(MONEY Magazine) – Those families with more than 10 years until they ship their tyke off to college have the best savings tool that money can't buy: time. They not only have time to set dollars aside, but those dollars have time to compound. Say you're planning on sending your youngster to a school that would cost $5,000 a year today, and assume that costs will increase 6% annually. If you begin saving when the child is five years old, you would need to set aside about $150 each month. But if you wait until age 10, you would have to cough up about $300 monthly. And if you don't start until the child's 15th birthday, it will take more than $1,000 a month to meet the goal. Given the long lead time that parents of grade-schoolers have, they should think in terms of investing, not just saving. ''Too often people are reluctant to put their college savings at risk and favor conservative vehicles,'' observes Steven Enright, director of financial planning at Seidman Financial Services in New York City. But with more than a decade until freshman year, low-yielding savings instruments leave you vulnerable to inflation, and you have time to make up for any losses on higher-risk investments. Thus you should use some of your money to seek higher returns than those available on such traditional college-savings vehicles as Series EE bonds, CDs and zero- coupon bonds. Financial planners suggest a college portfolio invested half in savings instruments and half in growth stocks or mutual funds. Enright likes two no- load funds -- Neuberger & Berman Manhattan Fund (800-877-9700) and the Boston Co. Capital Appreciation Fund (800-225-5267) -- with compound annual returns exceeding 20% over the past five years. To figure out how much money you will need to save now to meet your college goal, complete the worksheet on page 64. The next question is in whose name you should keep college funds -- yours or your kids'. While traditional wisdom has held that a custodial account is the way to go, many thoughtful parents are rejecting that strategy. For starters, money put in a custodial account is irrevocable, and after a certain age -- usually 18 or 21 -- the youngster is free to do what he or she wants with it. Also, a custodial account is no longer the tax haven it was before 1986, when the kiddie tax reduced the advantages of shifting money into a child's name. Still, if your child is under 14, the first $500 of investment income in his or her name is tax-free; the next $500 is taxed at his or her rate, probably 15%. Anything above $1,000 will be taxed at your rate. Once a child hits 14, all earnings on assets in his or her name are taxed at the child's rate. Keep in mind that the formula for calculating financial aid is another reason to keep money out of the child's name. Colleges expect 35% of any money in a child's name to go toward school, whereas only 5.6% of money in the parents' name counts (see ''The Curious Game of Financial Aid'' on page 73). What follows is a closer look at some products and strategies designed for families with college-bound children. Most of the investments offer low risk and low returns, but they are suitable for the conservative half of a college portfolio. -- Series EE savings bonds. These supersafe government bonds have always been exempt from state and local taxes. But beginning next year, for many parents EE bonds bought to finance college will also be free of federal tax. Interest will be fully tax-free for married couples filing jointly with adjusted gross incomes (modified to include Social Security benefits, retirement contributions and passive investment losses) of $60,000 or less; the cutoff is $40,000 for single parents. The tax break phases out beyond these levels and disappears entirely at $90,000 for couples and $55,000 for singles. Note: these amounts adjust for inflation. EE bonds pay a variable rate, currently 7.81%. If EE bonds were totally exempt from taxes now, a taxpayer in the 28% bracket who pays only federal taxes would need to get a taxable 10.9% to beat that current yield. And for taxpayers in high tax states, the taxable equivalent would be as much as 12.5%. EE bond yields are guaranteed not to drop below 6%, but you must hold them for five years or you will receive a return below 6%. Baccalaureate bonds. Municipal zero-coupon bonds -- nicknamed baccalaureate, B.A. or college savings bonds -- pay all interest at maturity, so they offer parents the security of knowing exactly how much cash will be available when a child enters college. Like most munis, these are exempt from federal taxes and, for state residents, from state and local