Early planning eases the burden of rising college bills later

AUGUST has a lot going for it: warm sun, sandy beaches, splashing pools. The problem is, August is followed by September. For students, that means going back to school. For their parents, if the students are in college, that means paying the bills.

But for many parents and grandparents, future Augusts and Septembers won't hold the terror they once did. Instead of waiting until the children are in junior high or entering high school, more parents and grandparents are beginning sophisticated savings and investment programs before the children enter kindergarten, sometimes when the child is a newborn infant.

``People are getting social security numbers for their babies,'' says Gustave J. Seasongood, personal financial planning officer at the Provident National Bank in Philadelphia. ``The sooner you start, the less painful it is.''

Even starting at birth, however, there is a lot of saving to do. Currently, Mr. Seasongood says, expenses at state colleges and universities run about $8,000 a year and $12,000 to $13,000 at private schools. He figures parents can expect those costs to rise about 6 percent a year.

A college education costing $10,000 a year today, then, would rise to over $26,000 a year in 18 years, and the bill for four years beginning then would add up to over $115,000. Some schools have raised this estimate to over $140,000.

``Financial planners are recognizing that middle-income people really have a difficult time affording college for their children,'' says Thomas Foley, a planner in Minneapolis. ``But if you plan early enough, it's much less of a problem, and it can be done very comfortably within the current budget.''

While inflation is raising college costs 6 percent a year, there are, for example, several investments that appreciate faster than that, so $10,000 invested now could conceivably meet those future college obligations.

The problem for many young parents, of course, is coming up with that first $10,000. If the money is not available from family members, one answer is to borrow the money, invest it, and deduct a portion of the interest from income taxes. (Although interest payments decrease the return significantly, even after deductions, a wisely chosen investment can still net you more than 6 percent.)

Another option, available to homeowners, is a home equity loan, sometimes more forbiddingly called a second mortgage. Even if you have sufficient equity in your home to begin funding a college-saving program, however, financial advisers urge caution.

``We prefer to look at a home as a place to live,'' Mr. Seasongood says. ``But if someone wants to educate their children and that's an important enough goal, then freeing up some equity is a valuable option.''

Before trying this, however, work through the numbers. After figuring in interest costs paid by you vs. interest earned on the invested loan, you may find it's more efficient simply to make monthly payments to your own college fund, instead of payments on the equity loan. Also, the lower your tax bracket, the less likely it becomes that borrowing to start a college fund will work.

Another less-conventional way to save for college is with an Individual Retirement Account (IRA). True, these are intended for retirement, and there is a 10 percent early-withdrawal penalty, but it still doesn't take too long before the penalties and the taxes are offset by the earning power of tax-free interest and the fact that deposits are deducted from taxable income. The length of time needed to achieve this is known as the ``break-even holding period.''

If you are in the 25 percent tax bracket, for example, and the IRA is earning 10 percent interest, the break-even holding period is about 5 years and nine months. Or, if you're in the 40 percent bracket, and the IRA is earning 10 percent, the break-even point comes just after four years and six months (see table). These holding periods may be lengthened if the bank, mutual fund, or other custodian has additional penalties for early withdrawals.

People have also considered using 401(k) or 403(b) salary reduction plans and profit-sharing plans available through their employers. These plans, also nominally meant for retirement, have the same tax-free earning power of IRAs, but with higher deposit limits.

A word of caution: This technique should be used only by those who are confident of adequate retirement income from other sources, such as their pension, along with savings, investments, and social security. If you think you'll need the IRA or 401(k) for yourself, don't use this method of college savings.

One indicator of growing interest in starting planning earlier is increased use of services to help in this goal. One is the Early Financial Aid Planning Service of the College Board. For $9.50, you can get an analysis of your financial resources, how much you should expect to pay for four years of college, some indication of the kind of financial aid you might be eligible for, and ideas for meeting the remaining needs. Write Early Financial Aid Planning Service, College Scholarship Service, CN 6303, Pr inceton, N.J. 08541.

A more expensive, and presumably more comprehensive, program is called Pacesetter. For $95, it will look at a family's detailed financial picture, including income, savings, stocks, property, the number of children, and the years they are expected to enter college. After all this is pushed through a computer, the client is given a loose-leaf binder with 50 pages of expected costs, financial aid options, projected loan indebtedness, and tax-saving accumulation programs. It can be used up to 15 years ahea d of time, says Gayle Speck, vice-president at Pacesetter.

If the family wants to examine other financial options or different colleges, the program can be rerun up to five times during the following year at no charge. There is also a less extensive analysis available for $65. The address is Pacesetter College Financing Plan, PO Box 78, Belmont, Mass. 02178.