Save Early and Even a Pricey College Is in Reach, Advisers Say

Parents are so intimidated by rising college costs that they often fail to undertake the long-range planning necessary to make higher education possible for their children, according to college financing experts.

Middle-income families can in many cases afford even expensive private colleges if they begin a careful savings program when their children are young and take maximum advantage of loan and scholarship opportunities.

“The increase in college costs is nothing new, but people don’t think about it until their kids are in high school,” said Charlie White, president of College Planning Services in San Bruno. “The hardest thing I have to do is motivate people to act early.”

The advice may be particularly important for Orange County parents. According to a Times Orange County Poll conducted last month by Mark Baldassare & Associates of Irvine, Orange County parents are increasingly pessimistic about their ability to pay for their children’s college education, though a near-unanimous majority believes that higher education is crucial to career success. The poll indicates that many parents are frightened by reports of tuition increases which continue to outpace inflation.

White and other financial planners emphasized that parents should not assume they have to save the entire six-figure sum that might be necessary to send their kids to college. Rather, they should look at saving for college as just one part of a balanced financing plan.

“There are four ways to get the money for college: save it; pay it out of current income; borrow it; or get someone else to pay for it,” said Raymond D. Loewe, president of College Money in Marlton, N.J. Parents should expect to draw some money from each of these sources, Loewe said.

The best way to save money for college depends on each family’s financial situation, but all parents should pay careful attention to tax and financial aid considerations in developing a college financing plan. And there are plenty of financial vehicles to choose from: trust accounts, tax-free municipal bonds, savings and Treasury bonds, mutual funds, stocks and life insurance policies.

Traditionally, putting money in a trust account in the child’s name has been a popular option, primarily because of the tax advantages. But financing experts note that since the 1986 tax reform, only the first $500 of income from a trust account for a child under 14 is tax-free; the next $500 is taxed at the child’s rate--probably 15%--and anything over $1,000 is taxed at the parent’s rate.

Moreover, money in the child’s name becomes a liability when it comes time to compute eligibility for scholarships and other forms of financial aid, which are generally based on need. Thus, most experts recommend against this route.

“People say, ‘Put it in the child’s name,’ but the tax gains could be minimal as opposed to the financial-aid problem,” said Calman Chaney, president of Campus Consultants in New York.

Tax-free municipal bonds, in the name of either parents or children, have long been a popular way of saving money for college. With zero-coupon bonds, in which all interest is paid at maturity, parents can know the exact amount of money that will be available when the child enters college. Beginning in 1990, Series EE U.S. Treasury bonds will be tax-free, with certain restrictions, if the money is used to pay for college.

Certificates of deposit, including some now offered specifically as college savings vehicles, are also a good, secure option.

Another safe investment is a universal life insurance policy, which can in many cases yield tax-deferred or tax-free income when the child enters college. But such a policy must be properly set up and should be purchased only if life insurance is needed.

A proposed change in the tax laws presented last week in the Senate might allow money in Individual Retirement Accounts to be withdrawn without penalty to pay for college, though this is not currently permitted.

If the children are still young, most experts recommend that at least some money be placed in higher-risk, higher-yield investments such as a growth stocks, growth mutual funds or even real estate. Many financial planners recommend a portfolio of half bonds or savings and half stocks or mutual funds.

An option which may become more popular in the future is prepaid tuition, currently available at only a few colleges. These plans allow parents to begin paying far in advance and protect themselves from future tuition increases. If the child chooses not to go to that school, or not to go to college at all, the money is refunded, but usually without interest. A proposal for a tuition prepayment plan at the University of California, however, was vetoed by Gov. George Deukmejian.

As children approach college age, understanding the college financial-aid process becomes extremely important. Chaney said many parents don’t really know how scholarships and subsidized loans are awarded and thus assume, incorrectly, that they won’t be able to take advantage of them.

“I’ve had clients with incomes over $100,000 who qualify for aid--a lot of people don’t know about these opportunities,” he said.

Chaney also pointed out that financial aid awards are in part a function of the cost of the school. Most private universities use a complex formula to determine how much the family can afford to pay, and then provide the remainder in financial aid. Even the most expensive and elite institutions can thus end up costing parents no more than a cheaper school.

Through careful money management, parents can actually increase the chances that their children will qualify for aid. Chaney said, for example, that capital gains from the sale of stocks should be taken before Jan. 1 of the child’s junior year in high school to avoid increasing the family’s gross income and thereby hurting financial-aid prospects.

And parents and students should fully explore all options for aid. Charlie White pointed out that some colleges, particularly those in the Midwest that are seeking students, will in effect negotiate financial-aid levels without regard to need. And a variety of loans are available even for families which don’t qualify for government-subsidized aid.

Most qualified financial planners can offer advice on paying for college, and The College Board publishes a book called “How to Pay for Your Children’s College Education.”

But there’s no substitute for making even a modest savings commitment as early as possible. As Brad Weddon of Prudential-Bache Securities in Newport Beach noted: “The eighth wonder of the world is the compounding effect of interest. It’s never too late to start.”

TIMES POLL

Most Orange County parents fear they won’t be able to finance their children’s college educations. Part I, Page 1.