CollegeSure: a way to keep pace with rising cost of college

``Students and their families should not be discouraged by these increases.'' Those less-than-comforting words were uttered last week by Donald Stewart, president of the College Board, as he announced that college costs will be 7 percent higher this fall than they were last year.

For the ``average '' four-year private college, the annual cost will be $11,330 for the 1988-89 school year. Add $1,600 on top of this, which the board figures will be needed for incidentals like books, supplies, and transportation, and the cost approaches $13,000. At a public four-year college, the average annual cost is just over $6,000, including incidentals.

All this is happening while the national inflation rate is running about 4 percent, making it the eighth year in a row that tuitions have risen faster than the consumer price index.

Obviously, this makes it difficult for parents to figure out a rational program to save for their children's college costs, when they can't even predict what those costs will be, say, 10 years from now. If anybody came up with a way to bring a little certainty back to the process, most parents would probably welcome it.

About a year ago, one possible answer came from a newly created financial institution in Princeton, N.J. The College Savings Bank was put together by a former bond-market executive at Lazard Fr`eres & Co. specifically to market a product called the CollegeSure CD. This certificate of deposit has a floating interest rate that the Savings Bank guarantees will keep pace with the rising cost of college.

So far, the response to the CD has been good, and although bank officials say they have depositors in every state and several foreign countries, they do not say how many customers there are or tell how much money has been deposited. Generally, financial advisers applaud the product, but they note that there are other, equally effective ways for parents to save - if they have the discipline to do it.

``I think there are some advantages,'' says Grace Weinstein, a financial writer and author of ``The Lifetime Book of Money Management'' (New American Library, New York, $12.95). ``The biggest advantage is that most people aren't disciplined enough to buy CDs regularly and do it on their own.''

``I think it serves a very useful purpose for people who do not have the discipline to create that kind of plan for themselves,'' agrees Irene Goldfarb, a financial planner in Princeton. ``I've heard nothing negative about it, only good things. I think it's an excellent idea ... but so far I've not had any of my clients use it.''

This CD was introduced shortly after several states, including Michigan, Florida, Indiana, Maine, Tennessee, and Wyoming, were preparing similar programs, usually for parents whose children would be going to college within those states. If the child does not go to a school in that state or decides not to go to college at all, the parents could lose all the interest their money earned.

With the CollegeSure CD, the money can be used at any college, and if Junior decides to run off with a rock band instead, the parents would get all their money back. The account stays in the parents' names, and there is a penalty for early withdrawal.

The CD is federally insured and is available directly from the College Savings Bank (800-888-2723), or at no extra charge through brokers at PaineWebber Inc. offices around the country. Parents can deposit any amount starting with $1,000, or they can put in several thousand dollars, if they have a lump sum available.

To pay its expenses, the bank takes 1 percent off the college inflation rate for deposits over $10,000, while deposits under that amount cost 1 percent. The bank continuously invests the money on this basis until the child is ready for college.

``When you look at college inflation relative to investment yields, college inflation runs well ahead,'' explains John Finnerty, executive vice-president and chief financial officer at the College Savings Bank. ``So by paying only one percentage point below the college rate of inflation, we're actually offering a return that is significantly better than you could get on a Treasury bill or Treasury bond or comparable high-grade debt instruments.''

If the parents do start with just $1,000, and they hope to have their newborn child attend a private college, they would add $465.59 each quarter to the account. Parents who have a large amount of money to invest - a gift or inheritance from the child's grandparents, for example - may be able to set aside enough for college with just one large CD.

As with any other CD, there are tax consequences. Even though the money is not available while it's growing, it is considered taxable income. And if the child is under 14, any income over $1,000 is taxed at the parents' rate. All this reduces the actual yield.

You can find tax-free or tax-deferred alternatives in municipal bonds or Series EE United States Savings Bonds. You can also set up a buying program of short- and medium-term CDs at your own bank. Matching the college inflation rate through a continuous program of buying and rolling over bank CDs should not be difficult, but you have to stick to whatever program you start.

``If you can save on your own,'' Ms. Weinstein says, ``you've got to do it. A lot of people don't.''

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone.