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Bonds an option for college saving

Updated: May 3, 2013 12:14PM

Originally published: August 7, 2001

The State of Illinois is issuing another round of College Savings Bonds next week, and if you’re thinking about future tuition money for a child or grandchild, you might want to consider these for at least a portion of your savings program. Here’s a look at what you get:

Q. What are Illinois College Savings Bonds?

A. They are tax-exempt municipal bonds, which means Illinois residents do not pay either federal or state income taxes on the interest they earn from the bonds.

Q. When do they pay interest?

A. These are zero-coupon bonds--much like U.S. Savings bonds. You buy them at a discount from their face value of $5,000 each. Over the years, the interest builds up until the bond reaches maturity and is worth $5,000. There is no tax bill to pay when you cash in the bonds at maturity.

Q. How much do they cost?

A. The cost of the bond depends on which year of maturity you choose. The longer the interest has to build up inside the bond, the lower the current purchase cost. As an example, if you have a newborn child, you might want to buy a bond that matures in August 2018--the year your child will enter college. The purchase price would be roughly $1,955. But if your child is now 5 years old, you’d purchase a bond that matures in 2013--just in time for that child’s first year of college. It would cost you about $2,660. Again, both bonds are worth $5,000 at maturity.

Q. Can they be used for any college?

A. Yes. When you cash the bonds in at maturity, you can use the money to pay for college in any state. But there is a bonus if you use the proceeds to pay tuition at an accredited college or university in Illinois.

Q. What if the bonds mature, and I don’t use the proceeds for college?

A. That’s fine. You’re still getting a nice return for a low risk investment.

Q. I’m getting confused: How do these bonds compare to other Illinois college savings plans?

A. It’s no wonder you’re a bit confused. There are three major college savings plans. These are, first, the State of Illinois College Savings Bonds. They’re regular tax-free municipal bonds, sold at a discount--zero-coupon bonds. They can be used for any purpose, but give you a tax credit if you use the proceeds to pay tuition.

They’re often confused with the CollegeIllinois! tuition savings plan, which offers a chance to “buy” tuition now at a discounted price for future use. But CollegeIllinois! units guarantee only that you’ll have tuition credits that are guaranteed to pay part or all of a student’s tuition at an Illinois school. Choose an out-of-state school, and you might not have enough to pay the bills.

And No. 3, there’s a new Section 529 Illinois College Savings/Investment plan, which allows you to earn greater returns on a tax-deferred basis, by giving money to a state-sponsored investment plan. You do not have control over how the money is invested, so there is more risk involved and no guarantee of the ultimate value of your account.

Q. The BIG question: When and Where can I buy Illinois College Savings Bonds?

A. The bonds will be offered next week, from Monday through Wednesday. You can buy them through most major banks or brokerage firms. PaineWebber Inc. is the lead manager, along with 11 other financial institutions, including First Union Securites, Bank One, Harris Banks, LaSalle Bank, Merrill Lynch, Morgan Stanley, Prudential Securities, and more than 40 others throughout the state. Call your bank or broker to ask for complete information and to get advice on whether these are a suitable investment for your situation.

Or you can call toll-free, (888) 377-4280, and leave your name and telephone number. A registered representative will contact you to explain everything and take your order. The specific purchase prices for each year of maturity will be posted Monday and finalized Wednesday. Then you’ll receive a bill, and you can handle the entire purchase by telephone and mail.

Depending on your situation, these Illinois College Savings Bonds could be an easy, and rewarding, addition to a college savings plan.

And that’s the Savage Truth.

Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at savage Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.

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