Saving for College: Never Too Early

IF you think buying a house, or a car, or a John Deere power lawn mower is expensive, you obviously haven't paid for college yet.

If you want to talk big bucks, take a look at projected college costs for the next five to 20 years. It is estimated it will cost about $128,000 to get a degree from a four-year private college starting in 2000. The total cost at a public college will be about $52,000. For a child born today, total college costs could exceed $300,000 at an Ivy League college, close to $200,000 at a private college, and $100,000 at a public university.

Granted, future costs will vary between schools; but it is reasonable to assume that they are going to ''continue to rise,'' says Vance Grant, a specialist with the National Library of Education, the research arm of the United States Department of Education in Washington.

According to Dr. Grant, ''college costs have been rising on average about 5 percent to 6 percent per annum.''

Tuition costs will probably ''continue to exceed the inflation rate,'' says John Hammang, director of state and campus relations for the American Association of State Colleges and Universities, based in Washington.

About half of the more than 14 million current US college students receive financial aid in the form of grants, scholarships, loans, or work programs.

Regardless, the experts advise parents to start a college savings program as soon as possible to supplement tuition aid. ''For a child born today, today is about the right time to set up a college savings program,'' laughs Kathleen Brouder, a cost expert with the College Board in New York.

For very young children, experts say, parents should seek investments offering the maximum growth. For children in junior high school or high school, parents need to conserve income, to offset unexpected economic gyrations or downturns.

To start with, experts say, set up a college savings/investment account. You can always register the account in your name. But earned income will be taxed at your own tax rate, which is usually higher than a child's rate. Alternatively, you could establish a custodial account for the child, to minimize taxes on earned income, since much of the income is taxed at the lower child's rate.

There are two primary accounts. An account under the Uniform Gifts to Minors Act allows you to transfer cash or securities to your child. An account under a Uniform Transfers to Minors Act lets you transfer a broader range of financial assets, including real estate, partnership shares, and collectibles. Banks, brokerage houses, mutual funds, or attorneys can set up either account. (Children under 14, after a tax-free $650 of unearned income in 1955, pay 15 percent in taxes on the next $650, and thereafter at the parent's tax rate. Over 14 in age, all income over $1,300 is taxed at the child's rate.) But once the child reaches the age of majority (usually 18 but in some states 21) the child can take full custody of the account.

To retain some control over the disposition of assets, you could consider setting up a special trust, such as a ''minor's trust.''

Since legal costs of a minor's trust are expensive, it is usually only undertaken when assets are substantial -- say more than $50,000 for just an initial investment -- according to Scudder Investor Services Inc. in Boston. Should the minor's trust become large, it is likely the child will not qualify for student financial aid.

Parents, Ms. Brouder says, should ''stay with a regular savings or investment plan.'' For example, $1,200 invested annually for 18 years and earning 10 percent interest (without any loss of interest to pay taxes) will reach slightly more than $60,000, according to Scudder.

Among the most popular types of investments for college are US government Series EE bonds, zero coupon bonds, mutual funds, state baccalaureate bonds, or special certificates of deposit, such those offered by the College Savings Bank of Princeton, N.J., which specializes in savings for college. A number of other banks can put together a college savings plan for parents.

College savings plans based on Series EE bonds have become very popular in recent years; the bonds are backed by the full faith of the US Treasury, come in different denominations, and are exempt from state taxes. The bonds cost one-half the price of their face value. Taxes on interest earnings are deferred until the bonds are redeemed. Further, a parent might be able to totally avoid paying federal taxes on the accumulated interest if their adjusted gross income is under certain modest levels. The levels are adjusted frequently, however.

Zero coupon bonds are somewhat like savings bonds, in that bonds are sold at a deep discount and then redeemed at face value at maturity, with interest accruing over time. But federal taxes on interest earnings must be paid annually. The advantage is that one can usually anticipate what the total value of the bond will be at the end of an investment period. The best time to buy ''zeros'' is when interest rates are rising, experts note.

The US Treasury, private corporations, and municipalities issue zero coupon bonds. The most popular, because of safety, are US Treasury zeros. When you purchase Treasury zeros through brokerage houses, you will have to pay a small commission. Treasury zeros are usually not ''callable'' -- that is, they are not called in before their maturity dates; other zero bonds are often called, which means that bond holders can lose out on their higher interest rates.

Several mutual funds also offer zero coupon mutual funds. The funds invest in zero-coupon Treasury securities.

Some states also offer college savings programs called baccalaureate bonds, which are essentially zero coupon bonds, as well as prepaid tuition programs where parents pay current tuition costs now for future college attendance. But what if little Marty or Molly wants to go to school five states away? You may not get all your interest earnings back.

Finally, many experts are now recommending that parents send youngsters to a junior college or community college for two years, and then transfer to a four year institution. Savings can be substantial -- several thousand dollars.

Over one-third of all college students now attend two-year institutions. Alternatively, a child could obtain a special assistance program from the military, based on a required period of active duty. Some businesses also offer programs, where students work for a company and go to school part time, partially on the company's dime.