situation.

But in general and before taxes, if you have a $100,000 college fund and it's put into a 12-month certificate of deposit at 5.0% with monthly compounding, your CD will have gained $5,116.19 when it matures.

If it took you 12 years to put that money together at an average of $8,333 per year, you just gained 61% of a year's worth of effort by doing absolutely nothing.

This works especially well if your child has a few years left before college. Let's say my friend had started her CD adventure when her son had three years of high school left. Assuming the CD rate remained steady, she'd have a gain of $16,147.22 if all other things are equal.

That's nearly two years of savings that are just extra. Growing your child's education fund has never been so simple or so easy. There's not a thing wrong with certificates of deposit, and there's no catch. There's just a simple return for doing nothing but letting the bank borrow your money for a little bit.