Plan early to pay for children's education

June 09, 1991|By Dinah Zeiger | Dinah Zeiger,Knight-Ridder News Service

BOULDER, Colo. -- By the turn of the century, tuition for four years at an Ivy League school will cost upwards of $165,000. Even at a state-supported school, you'll need about $61,000 to finance four years of college for your child -- and that's for a student paying in-state tuition.

It's never been more important to make a financial plan for a child's education. Yet, only 50 percent of parents save anything for college, and only 10 percent of those have fully funded their child's education needs, said John Claxton, a certified financial planner with Dain Bosworth Inc. in Denver.

"Most people think about and plan for their retirement. But most don't really give much thought to paying for college for their kids," he said.

Meanwhile, federal grants and loans are becoming scarcer and harder to get, and a new plan being floated by the Bush administration would cut even deeper into the middle-class's access to those federally funded loans.

College costs "are an eye opener," said Mary Wright, vice president of investments for Prudential Securities Inc. in Boulder.

Experts agree that financial planning should start immediately. If you have more than 10 years before you have to start paying out, don't be overly cautious, experts say. Growth investments that earn high returns make the most sense. Those include high-quality U.S. and foreign stocks, which are easy to invest in through mutual funds. Investing through mutual funds allows you to diversify and gives you access to professional management.

You should probably set up a monthly investment plan, which is easier to handle than a lump-sum investment or an annual contribution. According to Mr. Claxton, if your goal is to have $21,000 in 13 years, you would have to invest $7,600 in one big chunk, at 8.25 percent. Or you could pay in $902 a year for 13 years, or $80 a month.

The monthly amount is definitely "easier to swallow" for most investors, he said. Moreover, investing monthly allows you to smooth out the volatile price swings that occur in the stock market.

Ms. Wright, who is investing for her 3-year-old's college fund, puts between $100 and $200 a month into a mutual fund. When she has some extra money, she buys zero-coupon government bonds.

Zeros are a simple and affordable investment that have the attraction of a predictable return for a relatively low cost. They pay no interest (that's why it's called a zero coupon), but the price is discounted, which in effect locks in the yield. The cost depends on how long the bond has until maturity. For example, a zero-coupon bond that will mature in 2006 can be purchased today for $282.72 and will pay out $1,000 at maturity, Ms. Wright said.

In the meantime, you don't have to reinvest or roll anything over, and the bonds are backed by the U.S. government. They are free of state taxes, but not federal taxes. And you assume any market risk if you sell them before they reach maturity, Mr. Claxton said.

"The longer time you have to invest, the farther ahead you'll be. That's obvious," he said.

But all is not lost if your child is 15 years old.

Ms. Wright suggests looking at your 401(k) plan if you need a college loan for your child. Some of these plans allow you to borrow against them, and your interest cost is only the difference between the rate being earned and the loan rate, she said. For example, if your 401(k) is earning 8 percent, and the interest charged to borrow is 11 percent, you may only have to pay the difference, or 3 percent, to borrow the funds.

"It's cheaper than borrowing from a bank," she said.

You also can borrow on margin if you have an investment account, using your investments as collateral, Ms. Wright said. The advantage here is that margin interest is still deductible on your federal income taxes, while a personal loan is not.

The caveat here, or for taking out a home equity loan, is to be prudent and to make sure you can repay the loans. It's your home, your retirement income and your nest egg that you are borrowing against, financial experts warn.

The first, last and best word of advice is: Start immediately. The longer you wait, the more you will need and the less time you'll have to accrue it. Here are several resources to get you started:

* A brochure, "Your Children's College Bill: How to Figure It . . . How to Pay for It," is available free from the Institute of Certified Financial Planners. Call 1-800-282-PLAN.

* The "Wheel of Fortune" planning wheel from the Delaware Group of mutual funds will show you how much you will need now and 12 years from now for college. It's free from Dain Bosworth, (313) 443-5384. (Ask for Bill Holmes.)

* "The College Savings Calculator: How Much Is Enough?" is available free from John Claxton, 1-800-525-3703.

* Don't overlook the resources in your library, including Peterson's Guide to Four-Year Colleges.

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