The Lowdown on Saving for Higher Education

It seems that every decade must be known for one thing--whether it is the “free love” of the 1960s or the greed of the 1980s. One investment expert maintains that the 1990s will become known for a newfound emphasis on culture and education.

If you talk to young parents, you’ll probably see some evidence of this theory. It seems that nearly every new or soon-to-be parent is talking about signing the children up for school when they’re practically still in the womb. And some start squirreling money away for Junior’s college costs from the moment he leaves the hospital.

There’s good reason for moving quickly to save.

College costs have skyrocketed in recent years, and all indications are that they’ll continue to soar at rates well above inflation. That means that parents who want to support their children through school will have to work harder and start sooner than before.

If your child is born today, for example, by the time he or she is of college age, four years of schooling are expected to cost upward of $100,000. (Already, industry experts maintain, one year at a state college will run $7,500, while the cost of attending a private university amounts to about $16,000 annually.)

To save that much money at today’s market interest rates of less than 6%, you’d have to put away about $245 a month, starting today, until the day your child entered school.

Clearly, then, passbook savings is not the best answer for putting aside funds for a child’s college education. What is the answer?

Investment advisers suggest a balanced portfolio that puts some money in higher-risk ventures that have a better chance of paying off big, and some money in safe--but lower-yielding--investments.

Tax advisers also believe that parents are well-served to “gift” a certain amount of money to their children so the income on their children’s investments will be taxed at the child’s lower rate.

There are limitations on such gifts, however. First and foremost, each individual is allowed to give away no more than $10,000 each year to one individual without triggering gift taxes.

Also, children under age 14 can earn only $1,000 in interest and investment income without running afoul of kiddie tax rules that force the child to pay taxes at the parent’s rate.

And, last, money given to children is legally theirs. Unless you have placed the money into a trust that has spending restrictions, once the funds have been transferred and a child reaches legal age, the child can spend it as he or she wishes. In other words, the money you intended to go for schooling might buy a jet ski instead.

But aside from these relatively minor problems, setting up a savings account in your child’s name is a good way to start a college fund.

How should you invest the money?

First, divide it up. Put aside a certain amount for long-term investments that have the potential to yield more than the average savings account. Depending on how much money is available, you might want to consider investing in individual stocks, mutual funds or real estate.

Recognize, however, that these investments probably will be buffeted by short-term market swings. This is not a worry if you are sure of your investment and if you have staying power--the ability to wait out a bad market.

A separate amount should be placed in relatively risk-free and liquid investments such as insured bank deposits or Treasury bills. This is important for two reasons: You need to have a baseline amount that you know is never at risk. And you need to have the ability to handle unexpected expenses that crop up long before your child takes college enrollment exams.

What kind of expenses? Let’s talk kindergarten.

One local housewife says sending her child to a private grammar school costs upward of $8,000 annually. That was an expense she had never anticipated--and couldn’t afford without dipping into what had started out as her boy’s college fund.

She hated to do it, she added. But because the public schools in her neighborhood consistently turned out poor-performing students, she felt that private school was the only way to get her child to college.

Finally, depending on the amount of money you have to play with and how savvy an investor you are, you might want to consider having a small amount set aside for pure speculation.

This is money you should be prepared to lose. If you have that luxury, you can trade in commodities, limited partnerships or other highly speculative deals. You might also consider buying and selling stock options, or just actively trading stocks.

If you are good at timing markets--a rare talent--you can earn gratifying returns by investing aggressively. But because this is difficult and risky, this should probably be the smallest part of your portfolio.

A final note: If your college fund proves insufficient to pay for even one year of school, don’t panic. There are a wide array of scholarships, grants and low-interest loans available to students. Your child should plan on making an appointment with a student aid counselor even before the academic year starts.

An 18-year-old with confidence and initiative will not miss out on anything for lack of funds. Even if you’ve given your children nothing but a sense of self-worth, you’ve made it possible for them to make it through college--not to mention the rest of their lives.