Parents should begin saving money early for their
children's college education because of the high costs
and expectations that parents will pay part of the
costs associated with the education. Several stock
mutual funds are recommended.
Upromise
- Save money for college 
Here's a question that's as pleasant to consider
as a fraternity hazing: How will you come up with
the money to send your child to the campus of his
or her choice? If you're like most Americans, your
answer is probably loans--unless you start saving
and investing more effectively. According to a recent
MONEY poll, fully 87% of U.S. moms and dads expect
their kids to go to college. But nearly half of them,
47%, have not yet stashed away any money to cover
the costs, which currently run an average of $7,118
a year for tuition, fees, room and board at four-year
public schools and $18,184 at private universities,
according to the College Board. And at the current
growth rate of 5% a year, the cost of a four-year
degree is projected to rise to $73,834 (public) and
$188,620 (private) for a child born in 1997.
The survey of 1,118 adults with children, conducted
by ICR of Media, Pa. (margin of error: plus or minus
2.9 percentage points), also provides a wake-up call
for parents who say they are saving for their kids'
college costs. More than half stash their savings
in unwise college investments, such as certificates
of deposit. And nearly a quarter of parents who are
saving are putting away a paltry $500 or less a year
for each child.
Yes, your child can lessen your burden by working
part time and by pursuing scholarships (see "Strategies
That Can Cut Costs 30% or More" on page 126). But
financial experts say that the average parent should
be prepared to pick up at least a third of total college
costs.
If your child is in high school and you haven't saved
enough, check out our advice on page 138 on borrowing
for college. If your children are younger, however,
the sooner you start to save, the better. For example,
Richard and Deborah Winters of Milford, Conn. (pictured
at left) began putting away col- lege money for son
Kyle, 4, when he was six months old and for daughter
Kar- lie, 2, when she was 1 1/2. Oakland registered
nurse Iris Winn (pictured on page 139), a late starter,
now stashes a whopping $12,000 of her $70,000 annual
salary into college savings for her daughter Monique,
15.
But whenever you start your savings regimen, you
can maximize your dollars by planning and investing
wisely. Later in this article, we suggest investment
strategies for families with college-bound children.
But before you get to the specific advice, study
these basic rules--the dos and don'ts of smart invest-
ing for college:
--Do set family goals. You must first figure out
how much you need to carve out of today's spending
for tomorrow's college costs. To do this, you can
use the savings calculators included in popular software
such as Quicken, online services like MONEY's college
savings calculator (http://www.pathfinder .com/cgi-bin/Money/collsave.cgi)
or free worksheets offered by brokerages and mutual
fund companies, including Charles Schwab (800-435-4000)
and Fidelity (800-544-8888).
"Parents and children should work together to make
sure they are focused on the same goal," says James
Pearman of Fee-Only Financial Planning in Roanoke.
"That way, you can face tough questions early on--for
example, what to do if you are planning to pay for
75% of tuition at an in-state public school and your
child wants to go to Harvard."
--Do start saving early. Every year, as your investment
principal grows, so do the earnings on your money.
The lesson is simple: Don't put off investing.
--Do invest in stock mutual funds. According to the
MONEY poll, parents saving for college have plowed
53% of their education investments into low-risk--but
low-interest--CDs and savings accounts at banks and
money-market mutual funds. The parents have invested
only 23% of their money in stocks and stock funds.
That's a serious mistake. While stocks carry some
risk, they are your best bet for making your money
grow over five years or more. Since 1926, stocks have
gained an average of about 11% a year, more than any
other type of investment. Moreover, you can't count
on bank account and CD yields to keep pace with tuition
hikes. The safest, easiest and most disciplined way
to invest in equities is through mutual funds. Not
only do funds offer diversification but many will
also waive initial investment minimums if you make
automatic deposits every month, typically as little
as $50 or $100. To avoid having any money siphoned
off in commissions, stick with no-load funds like
the ones we name in this article.
--Don't neglect saving for retirement. Planning for
your child's education should not sidetrack you from
making regular contributions to your own 401(k), IRA
or similar tax-deferred retirement account. You simply
don't want to miss the chance to make the most of
the tax-deferred gains available in such accounts.
And retirement assets won't affect your eligibility
for federal need-based college financial aid.
--Don't invest in esoterica. From time to time, you
may encounter sales pitches encouraging you to save
for college with investments such as annuities or
cash-value life insurance. Both defer taxes on your
investment earnings but at the price of costly withdrawal
rules. Many deferred annuities, for example, charge
penalties of 7% or more if you need to take out money
within seven years of making your investment. Tempted
to buy zero-coupon Treasury bonds, which recently
yielded 6.6%? They can be fine investments--as long
as you buy ones that will be redeemed when you need
the money. If you have to sell a zero before maturity,
you may lose principal if interest rates have risen
since you bought it. Prepaid-tuition plans, another
way of building up college savings, can make sense
if you're too nervous to invest in stocks (see the
box opposite).
--Don't put your money in your child's name if you
hope to get financial aid. College financial aid formulas
generally require a child to contribute 35% of his
or her assets toward costs, but parents typically
need to put up no more than 5.6% of their savings.
With those basic dos and don'ts at the heart of your
investment strategy, here are moves to make, based
on your kid's age:
If your child is 13 or younger, you have enough time
to weather any short-term stock market squalls. Investment
strategists therefore recommend that you put 75% to
100% of your college savings in stock funds, depending
on how much risk you can tolerate, and the rest in
such fixed-income investments as bonds and bond mutual
funds. You might start your savings program with a
fund that holds shares of large and mid-size companies
with consistent earnings gains and strong growth potential.
Financial planner Michael Zabalaoui at Resource Management
in Metairie, La. suggests Oakmark (up an average of
25.13% annually for the three years that ended June
30; 800-625-6275). Pearman recommends Vanguard Index
Value (up 25.46%; 800-851-4999). Both funds seek out
undervalued equities and bear below-average risk,
according to fund ranker Morningstar.
After you have accumulated $5,000 in your starter
portfolio, you can move as much as a third of your
holdings into small-company and international stock
funds, which offer the prospect of juicier returns
but also carry greater risk. For funds specializing
in shares of small companies, Zabalaoui favors Berger
Small Cap Value (up 22.6%; 800-333-1001). Among international
funds, he likes Janus Worldwide (up 24.7%; 800-525-8983).
If your child is 14 or older, reduce risk to safeguard
savings. Zabalaoui recommends getting at least 50%
of your money out of stocks by the end of your child's
freshman year and moving all of your college savings
for that child into short-term bonds, fixed income
and cash by the end of her sophomore year. To keep
risk low, most investment experts prescribe short-
and inter- mediate-term bond funds, which will add
more pop to your total return than CDs or U.S. Savings
Bonds. Pearman likes Vanguard Bond Index Intermediate-Term
(up 8.62%; 800-851-4999). The fund shuns high-risk
bonds and has an extremely low annual expense ratio
of about 0.2% of principal, enabling more savings
to go toward your child's college costs.
About the Author: Marc Sylvester is a financial
expert based in Edison, NJ . He holds expertise in
the banking and finance sector and is a consultant
to leading business houses.
