Bonds to Help Save for College Gain Popularity
Municipal bonds designed to help parents save for their childrens' college education are winning favor among state lawmakers, bond analysts and investors.</br></br>Washington, which plans an offering next month, will be the fifth state to sell such "baccalaureate" bonds. At least three other states -- Missouri, Iowa and Minnesota -- have passed legislation paving the way for similar tax-exempt issues.</br></br>Baccalaureate bonds are "zero-coupon" issues, which means they don't pay interest or principal until maturity. As a result, zero-coupon issues fluctuate more in value than conventional bonds as interest rates rise and fall. But they're also sold at a big discount to their face value, making them accessible to many financially strapped parents. Washington will sell a $5,000 bond due in 20 years, and rated double-A by Standard & Poor's Corp., for $1,070. (Purchases are limited to five bonds.)</br></br>Baccalaureate bonds are "a pretty good idea for people saving for college," says Richard Cicarone, senior research analyst of Van Kampen Merritt Inc., a Naperville, Ill., securities firm. But because of the bonds' potentially fluctuating value, "there's a big liquidity risk" if the bonds have to be sold early.</br></br>However, if an investor can afford to keep money tied up until the bonds mature, baccalaureate issues are a better bet than other municipal zero-coupon bonds, analysts contend.