College-Bound? Make Sure You Open These Key Bank Accounts

There are three bank accounts that are worth knowing about ahead of going to college: checking accounts, savings accounts, and certificates of deposit (CDs). Each type of account varies in regards to the interest rates they charge, and even small differences can add up to big gaps in returns. Additionally, different account structures can affect your ability to pay for school using the funds in your account.

Key Takeaways

• Bank accounts generally won’t earn as much as investments like stocks, but there’s typically a much lower risk of losses.
• By saving for college, you won’t have to rely on student loans as much, but certain bank accounts are typically better long-term savings vehicles than others.
• Savings accounts generally pay higher interest rates than checking accounts, while CDs can pay even more than savings accounts but have limited liquidity.

How Bank Accounts Can Help You Save for School

Saving money in a bank account can help you build up cash to fund a higher education. You might earn more by investing in stocks, but there’s no guarantee you’ll see a return on whatever you purchase. That kind of loss can be devastating for students who have so little time to save for school. So, if you’re starting college soon, you may prefer the stability of a bank account.

Using a Federal Deposit Insurance Corporation (FDIC)-insured bank or National Credit Union Administration (NCUA)-insured credit union protects up to $250,000 of your deposits, per ownership category, per financial institution.

There are significant differences among bank accounts in terms of their interest rates, fees, and liquidity. Picking an account isn’t always as simple as choosing the one with the highest interest rate. For example, some banks have high APYs but also charge monthly maintenance fees that eat into your returns.

Note

If you earn a 1% annual percentage yield (APY) on $50,000 for five years, you’d earn $2,550.50. At 5%, you’d earn $13,814.08. Thus, choosing a high-yield account could be the difference in affording a semester vs. needing to take out student loans.

Three Bank Accounts Students Ought to Know About

• Checking accounts: A checking account generally pays the lowest interest but offers the most flexibility, as they tend to have more relaxed withdrawal limits. Consider keeping a small amount in checking to pay for monthly expenses but not long-term savings.
• Savings accounts: A savings account typically pays more in interest than a checking account but has slightly less flexibility. For example, you might be limited to six withdrawals or transfers per month. As such, you may want to keep a large portion of your funds in savings so that it can grow, but be mindful of any potential access limitations that your bank might impose.
• Certificates of deposit (CDs): A CD usually has a slightly higher interest rate compared to a savings account; however, this comes at the cost of keeping your money locked up for a designated period. If you withdraw early, you could face penalties. If you’re saving for college, consider getting a CD based on when you’ll need the funds (e.g., put enough money into a six-month CD now to afford the cost of tuition in the fall). Whatever you do, don’t take out a CD if its term won’t expire until after the point when you’d want to withdraw the funds.

Note

You can minimize the tax hit of saving for college by putting money into a 529 plan. What kind of investment options are available in each state’s plan can vary, but some allow you to put money into an FDIC-insured account within the 529 plan.

The Bottom Line

Regularly putting money into a bank account can be a low-risk way to save for school, but there are differences between accounts. Shop around for the best interest rates while also considering how and when you’ll need to access the money, along with any other advantages and disadvantages of particular bank accounts.