(MONEY Magazine) – No matter how long parents have known their children will go to college, most are caught unprepared for the cost. According to a recent survey of 1,062 parents conducted for MONEY by ICR Survey Research Group of Media, Pa., parents of college-bound high schoolers typically have saved only $11,000 for the bills. That's about 13% of today's average cost of $82,700 for four years at a private college, 21% of the $53,200 price for out-of-state students at a public school.

As a result, parents with children in high school told MONEY's pollsters that to pay for college, the families plan to cut expenses in the following ways:

--More than half expect to trim retirement savings and spending on vacations.

--Nearly a third figure on taking on a second job.

--Almost 60% think they will have to send their child to a college that's more affordable than his or her first choice.

--Nearly 70% say they will have to borrow to pay the bills.

What's more, for the foreseeable future, tuition is expected to keep on rising at this year's torrid 6.5% pace at public and private schools--about the same annual increase as was averaged in the past 10 years. At that rate, sending a child born this year to a four-year state college in 2014 will cost an average $165,600, including tuition, fees, room, board and miscellaneous expenses, according to Raymond Loewe, president of the financial planning firm College Money in Marlton, N.J. If your child eyes an Ivy League university, you will have to come up with an astronomical $461,300. Counting on grants to see you through? Consider this: Less than one-third of today's undergrads receive grants based on need, and they generally go to kids from families with less than $80,000 in annual income.

Stay calm. True, it's tough for most middle-class families to save 100% of college costs, but you don't have to set aside anywhere near that much. "If you can put away at least one-third of the cost of college, you'll be in reasonable shape," says Loewe. "You and your child can probably make up the rest through loans or campus jobs." But if you don't save at least that much, you may not be able to send your child to her first-choice school without taking on more debt than you can afford.

According to MONEY's survey, nearly half of parents with children in high school didn't save anything for college bills when their kids were under age 11. But the sooner you get started, the easier it will be to achieve your goals--a lesson Wilfred and Wendy Frye, pictured on page 122, have taken to heart. Early last year, when their daughter Jazmin, now 3, was 18 months old, the Sun Prairie, Wis. couple began funneling about $600 a month--10% of their household income--into zero-coupon bonds and stock funds, including Fidelity Magellan and Fidelity Growth & Income. Since then, the Fryes' college savings have swelled to a healthy $10,000. "When I was in school, I had to work 20 hours a week just to pay for a state college education," says Wilfred, 38, a market development associate for Merck and a 1980 graduate of Morgan State University in Baltimore. "I want to be able to send my child to the college of her choice."

Whether or not your family can be supersavers like the Fryes, you can get the most out of every dollar you put away by choosing investments geared to your risk tolerance and the number of years you have before your child's freshman year. We outline strategies below for parents whose children are five years or more from attending college as well as for those with only four years to go. For parents with kids in high school, we provide advice on borrowing in the box on the facing page. Before we get started, though, review these six basic college-saving rules:

--Set realistic goals. First, determine 1) how much college is likely to cost when your child enrolls and 2) what return you can reasonably expect on your savings. You can then estimate how much you would have to stash away each month if you intended to pay all the bills. Most mutual fund families, including T. Rowe Price (800-638-5660) and Fidelity (800-544-8888), offer free worksheets that can help you make those calculations. You can also try MONEY's online college calculator on CompuServe. (See the MONEY Online box opposite for information.)

Expect to come up with some scary numbers. For example, paying your toddler's way through your state university in 15 years might require socking away anywhere from $250 to $400 a month, assuming a reasonable 8.5% annual investment return. Remember, however, that you have to shoot for only the one-third goal.

--Stick with stocks. MONEY's poll of parents found that more than half the families saving for college are investing entirely in fixed-income assets like savings accounts, CDs and money-market funds. Bad move. While such investments may seem safe, over the long run they will lose ground to tuition inflation. To make your money grow, you must put the bulk of your savings in stocks. Since 1926, equities have gained an average of 10.5% a year, vs. 5.3% for bonds.

--Take advantage of mutual funds. Many fund families will waive their minimum initial investments--typically $2,000--if you agree to make automatic monthly contributions of as little as $50 or $100. You can minimize your expenses by investing in no-loads, which don't charge sales fees. (The funds recommended in this story are all no-loads.)

--Be wary of prepaid-tuition plans. Eleven states now offer these savings plans, and about 500,000 investors have signed up. The offer sounds tempting: No matter how young your child is, you can pay his college tuition in advance at current rates, either in a lump sum or in installments. Initially designed to help residents meet the rising costs of in-state public universities, some prepaid-tuition plans now also include residents' costs at private colleges in their states. As many as 22 additional states may sponsor prepaid plans if Congress passes pending legislation that would defer taxes on earnings in them until they're withdrawn.

Prepaid plans can be a good buy for parents who are skittish about investing and intend to send their children to a participating school, according to Michael Olivas, professor of law at the University of Houston and an expert on the plans. For other families, however, prepaid plans have serious drawbacks. For one thing, if your child decides to attend college in another state--or not go at all--most plans will return just your principal, plus a measly 3% to 5% in annual interest. What's more, notes financial planner Dee Lee of Harvard, Mass., most prepaid plans seek only to protect you against tuition inflation. "You can do better than inflation in a growth-stock fund, while keeping control over your money," she says.