taxes as well. Recent yields on B.A. bonds were 6.5% to 7% on maturities of 10 years or more -- the equivalent ; of a taxable 9% to 9.7%. B.A. bonds have a big advantage over other munis, however: they are generally not callable. States that have issued them are Connecticut, Delaware, Hawaii, Illinois, Iowa, Missouri, North Carolina, North Dakota, Oregon, Rhode Island, Virginia and Washington. Four other states -- Arkansas, Colorado, New Hampshire and Tennessee -- are likely to offer them soon. If your broker can't find you a noncallable zero muni with an attractive yield, you may consider taxable zero-coupon Treasuries. They are exempt from state and local taxes and recently yielded 8% on 15-year maturities. Or you might want to consider a so-called zero-coupon CD, which is sold at a discount from its face value. The Bank of Hartford (203-525-6631), for example, sells a discount Education Savings Certificate with a recent yield of 8.87%. -- Universal life insurance. Universal life offers yet another tax-advantaged way to save but makes sense only if you also need insurance. With such policies, part of your premium is deposited in an account where it compounds tax deferred. Recent yields: about 9%. When your child is ready to go to college, you can withdraw the cash balance or borrow against it. But because up-front commissions are usually steep, your cash value is minimal in the early years. Two low-load insurers whose products allow you to build up cash value quickly: USAA (800-531-8000) and Ameritas (800-255-9678). Insurance agents like to point out that cash value life insurance provides a mechanism for savings, but if you are a disciplined saver you may be better off buying cheaper term insurance and investing the difference in other tax-advantaged assets. -- Prepayment plans. By allowing you to pay now the cost of sending your child to school later, prepayment plans eliminate the risk that inflation will put college out of your reach. Offered in Florida, Michigan and Wyoming, the best plan is Michigan's, which works this way: Parents of a six-year-old put up $7,500 -- or 82% of the current costs -- and their child's tuition is guaranteed at any Michigan state school in 12 years. When the child enrolls in 2001, he or she will have to pay taxes on the difference between his parents' prepayment and the then tuition. If tuition rises 6% a year, four years at a Michigan school will cost $18,512, so the child's tax, assuming the 15% bracket, would be $1,652. Meanwhile, if the same parents put their $7,500 in a 12-year zero muni, recently paying 6.5%, at maturity the bond would pay $2,348 + less than the $18,512 tuition. The deeper the prepayment's discount from current price, the better the deal. Florida's plan includes no discount. Wyoming's is 17% for a six-year- old, but there is only one four-year public college in the state. Moreover, if your child opts for a private or out-of-state school, Michigan refunds the average cost of Michigan state schools, but Wyoming returns just your principal plus 4% and Florida refunds principal only. Hemar Education Corp. of America, a private company involved in educational financing, is awaiting an SEC ruling on a prepayment plan that would offer a choice of a wide range of schools nationwide. Brandeis and George Washington University are among the well-known institutions considering participating. Also awaiting a go-ahead from the SEC is the nonprofit Tuition Maintenance Organization's College Prepayment Fund. Under this program, your prepayment would go into a new no-load balanced mutual fund managed by Kemper. Your tuition is guaranteed at participating colleges, and if -- come college time -- your investment is greater than the tuition, you get to keep the excess.

BOX: EARLY INVESTMENTS TO CONSIDER

-- A no-load growth fund -- Series EE savings bonds -- Baccalaureate bonds

BOX: Fill It Out

FIGURING OUT HOW MUCH TO SAVE The worksheet below will help you calculate what you need to sock away this and every year to meet future college costs. It assumes that you have no college savings yet, that costs will grow by 6.5% annually and that your investments will earn 8% after taxes.

1. Number of years before college (18 minus child's age)

2. Present annual college costs (use $4,733 average for public school, $12,635 for private, or the cost of a particular school)

3. Future cost of first year of college (line 2 times factor from column A in the table below)

4. Future total cost of college (4.69 times line 3)

5. Amount you need to invest each year to meet that goal (line 4 times factor from column B below)

CHART: NOT AVAILABLE