Paying For COLLEGE Infant or teen, that tuition bill must get paid. Here's how you can do it.
By Beth Kobliner

(MONEY Magazine) – If you're a parent, the goal of raising the money to send your child to college may seem achingly unattainable. After all, four years at a private college now costs more than $45,000 on average ($18,000 at public colleges). If the price keeps growing by 6% annually, as many economists expect, a bachelor's degree for today's newborn could cost nearly $140,000. Before swearing off colleges -- or at them -- remember this: there are probably more sources of help for reaching this goal than for any other. Among them are the following: -- Almost countless savings and investment choices from banks, stockbrokers, mutual funds and insurance companies. -- U.S. Savings Bonds, which are available at most banks. Bonds bought after 1989 will pay tax-free interest to parents who use them for their kids' college educations. (A caveat: the interest will be fully tax-free only for parents whose joint incomes are $60,000 or less; the cutoff is $40,000 for singles. The interest exclusion phases out beyond those amounts and disappears at $90,000 for couples, $65,000 for single parents.) -- Tax-free bonds for college bills, which are sold by a growing number of states to their residents. -- Ever more scholarships for undergraduates from private organizations -- more than $200 million in the 1988-89 school year, double the amount in 1984-85. -- All sorts of federal assistance, including the popular Stafford Loans, formerly called Guaranteed Student Loans. (See the box on page 82 about applying for them.) Ideally, families should start planning for college practically at their children's birth, as Bob Kite of Knoxville started doing for his three daughters 20 years ago (see the box on page 83). But whether a child is a year old or a year away from college, it's never too late to begin. The smartest techniques include the following:

Long-Term Strategies If you need proof that an early start on saving for college pays off, consider this: Say that you are fiercely determined to send a child to private college entirely at your own expense. Let's further assume that the money you put away will earn 9% annually, while college costs will escalate at 6%. How much must you set aside? For a newborn: $250 a month. For a 15-year-old: nearly $600 a month, or about $7,200 a year. If you want to save for college at a bank, brokerage house or mutual fund, your first decision will be whether to put the account in your name or in your children's names. If you keep the account in their names, you or another adult can serve as custodian so that your children cannot take the money out until they reach the age of majority -- usually 18 or 21. At that point, your children can use the money as they wish. Depending on the law of your state, you can open one of two types of custodial accounts: either an UGMA account (for the Uniform Gifts to Minors Act) or an UTMA account (the Uniform Transfers to Minors Act). The only significant difference is that an UTMA allows you to give your children real estate or art, in addition to cash and securities. Some parents like to set up custodial accounts as a form of self-discipline, figuring that they won't be tempted to withdraw cash specifically earmarked for college. Others do so to save on taxes, as a result of the so-called kiddie tax. It specifies that if your child is under 14, the first $500 of annual investment income in his or her name is tax-free; the next $500 is taxed at his or her rate (normally 15%); and any unearned income above $1,000 is taxed at your bracket. None of the earnings in an older child's account are taxed at your rate. (Another way around the kiddie tax is to get a lawyer to set up a minor's trust. The first $5,000 of its income will be taxed to the trust at the 15% rate, and additional earnings will be taxed at the 28% rate.) Families expecting to apply for federal financial aid might want to keep their college money in the parents' names rather than in custodial accounts. Reason: doing so could increase their aid packages. According to federal law, if a family applies for most federal student loans or grants, the student must contribute toward college 35% of the savings in his or her name. Parents, by contrast, must contribute only up to 5.6% of their total savings. Whether or not you open a custodial account, you cannot afford to take the chance that the money will have lost value when the bursar calls. So restrict your investments to ones carrying low or moderate risks. In particular, be sure to avoid chancy junk bonds, commodities and stocks of start-up companies. With custodial accounts, invest the cash in ways that take advantage of the tax rules. ''The emphasis in a custodial account should be on high growth and low income before age 14, but growth and taxable income after 14,'' says Gerald Krefetz, author of How to Pay for Your Children's College Education (The College Board, $12.95). Appropriate investments for a child under 14 include tax-free municipal bonds or muni bond mutual funds, U.S. Savings Bonds, conservative growth stocks, and long-term growth mutual funds, which pay little or no dividends. (For advice on choosing mutual funds, see the story on page 26.) When your child turns 14, you can sell half of the growth investments and buy income generators such as bank certificates of deposit, Treasury bills or notes and money-market mutual funds. Some of the best investments for college -- in or out of custodial accounts -- are zero-coupon bonds. They get their name because you receive no income from the bonds until they mature. You buy a zero at a substantial discount from the face value you collect at maturity. For example, a zero-coupon bond yielding 9% that matures in 1999 might cost $390 compared with the bond's $1,000 face value. Zeros are issued by the U.S. Treasury, corporations, states and municipalities. Even though you will not receive income from a zero before maturity, you must pay annual income taxes on its accrued interest, except for municipal zeros and ones from your state, which are both tax-free. The prices of long-term zeros are the most volatile of all bonds. So be certain you will not need the money before the bond matures. Otherwise, if you have to cash out at a time when interest rates are rising, you could take a heavy loss. You can buy individual zero bonds from a stockbroker or purchase a portfolio of them in no-load mutual funds sold by Benham Capital Management (800-472-3389) and Scudder Stevens & Clark (800-225-2470). Some banks and savings and loans sell zero-coupon certificates of deposit, which are similar to taxable zero bonds. Ask your stockbroker if your state will be issuing any so-called college savings bonds, a type of tax-free zero. As of early 1989, nine states had sold the bonds and eight others had announced plans to follow suit. Specifics vary from state to state, but in general, college savings bonds have higher credit ratings than other municipal zeros.

