Sense to Save

Citizen’s Bank education bonus: Not a good deal

Citizen’s Bank is offering a promotion for parents saving for their children’s college education. I saw a commercial advertising this deal and I thought I’d take a closer look. (See the FAQs for more info).

You have to open an account before your child turns six, deposit at least $25 per month in the account, and the account will get a $1,000 bonus on your child’s 18th birthday.

My son has about 17.5 years until his 18th birthday, so if we set up an account now, we’d contribute a minimum of $5,250 to get the bonus. 

The interest rates on this account is pretty low right now — about .3 to .4% interest depending on the balance. 

By using this simple calculator, I can see that the bonus would provide an average of a 1% annual return. Of course, this is ignoring the nominal amount of interest the account would earn over the years. At these rates, we’d earn less than $9 for the first year. Big whoop.

[Want to check my math? I put in $5,250 for the present value, $6,250 for the future value, and 17.5 years]

When you factor in the taxes you’d have to pay on the growth, it’s looking like a lousy deal. See, 529 plans and Coverdells have special tax advantages — this account does not. 

What if your child was about to turn 6, and you wanted to open this account for him or her? You’d contribute around $3,600 yourself. The annual rate of return for the bonus improves to 2.06%, not including regular interest. Better, but not that great.

The bottom line: Even if you’re an ultra-conservative investor, you can do better in high-interest money market accounts and possibly CDs, if the rates improve. If you’re willing to take on more risk, you can probably do better in mutual funds/bonds/etc. Talk with your financial advisor for more info, of course.

Opening this account might be a good option if you’re seeking a simple, low-risk way to save for your child’s future. The money doesn’t have to be used for education so you can use it to buy them a car or help them set up their first apartment.

But again, even with the $1,000 bonus, your money can be put to better use elsewhere.

It pays to run the numbers.