Parents Cut Costs by Paying Children’s College Tuition Years in Advance

Richard and Stephanie Hack have not only picked out where their two small children will attend college after the turn of the century--they have already paid their tuition in full.

The Bethel Park, Pa., couple bought that peace of mind for about $10,000 through a “tuition-futures” program that had been offered for about three years at Duquesne University, their alma mater.

Other young families may wish they had it so easy as they watch tuition increases outpace inflation.

The cost of housing and tuition at some private colleges, for instance, is around $80,000. Financial advisers and educators agree that the only way to stay out of the poorhouse, yet provide a college-bound child with a good education, is to develop a strategic plan as early as possible.

‘Need to Save’

“People need to save for a university just as they buy a house,” said Richard F. Rosser, president of the National Assn. of Independent Colleges and Universities.

It was for that reason that Duquesne, a small Roman Catholic university near Pittsburgh, developed its tuition-futures plan in 1985, a program Stephanie Hack believes will benefit her children, Melissa, 5, and Brian, 4. About a half-dozen other schools established similar programs, but some of them, as Duquesne did recently, have stopped taking new applicants due to unexpectedly high tuition increases and falling interest rates on bonds, the schools’ main investment vehicle.

Aside from the obvious drawbacks--what if a grown child doesn’t want to go to college or to the one already paid for--the program seemed like a good deal. At Duquesne, for instance, the family of a 1-year-old child eligible to go to college in 2005 would have paid a lump sum of around $8,600 last fall to cover the projected four-year tuition of $102,600. The older the child, though, the higher the cost.

Most investment advisers say a family could almost do the same on its own by investing bit by bit in savings bonds or certificates of deposits, although such investments wouldn’t have the same tax benefits enjoyed by the schools.

Since Duquesne’s trend-setting program, numerous programs and proposals have emerged.

Several bills are pending in Congress that would set up tax-free savings accounts resembling Individual Retirement Accounts to finance education. President Reagan supports a tax-exempt savings-bond program.

Six states--Michigan, Indiana, Florida, Maine, Tennessee and Wyoming--have passed laws establishing prepayment tuition plans, according to the Education Commission of the States. (The Internal Revenue Service just ruled that the Michigan Education Trust had to pay federal taxes on earnings, but that individual investors would not have additional tax liabilities.)

California, Illinois, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, South Carolina, Texas and West Virginia have similar legislation pending, the commission said. And Illinois and North Carolina have passed special plans for savings bonds, it said.

On the commercial side of things, there’s the College Savings Bank in Princeton, N.J. The institution’s main line of business is to sell certificates of deposit with interest rates changing annually to keep pace with rising college costs.

Keeping track of what’s available to students and families in the way of investment plans, financial aid or scholarships is often half the battle as college-sponsored programs come and go, new laws evolve from state to state, or Congress and the IRS get involved.

“There’s just so much change going on,” said John B. Cox, a spokesman for the National Assn. of College and University Business Officers. The nonprofit group, based in Washington, publishes “Alternative Approaches To Tuition Financing,” available to the public for $15. Many other guidebooks also are available in bookstores and colleges.

Some Suggestions

Cox suggests that parents start by selecting a few prospective colleges, then contacting the financial aid departments of each to see what programs the schools have or might be considering.

Here’s a thumbnail look at some of the many programs being offered:

-- Prepayment plans. Students have the option at some colleges and universities of paying for all four years up front, thus avoiding future tuition increases. About 50 institutions offer this program, including a number of Ivy League schools such as Brown, Cornell and Yale universities.

-- Delayed prepayment or installation plans. A number of colleges and universities allow tuition payments to be made in equal installments during a semester or year. Some institutions require a down payment of as much as 50%.

-- Tuition gift certificates. Sold by a handful of colleges, including two-year schools, these certificates may be bought for a designated number of credit hours or other tuition unit. Some are transferable but most cannot be cashed in.

Interstate tuition plans. At least two regional consortiums--one on the West Coast and the other in New England--offer some students a chance to go to college out of state for slightly higher than the residential rate. The program is limited to participating states and institutions. One of the groups, Western Interstate Commission for Higher Education, also arranges for state-subsidized tuition across state borders.

-- Loan programs. Besides commercial banks and thrifts, a number of colleges and universities loan money directly to families or students, although most are intended to pick up where federally guaranteed student loans leave off. Several states, such as Massachusetts, Connecticut, Maryland and New York, also provide student loans.

-- Others. Work-study programs and scholarships are available to a broad range of students. Several research services will even help track down obscure scholarships for a fee.