--Keep saving for your retirement. Remember: You're solely responsible for financing your retirement, while your child will have other options to pay for college, including scholarships, loans and jobs. Moreover, your 401(k) or IRA stash usually won't hurt your chances of receiving need-based financial aid. That's because most colleges don't include retirement plan assets in calculating how much you can afford to pay.

--If you're counting on financial aid, don't invest in your child's name. Currently, a child's first $650 of investment income is tax-free and the next $650 is taxed at his or her rate, usually 15%. Anything above $1,300 is taxed at your rate until the child turns 14, when the rate usually drops to 15%. But the tax savings of keeping money in your child's name may be outweighed by what you may eventually lose in financial aid. Reason: College financial aid formulas require a child to pony up 35% of his or her assets toward costs, but parents are expected to contribute no more than 5.65% of their savings.

If you're still tantalized by the tax savings, financial planner Gary Schatsky of New York City suggests this compromise: Save $15,000 or so in the child's name--just enough to produce $1,300 in investment earnings--until age 14. At that point, you'll have a better idea of your chances of qualifying for aid. If it turns out you probably won't get it, you'll have four years before freshman year to invest more money in your child's name for additional tax savings.

Now that you've mastered the fundamentals, here are specific investment strategies geared to different age groups:

YOUR CHILD IS 13 OR YOUNGER

With five to 18 years before your first college bill, you have time to ride out any stock market downturns. So equities should be your portfolio's core holding. Financial advisers recommend that parents of young children put 75% to 100% of their college savings in equity funds, depending on the parents' risk tolerance. Whatever you don't put in stocks, keep in the fixed-income investments discussed in the next section.

If you are a novice investor, you might start with a growthstock fund that holds the shares of large and mid-size companies with records of powerful earnings gains. Lee recommends Vanguard Index 500 (up an average of 15.5% annually in the three years through July 19; 800-662-7447), which seeks to match the performance of Standard & Poor's 500-stock index of blue-chip companies. Another sound choice, according to Lee, is Harbor Capital Appreciation (up 17.5%; 800-422-1050), which focuses on medium to large companies with rapidly growing profits.

When your stock fund balance swells to $5,000 or so, you can begin adding more funds to your portfolio, including small-company and international stock entries. These funds offer a shot at higher returns but can be risky, so put a total of no more than 20% to 35% of your money in them. Craig Litman, co-editor of the newsletter No-Load Fund Analyst ($225 a year; 800-776-9555), likes Berger New Generation (800-333-1001), a small-stock fund that buys the shares of tiny companies with explosive earnings gains. The fund is only four months old, but manager Bill Keithler, 44, has spent eight years successfully managing similar small-cap funds. Among foreign funds, Litman suggests Warburg Pincus International Equity (up an average of 13.7% annually in the three years through July 19; 800-257-5614), a diversified portfolio that typically keeps 20% of its assets in emerging market stocks.

YOUR CHILD IS 14 OR YOUNGER

When your child nears high school, consider taking steps to preserve your gains and tame your portfolio's risk. Otherwise, you might be in trouble if the stock market dropped steeply just as you wrote your first tuition check. Says Gerald Krefetz, author of Paying for College (College Board, $14): "Your goal should be to have money for the first year or two of college tucked away in stable accounts by the August before your child's freshman year of college."

To reach that goal, investment advisers suggest that when your child hits 14, invest any new savings in--or shift money from your stock funds into--fixed-income securities with average maturities of 10 years or less. Although bond returns will almost certainly lag those of stocks over the long term, bonds' steady yields can help bolster your portfolio if the stock market slides.

Truly risk-averse investors may want to stash their cash in money-market funds or CDs, which offer virtually no risk. But many investment pros recommend short-term or intermediate bond funds instead. They can provide higher returns with only a little risk. Schatsky favors Vanguard Intermediate-Term Corporate (up an average of 4.7% annually from its Nov. 1, 1993 inception through July 19; 800-662-7447). The fund has a miserly 0.28% expense ratio that helps ensure above-average returns.

Once your portfolio reaches $20,000 or more, Krefetz suggests that you move your money into a laddered portfolio of individual Treasuries or zero-coupon bonds. (Zeros sell at deeply discounted prices, pay no current interest and can be redeemed for their face value at maturity.) Time the maturities so that one-quarter of your securities will mature in each of your child's college years. You can buy Treasuries directly through the Federal Reserve with no commission (call your nearest regional Federal Reserve Bank for buying information). Buy zeros through a broker.

Of course, if you have more than one child to educate, you may have to pursue a growth strategy for one set of bills at the same time you're shifting money to fixed-income investments for the other. For example, Steve and Vicki Morris of Atlanta, pictured on page 121, have about $30,000 for college bills for each of their youngest children, Nikki, 15, Zach, 12, and Tessa, 9, in a portfolio of six stock funds: Janus, Mutual Discovery, Mutual Shares, Neuberger & Berman Guardian, SoGen International and Tweedy Browne American Value.

But the Morrises have a fourth child, Jessica, now a high school senior. When she turned 14 three years ago, they began switching her college money from stock funds to a laddered portfolio of zeros. The issues, now worth about $46,000, will reach maturity over Jessica's four years in college. Says Steve, 46, a gastroenterologist: "We feel secure knowing the money will be there when we need it."