(FORTUNE Magazine) – If you think you needn't worry yet about your toddler's future tuition expenses, it's time to get real. Already room, board, transportation, books, supplies, and late-night pizzas add up to $14,000 at the average private college. The bill at Ivy League institutions comes to $21,000. Even assuming that tuition inflation eases from the current 9% rate to 7%, as some experts expect, the cost of the average private college for a child born today will total $215,000. Where on earth can families expect to find that kind of money? The best bet: Start early and stick with common stocks for their solid long-term returns, assuming that you won't have to cash in the shares for at least five years. (If college is closer than that, the risk to your capital is too great.) Thus, parents should start investing when a child is in the playpen, and start reducing risk in the portfolio when he or she becomes a teenager. After that, caution dictates transferring the money gradually, year by year, from stocks into CDs and other short-term investments that will preserve capital. Assuming that such a strategy provides an average annual return, after tax, of 7%, a new parent should be able to meet the college needs of a child born today with annual contributions of about $4,842 from now through the fall of senior year of college (see chart). An interesting alternative: the College Prepayment Fund, a new no-load mutual fund run by Kemper Asset Management. You designate a college that participates in the program; 30 private and public institutions had signed up by September, and at least 50 are expected on board by 1990. You invest enough to cover the present tuition, whether for a number of courses, a semester, or a four-year education. The College Prepayment Fund guarantees payment of the future cost, and if the ultimate cost exceeds the future value of your investment, the college takes the loss. If your child opts for another, more expensive school in the program, the fund will pay an amount equal to the tuition of the original school chosen. Most important, the funds do not have to be used for college at all; you can redeem your shares like those of any other mutual fund. State-sponsored prepayment plans, available so far in Florida, Michigan, and Wyoming, are a mix of pluses and minuses. Michigan, the pioneer, gets the best marks. The plan guarantees tuition at any one of Michigan's public colleges. While the tuition guarantee applies only to in-state colleges, the plan refunds the average tuition in Michigan to investors whose children choose out-of-state schools. If their children don't go to college, parents get back an amount equal to the lowest tuition in the state. Wyoming refunds the original payment plus 4% interest. Florida returns the principal only. The state plans have some tax advantages. Usually you pay no federal tax on income until the tuition money starts to flow. At that time the child pays taxes on the deferred earnings at his or her rate, which presumably will be lower than the parents'. Twelve states now issue special zero-coupon college savings bonds, sometimes called baccalaureate bonds, that are tax-exempt at the federal level and in the issuing state if you live there. These zeros, recently yielding around 7%, give you built-in compound interest that you can't easily get from ordinary bonds. Starting next year, some investors will be able to earn tax-free interest from Series EE U.S. Savings Bonds if they spend the proceeds on college tuition for their children. The yield of EE bonds, recently 7.81%, is reset every six months to equal 85% of the yield on five-year Treasury bonds. There's one drawback: The federal income tax exemption phases out as household income approaches $90,000 for couples or $55,000 for single parents. To reduce the tax bite, it pays to let college money pile up in a child's account until the fund earns more than $1,000 per year. The first $500 of that is offset by the child's standard deduction for investment income. The next $500 is taxed at the child's rate, which will be 15% under present tax law unless the child is unusually well off. The parents report taxable earnings above $1,000 on their tax returns until the child reaches 14. Then the income goes on the child's return and is taxed at his presumably lower rate.

CHART: NOT AVAILABLE CREDIT: SOURCE: THE COLLEGE BOARD CAPTION: GETTING A JUMP ON COLLEGE COSTS Even brand-new parents should start stashing cash for future college bills.