College Costs Out of Reach? Savings Plans Provide Help

ALTHOUGH college costs aren't rising as fast as they did in the 1980s, for many students today the sheepskin is as far beyond financial reach as the mythical Greek Golden Fleece.

For the 1994-95 academic year, undergraduates will pay, on average, $8,990 to attend a public institution and $18,784 for a private college. The bills include tuition, room and board, fees, supplies, books, transportation, and incidentals, according to the College Board, a nonprofit association in New York.

But the real challenge lies ahead, financial analysts says. College costs are rising twice as fast as inflation. The average cost of tuition and fees at some 2,000 universities jumped 6 percent this year over 1993, according to a College Board survey. Overall, college costs chalked up a 5 percent price hike.

``No one knows what's ahead in terms of college costs, but the past tells us that costs will probably rise well ahead of inflation,'' says Marcia Seigh, account representative at the College Savings Bank in Princeton, N.J.

If college costs rise annually at the comparatively tame rate of 5 percent, by the time today's toddlers reach their late teens, they will have to plunk down $63,000 for four years at a public university.

An undergraduate degree at a private college would cost $195,000, with elite schools charging far more, the College Board projects.

While disagreeing on what financial instruments to use, financial planners do agree on two basic principles for college savings: Start early and invest regularly.

``When it comes to college savings, the earlier you begin the better: Time is your greatest ally,'' says Sherwin Esterman, a certified financial planner at IDS Financial Services in Wilmette, Ill.

Meeting ever-higher costs

There is no sure-fire way for middle-class Americans to plot how much higher college costs will go. But they have groaned loudly about costs often enough that financial managers have pieced together some creative ways for meeting at least part of the ever-higher costs of higher education.

Some investment vehicles shield college savings completely from taxes. One option allows savers a unique way to put the inflation of college costs to their own advantage.

Among the promising ways to invest to cover future academic bills:

r State-backed bonds for college. Issued by 10 states, these securities are free from federal and state taxes and offer investors the safety of a government bond.

Illinois runs the largest college savings program in the country. It has made eight issues of the college bonds in the past seven years, taking in a total of $1.6 billion from investors, according to Mark Gallagher, a managing director of First Chicago Capital Markets, a senior underwriter for the issues.

During the Oct. 3-6 sale of Illinois College Bonds, demand outpaced supply by 17 percent. Investors placed orders for $246 million in bonds, well above the $210 million available for sale and the $150 million issue originally planned.

Investors need not use the money for college. But if they spend the money on an accredited, post-secondary school in Illinois, the state will pay a bonus for each bond equal to the number of years the bond was held times $20.

The zero-coupon bonds, sold in $5,000 denominations, offer an unusual mix of low risk and high return. For instance, an 18-year bond maturing in 2012 sells for about $1,720, yielding 6.1 percent tax-free, or the equivalent in a taxable bond of 8.73 percent for an investor in the 28 percent tax bracket.

Bonds' advantages

``The bonds offer several big advantages: They are an easy investment to understand, pay a fixed return, are immune from market volatility if held until maturity, are safe from a credit standpoint, and offer a tax exemption,'' Mr. Gallagher of First Chicago says.

* Series EE Savings Bonds. These federal bonds offer customers a 4.7 percent return and a haven from state and local taxes. In many cases, they also offer a shelter from the IRS.

This year, if a married couple with an adjusted gross income of $61,850 or less redeems a bond, they can enjoy a full, tax-free exclusion. Unmarried investors pay no taxes on the bonds if their income is $41,200 or less.

As incomes rise, the tax exclusion falls: Couples with incomes above $91,850 and singles making more than $56,200 reap no federal tax advantages from savings bonds.

* Custodial accounts. These also offer investors a tax break. If college is more than five years away, an investor should use the accounts to buy equities, which have historically given the highest long-term return, financial planners say.

A custodial account, held in the name of a child under 14, allows that child's first $600 in investment income to be free of federal taxes. The next $600 is taxed at the child's rate, usually 15 percent. Above that, income is taxed at the parent's top marginal rate.

* CollegeSure Certificates of Deposit. This patented financial instrument, issued by the College Savings Bank in Princeton, N.J., offers investors a unique way to ride the wildly rising costs of college.

Through the certificate of deposit, an investor in effect pays for all or part of a college education today at a fraction of the future cost. The CD yields interest at 1.5 percent less than the College Board's Independent College 500 Index, a measure of the average total charge for tuition, room and board, and fees at 500 independent four-year colleges.

Nine out of 10 buyers of the CollegeSure CDs carve out a tax shelter by holding the investment in a custodial account. The CDs are insured by the FDIC up to $100,000 per depositor, Ms. Seigh of the College Savings Bank says.