People who have been involved in serious auto accidents tend to drive very carefully for months, or even years, after the collision. Some buy a bus pass and never drive again.
Many parents were similarly traumatized after last year's bear market demolished their college savings plans. Unlike workers who are saving for retirement, parents who are saving for a child's college education don't have a lot of time to recover their losses.
One option for parents who can't bear to take any additional risk is a savings account or certificate of deposit that's insured by the Federal Deposit Insurance Corp. Several states now offer bank savings accounts and CDs within their 529 plans, providing the tax benefits of a 529 plan with the sleep-at-night security of an account that's federally insured for up to $250,000.
You don't have to be a resident to invest in a state's 529 college savings plan, although some states offer tax breaks and lower fees for residents. Choices for savers with a low tolerance for risk include:
•The Virginia College Savings Plan's CollegeWealth account, www.virginia529.com. Virginia's plan offers an insured savings account through Union Bank and Trust, a community bank with branches in central Virginia. Later this year, BB&T, a regional bank based in Winston-Salem, will also offer CollegeWealth accounts.
•The Utah Educational Savings Plan, www.uesp.org. Utah introduced an FDIC-insured savings account in February. Unlike some other federally insured 529 plan options, there is no minimum contribution required to open an account.
The account is offered through Zions First National Bank of Salt Lake City.
•Ohio CollegeAdvantage, www.collegeadvantage.com Ohio's 529 plan offers savings accounts and CDs through Fifth Third Bank. Terms for the CDs range from three months to 12 years.
•College Savings Bank, www.collegesavings.com This bank offers CDs through Arizona's and Montana's 529 plans. In addition to conventional fixed-rate CDs, the bank offers CDs with returns linked to the S&P 500 index and the inflation rate for college costs.
As long as you remain within federal deposit limits, you won't lose money by investing in these options. But you won't make much money, either. Through August, the annual percentage yield for Utah's bank account was 0.74% before administrative fees. A five-year CD offered through the Ohio plan is currently yielding 3.5%. Meanwhile, college tuition continues to increase faster than inflation. If you put all of your savings in an insured account, there's a good chance you'll come up short when it comes time to pay the bill.
Still, investing in an FDIC-insured option is better than not saving for college at all, says Andrea Feirstein of AKF Consulting, which advises 529 plans. Low-risk investment options offer a way for nervous parents to get in the habit of saving for college, she says.
"When you feel ready enough to put a toe back in the equity market, you already have an established pattern" of saving, she says.
Federally insured accounts in 529 plans also provide a tax-efficient way for parents of high school juniors and seniors to shelter their savings from market volatility. Most 529 plans offer age-based portfolios, which are supposed to shift savings to more conservative investments as the child nears college. But some age-based portfolios are much more aggressive than others. After last year's market meltdown, Feirstein says, some parents of college freshmen were shocked to discover that their age-based portfolio still had 20% of its money invested in stocks.
If you're already using a bank savings account or CD to save for college — whether it's because your child is a senior or because you don't have the stomach for the stock market — switching to an insured option within a 529 plan is a risk-free way to boost your after-tax returns. In a 529 plan, you won't be taxed on the interest you earn, as long as the money is used for higher-education expenses. Interest from bank savings accounts and CDs is typically taxed at your ordinary income rate.
And some 529 plans are offering higher interest rates than comparable bank products, says Joe Hurley, founder of SavingforCollege.com.
If you're already using a bank account or CD to save for college, he says, "Why not get the same or even better product without paying taxes?"
Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: email@example.com. Follow on Twitter: www.twitter.com/sandyblock