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Good funds for college
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September 13, 2000: 6:06 a.m. ET
The dawn of the school year raises dollars-and-cents issues for parents
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - Along with your home and retirement, funding your child's college education will be one of the biggest expenses you face.
Fortunately, there are more savings options than ever. Qualified state tuition plans and education IRAs are just two dedicated to the task of school-related savings.
And choosing the right mutual funds will augment your efforts.
"You want something very diversified and very dependable," said Russ Kinnel, director of fund analysis at Morningstar.
You also want to know you're with a good shop whose expenses are moderate, he added. That means fund families such as Fidelity, Putnam, Vanguard, Janus and T. Rowe Price. "If there's a problem at a fund, they'll fix it," Kinnel said.
Some key picks
Among the funds Kinnel finds worthy as long-term educational savings vehicles are some of the Vanguard tax-managed funds, which are among the best for tax management, he said.
 Vanguard's Tax-Managed Growth & Income Fund and its Tax-Managed Capital Appreciation Fund, for instance, have a record of five years or more and have outperformed their category average on an after-tax basis.
If, however, you don't want to put up the $10,000 minimum investments to get into those funds, you might consider Vanguard LifeStrategy Growth Fund, which has a $3,000 minimum investment and "offers lots of stability, low cost and dependability," Kinnel said. The same goes for Vanguard Star Fund, a fund that requires a $1,000 minimum account and invests in several Vanguard funds.
For other diversified, stable choices, you might consider TIAA-CREF's Growth Fund or its Growth & Income Fund. With a minimum investment of just $250, "they're good if you don't have a ton of money to set aside."
If mutual funds will be a main vehicle for your college savings efforts, you might want to invest in more than one to get adequate diversification. One combination Kinnel suggests is the TIAA-CREF Growth Fund along with Third Avenue Value, which has a $1,000 minimum investment.
Know restrictions of gift trust funds
Of course, you may be satisfied putting money into a gift trust fund such as the one offered by American Century. But there are some restrictions you should be aware of.
At American Century, for instance, there is just one fund - a mid-cap growth fund - into which your money will be invested. That may not offer you the kind of diversification you seek. Minimum investment is only $2,500 but the money must stay in the fund for a minimum of 10 years or until your child reaches legal age, whichever is later.
You are the only one who can invest in the fund but the money is earmarked for your child and will automatically transfer to him or her when the account matures. And there is no requirement that your child use the money for education.
So should Junior decide to forego Harvard for Hawaii to try his luck as a professional surfer, he can take the money and run.
Keep control of the funds
That's why certified financial planner Frank Armstrong, president of the Miami-based firm Managed Account Services, recommends you earmark a fund or two for your child's education but keep the fund in your name.
"If your kid doesn't go to college, you subsidize your own retirement," Armstrong said.
Of course, you will be taxed on dividends, interest and capital gains distributions, which is why a general index fund such as Vanguard's Total Stock Market Index Fund or its International Stock Index Fund might make the most sense, since their expenses, risk and tax bite are low, he said.
Should your child head for the center quad on campus, you both benefit. You can give the fund shares to him or her sometime before matriculation and it won't be taxed as a gift over $10,000 because it is for the child's support.
What's even better is that the child will pay the capital gains tax at a much lower rate than you would, probably no more than 10 percent given that he or she is likely to have a low or non-existent income at the time.
So what you've done in essence is preserved the capital gains and lowered your tax rate, Armstrong said.
And now for something completely counterintuitive
There is sometimes an unwelcome irony inherent in scrimping and saving to send your child to college. You may not end up with the full amount you need, but just enough to hurt your child's chances of receiving any financial assistance.
"The system is absurd," Armstrong said. "Saving a lot of money may impact your kid's ability to get a scholarship."
If you are depending on a scholarship to help pay for your child's education, you might want to sit down with a planner and figure out just how much you can save without penalizing the child, and then put the rest into your own 401(k).
"That's not an asset the state can see," Armstrong said. 
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