Schools of Hard Shocks

Linda Frost, a single mother living near New Haven, Conn., is determined to see her two young daughters go to college.

But as an administrator working at a private high school, she knows too well about the steep costs of education.

So since 1994, Ms. Frost has been salting away as much as she can, buying two $100 US savings bonds each month. The interest will be tax free if used for college.

She's avoiding some hard lessons.

It's crucial, say financial planners, for families to devise a long-range plan to pay for college. Now!

Tuitions rise faster than wages -- by about 3 percent a year - and financial aid generally covers just a fraction of the cost.

On Pages B6 and B7, you'll find important tips on saving for college, as well as some Internet sites that can help plot a strategy. One way to access these sites is through Work & Money's own Web site: www.csmonitor.com/work

Ms. Frost, not her real name, doesn't stop with savings bonds. She's also looking into new kinds individual retirement accounts - the education IRA and the Roth IRA - that Congress just created to help people like her. They allow savings to grow tax-free in mutual funds. And the money can be withdrawn tax-free for college.

"Between whatever I can save, and possible scholarships," she says, she hopes to have to have enough when her girls - one a teenager, the other a preteen - start college.

College unloads on American families one of the largest tabs they will face - often equal to buying a home.

"Total expenses at a private four-year school can run around $120,000 - and about $60,000 for a four-year public school," says Tom McGrath, co-owner of Strategies for College, a consulting firm in Rutland, Vt.

By one study, the annualized rate of return on a college education, in terms of higher income, can be about 11 percent. That beats most investments.

Unfortunately, studies consistently show that parents of young children are not saving enough.

A survey last year by Money magazine found that half of parents in the US have nothing tucked away for tuition. Of those actually saving, 25 percent save $500 or less a year.

Moreover, investments tend to be too conservative - low-yielding certificates of deposit or money-market accounts instead of stocks or stock mutual funds, which offer the greatest returns.

Despite the challenges, families can meet their goals if they make a plan and follow it, experts say.

They cite five key steps:

* Get your financial house in order. Pay down credit-card bills. Avoid tapping into your home equity, in case you need it later to supplement your college savings.

* Set aside whatever you can each month. See the chart at left or an Internet site with a college-cost calculator to help you figure out how much to save. Two Web sites to try are Fidelity (www.fidelity.com) and Vanguard (www.vanguard.com).

If you have a high salary, you might save in your child's name to take advantage of the child's lower tax rate, says Gary Schatsky, a financial planner in New York. If your income is modest, saving in your name might help your child qualify for student aid later.

Possible savings vehicles are outlined elsewhere on this page. Options frowned on by many experts: unit trusts, bonds that might have to be sold before college years, and tax-deferred annuities, which carry a penalty for withdrawals before age 59-1/2.

* Be knowledgeable about financial aid (see Part 2 of this series, which runs March 2). Aid dollars flow to the folks who know how the aid system operates, says Kalman A. Chany, author of "Paying for College Without Going Broke" (Random House/Princeton Review, $18).

* Learn as much as possible about the colleges your children might attend. Be aware of their costs and aid programs.

* Parents - and students - also need a heady dose of realism, experts warn. The college a student attends may depend as much on the aid package as on being accepted for admission.

Students should apply to between five and eight schools - including at least one sure thing and one or two that may be long shots, because of costs or academic requirements. You may be pleasantly surprised.

Don't overlook two-year colleges, Mr. McGrath says. They are relatively inexpensive, and may help your child get on the road to a four-year program elsewhere.

And if your child has special talents, or your family finances are extremely tight, consider enlisting help from a planner or firm specializing in college placement, Mr. Schatsky says.

Different Speeds, Different Needs

To save for college - or any other big ticket item - calibrate your savings to fit your financial situation.

Experts offer the following advice:

* Unless there's an absolutely compelling reason, don't use retirement dollars to pay for junior's schooling. Retirees face big expenses of their own and, with increasing longevity, need their savings for themselves.

* Consider your time horizon. For investors on a short leash, less than three years, consider a short-term bond fund, says analyst Russel Kinnel of Morningstar. An aggressive investor might put a portion into a stock fund, but be ready to move it into a money-market fund if the market goes haywire, says David Bendix, a financial planner in Uniondale, N.Y.

* If you have a five-year horizon, consider a conservative stock fund, such as a growth-and-income fund, or convertible bond funds, Mr. Bendix says.

* For long-term horizons, more than five years, think individual stocks or stock mutual funds, says financial planner Gary Schatsky. "Invest aggressively."