Short-Term Strategies As college gets closer, parents and children are often tempted to apply for loans to supplement their savings. But before signing up for college debt, be sure to explore such options as scholarships, grants and part-time campus jobs. Competition for private scholarships is extremely stiff. In the 1988-89 school year, only about 800,000 students received such awards, generally based on financial need, grades, special talents or a combination of the criteria. One excellent source of scholarship information is the paperback Need a Lift? (available only by mail from the American Legion, P.O. Box 1050, Indianapolis, Ind. 46206; $1). Parents should ask their employee-benefits offices about scholarships provided through their companies. Leaders of religious and social groups can also help. Although it has become harder to get a grant or subsidized loan from the federal government in recent years, undergrads received more than $10 billion of such aid in 1988. At the same time, states and colleges have become more significant sources of grants and loans. To receive any financial aid, parents of high school seniors generally must fill out an application form -- either the FAF (Financial Aid Form) or FFS (Family Financial Statement), depending on the college. These forms, available from high school guidance counselors and college financial aid officers, estimate how much a family must contribute toward college expenses before it can qualify for financial assistance. A college financial aid officer calculates the difference between this amount and the actual cost of the school to determine a family's financial need. Figure on a minimum of two to three hours to complete the four-page FAF or FFS forms. Some colleges also have extra aid applications of their own. As a rule, the federal Pell Grant and other grants -- which are outright gifts and don't have to be repaid -- typically go to families with incomes of about $32,000 or below. Federal student loans are available to children of families with higher incomes too, assuming the applicants demonstrate financial need. So don't skip applying for loans and grants just because you think your family's income is too high for you to qualify. Each college interprets a family's financial data differently. Sometimes high-income families who have extenuating circumstances -- heavy medical costs, for example, or several children in college -- can receive aid that they would not otherwise get. Indeed, students whose parents earn $60,000 or even more can sometimes qualify for Stafford Loans. One type of federal aid, the PLUS loan (Parent Loan for Undergraduate Students), is a gem of a deal that does not require a family to demonstrate financial need. In fact, any parent with a clean credit rating can receive a PLUS loan of up to $4,000 a year from a bank, S&L or credit union. The interest rate, which lenders can raise or lower once a year, floats at 3.25 percentage points above the rate on one-year Treasury bills; it cannot exceed 12%. The loan rate in early 1989 was 10.45%. PLUS loans must be repaid within 10 years, and payments start 60 days after the money is disbursed. For information and advice about each of the federal grant and loan programs, consult The College Cost Book (The College Board, $12.95) and Don't Miss Out (Octameron Associates, P.O. Box 3437, Alexandria, Va. 22302; $6.25). The second book has a helpful worksheet that will give you a rough idea of the contribution to college costs that aid officers will expect from your family. Keep in mind that only 20% of interest on student loans is deductible in 1989 and that by 1991 none of it will be deductible. For this reason, you may want to consider taking out a home-equity loan because interest on a loan of up to $100,000 is fully deductible. A home-equity loan, offered by banks and brokers, lets you borrow as much as 80% of the market value of your house minus the balance on your mortgage. In early 1989, the national average home- equity loan rate was about 12.5%. (For advice on shopping for a home-equity loan, see the story on page 42.) You might also look into borrowing from the New England Education Loan Marketing Corp. (known as Nellie Mae) or the Education Resources Institute (TERI), two national nonprofit educational programs that do not require families to show financial need. Both Nellie Mae and TERI offer loans to parents and students, charging a 4% up-front fee. The loans must be repaid within 20 years. With Nellie Mae's Excel loan you can borrow $2,000 to $20,000 a year at either a fixed rate (12.95% in March 1989) or a variable rate at two percentage points above the prime rate (making the loans cost 13.5% recently). For more information call 800-634-9308. Similarly, TERI (800-255-8374) makes variable-rate loans of $2,000 to $20,000 at about two points over the prime rate.

