Parents Scamper to Save for Children’s College Expenses

No one could accuse Maggie and Mark Pfeffer of failing to save for their son’s college education. They began socking away money in 1994, before young Alex even started kindergarten.

“My deal was I don’t want to choose between our retirement and Alex’s college,” Maggie Pfeffer said. “I want both.”

For all their determination to save, however, the Ojai couple aren’t putting much money into their Education IRA, a trendy new financial tool for college savings.

Why? Because for all the hype, Education IRAs only allow taxpayers to squirrel away $500 a year tax-free.

“You’re looking at expenses in the thousands and thousands and if you look at that, $500 is useless,” said Pfeffer, a manager at Kinko’s corporate office in Ventura.

“It’s not that I don’t like it, but it just seems like way too little,” she added.

Indeed, experts say saving for college is still what it always has been: a complicated puzzle with no simple answer.

“I would tell you that’s a great start and that it’s a good discipline move,” Ventura financial planner Russ Charvonia said of the federal program. “But it’s not going to get your son to USC or even UCSB.”

Like other experts, Charvonia contends planning for college must be a priority for parents, especially with tuition rates rising faster than inflation. The College Board estimates that by 2012, four years at a private university will cost $268,000 and at a public university, $128,000.

By that year, young Alex Pfeffer should be finishing his undergraduate degree. And although he is just starting second grade at Miramonte Elementary School, necessary preparation for his college education is well underway.

“I knew it was a huge thing to start saving. I felt a great deal of guilt that I didn’t go the first day he was born,” his mother said. “But it felt so good to start doing it.”

Strategies for Reaching Goals

Saving for college is like saving for anything, experts say, offering the following general guidelines:

* Diversify your investments.

* Start saving as soon as possible.

* If you are starting late, save anyway.

Some savers set up automatic transfers to make the process less painful. The Pfeffers, for example, have money automatically taken from their paychecks and deposited into several private as well as government-run savings programs.

“You need to use a combination of tools and techniques to really reach your goals,” Charvonia said.

Part of that is taking the first step to assess what those goals are. Do you want to pick up all the costs, including tuition, room and board, and even pizza money? Or do you want your child to be responsible for some of the expenses, such as spending money?

Parents not only need to resolve these issues early on with themselves, but with their children as well, Charvonia said.

“It’s important parents have this discussion and keep the discussion going,” he said.

Among the traditional options for college savings are bank savings accounts, mutual funds and zero-coupon bonds.

Financial advisors agree that although safe, savings accounts will provide the smallest return on an investment. With college tuition rates rising faster than inflation, it is doubtful savers using only this option would be able to keep up over the long haul.

There are thousands of mutual funds and an increasing number now focus on college savings, experts say. Parents often can arrange for automatic purchases of mutual-fund shares with regular automatic transfers from a bank account.

Zero-coupon bonds also are favored by some investors for college savings. More conservative than stocks, they work like U.S. savings bonds. Parents can buy--at a significant discount--bonds that will mature when their child is ready for college. Financial advisors can provide information on making the best choice.

Government Financial Aid

In recent years, state and federal programs designed to help families save for college and cut the need for government financial aid have become a necessary, although still small, component of every good saving strategy.

Education IRAs, for example, allow parents to save money that grows tax-free until it is used. However, the student will not owe taxes on withdrawn money if the expenses at a qualified university or college equal or exceed the amount.

The Education IRA allows family members to put a total of $500 a year into an account. If the money is used for education, it will not be taxed when it is withdrawn.

A better deal for California parents is coming soon, said Marshall Bennett, chairman of the College Savings Plan Network, a national nonprofit organization that works to promote saving for college.

He recommends parents pour money into the even newer state-sponsored savings programs, most of which do not have strict investment limits but similar tax incentives.

California has only recently started such a program, called the Golden State Scholarshare Trust. It could be up and running as early as mid-December.

Parents and other family members deposit money into an account for which the interest is tax deferred until the money is withdrawn for education expenses.

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And then it is taxed based on the income of the college student, rather than of the donor.

Although it sounds complicated, the trust program would ultimately allow parents to invest more money each year than the federally sponsored Education IRA.

But the program is new and the specifics are still being worked out, said Tom Dirthridge, who will run the trust program for the California Student Aid Commission. Forty-three other states either have tax-deferred savings or prepaid college programs already in place or well in the works.

“This is sort of an average person’s trust fund. The rich knew how to do it. The poor had grants,” Bennett said. “But the middle class was just left to borrow student loans.”

And borrow they did. Student loans doubled between 1990 and 1996, with college students borrowing $50.3 billion during the 1995-96 school year.

Tremendous debt for new college graduates and their nearing-retirement parents played a role in shifting the philosophy about how to fund higher education.

“We heard about four or five years of pro-family,” Bennett said. “Well, everybody wants to do something to help the family. And we realized that most families were going into enormous debt paying for their kids’ college tuition.

“As a result, states and the federal government started trying to initiate some tax relief and some savings programs that would help people pick up the tab.”