BOX: KEY TERMS

-- Custodial account: Sometimes known as an UGMA account (an acronym for the Uniform Gifts to Minors Act) or an UTMA account (Uniform Transfers to Minors Act). You set up a custodial account for a minor at a bank, brokerage or mutual fund. When he or she reaches the age of majority, the account belongs to the child. -- FAF and FFS forms: The most popular applications for college financial aid. The initials stand for Financial Aid Form and Family Financial Statement. The forms are available from guidance counselors and financial aid officers. -- Financial need: A term used in a technical sense by college financial aid officers. It is the cost of a year's tuition, room and board, and fees at a college minus the amount that a family must contribute toward schooling in order to receive aid. -- Stafford Loan: Formerly called a Guaranteed Student Loan, a Stafford Loan -- named after retired Senator Robert Stafford -- is a federal loan available to college undergraduates, graduate students and vocational school students. -- Zero-coupon bond: A popular investment for college sold by brokerage firms. The bond pays out no current interest, hence its name. Zero corporate, municipal and Treasury bonds are bought at deep discounts from the face value that they return at maturity.

BOX: THE MECHANICS Applying for a Stafford Loan

Federal Guaranteed Student Loans -- now called Stafford Loans -- are available to all college undergraduates, graduate students and vocational-education students demonstrating financial need. The maximum loan is $2,625 a year for first- and second-year students, $4,000 for upperclassmen and $7,500 for grad students. A borrower has up to 10 years after graduation to pay back the loan. Interest currently starts at 8% annually, rising to 10% in the fourth year of repayment. To apply for a Stafford, a high school senior and his or her parents should take these steps:

1. Soon after Jan. 1, fill out the federal financial aid forms required by the colleges to which you are applying. You can get the forms from your high school guidance counselor or the financial aid officers at the colleges. Ask at the colleges if they require you to complete their own aid forms too. Boys must have registered with the Selective Service System.

2. Send the forms to the companies that process them. The College Scholarship Service issues the Financial Aid Form (FAF); American College Testing handles the Family Financial Statement (FFS).

3. In the spring, after you receive your letters of acceptance, you will find out how large a Stafford Loan you can get at each college. Some schools send this information to you; others wait for you to ask their financial aid officers.

4. Soon after you decide which college to attend, choose a Stafford lender -- a bank, S&L or credit union. If you have trouble locating a Stafford lender, phone the college's financial aid office for names. If this fails, call the Federal Student Aid Information Center at 800-333-4636 for the phone number of the state agency that can supply the names. By federal law, lenders can charge an insurance fee of up to 3% of the loan amount. Fill out the lender's loan application and the promissory note and mail the form to the financial aid office.

5. Within eight weeks, you will receive a letter of approval. The lender will send the money to the college in the fall.