Playing to win

Entrepreneur, Sept, 1997 by Lorayne Fiorillo

"School days, school days; dear old golden rule days." School's back in session, and whether your child is starting first grade or looking at college catalogs, one thing is certain: You're going to have to come up with some of that precious metal to keep those golden rule days on track. Paying the bill for a college education is often as much of a challenge as getting accepted. The cost of a private college education, including room and board, can reach hundreds of thousands of dollars, and many students are on the "study now, pay later" plan. Since 1992, when government student loans became available regardless of the recipient's income, millions of new borrowers entered the system. But there are more ways to finance a college education than loans, so here are some methods for getting the most from a combination of loans, savings and scholarships to help you and your child win the college tuition game.

* IN JEOPARDY?

The answer is: "A place where you and your children can look for low-cost college loans." If your question was "What is the Federal Family Loan Education Program?" you've won the daily double. Low-cost federally backed loans provide money to about half today's college students. The three low-interest loan programs are: Perkins Loans, a need-based loan with a 5 percent interest rate (available at most four-year colleges); Stafford Loans, the most popular student loan, with an 8.25 percent repayment interest rate (available to most students regardless of financial need); and PLUS (Parents' Loans for Undergraduate Students) Loans, which carry an 8.75 percent interest rate. (All interest rates quoted were current at press time.)

If these loans sound exciting, don't jump just yet. Most federal loan programs have strict borrowing limits ($2,625 for dependent freshmen, for example), so you'll have to muster additional funds elsewhere. For more information on federal borrowing programs, call (800) 891-4595 and order the free brochure called Borrowing for College, published by Sallie Mae, a Washington, DC, financial services company that funds nearly 40 percent of all insured student loans.

To qualify for any type of financial aid, whether from government or private-sector programs, you must first prepare the Free Application for Federal Student Aid (FAFSA). Get one from a high school guidance counselor or library, or call the U.S. Department of Education at (800) 4FED-AID. This form will help determine the types of aid for which your child may be eligible, including work-study, grants, or public or private loans.

Remember the early bird that catches the worm? Well, likewise for many scholarships. Prepare your FAFSA form as soon as possible. For help with your homework, call the College Answer service at (800) 8914599. It's a free hotline operated by Sallie Mac, which offers advice on the financial aid process.

Whatever school you select, early saving and investing can make all the difference. Parents who start saving when their child is born will need to put aside approximately $260 per month (at 8 percent interest) to raise the projected $125,000 that may be necessary by the time their child enters college. Should they wait until Junior enters high school, the tab rises to about $2,200 per month to reach the same goal.

Starting early not only decreases the amount you'll have to save each month but allows for more flexibility in your investments. By giving yourself a longer time frame, investing in higher-return investments such as common stocks can provide the best opportunity for keeping pace with rising college costs. But no matter what age your child is, prudent investors don't put all their investment eggs in one basket. Asset allocation, or spreading investments across investment classes including cash, bonds and stocks, can improve overall returns while decreasing your exposure to risk.

* THE PRICE IS RIGHT

Before you rush out to invest your baby's shower gifts in savings bonds or commodities, consider an investment's tax consequences. While your child is learning the ABCs, learn a few new letters yourself: UGMA and UTMA. The Uniform Gift to Minors Act and the Uniform Transfer to Minors Act are state laws that define special types of accounts designed to make it easy to put securities in minors' names. Under these provisions, the minor is the owner of the securities, but an adult acts as custodian of the account, responsible for prudently investing assets until the child reaches the age of majority. (The age for termination of the custodianship varies among states, so consult your tax advisor.) Potential tax savings in these types of accounts can be substantial: The first $650 in annual investment income in a minor's account is exempt from tax, regardless of his or her age. The next $650 is taxed at the minor's rate of 15 percent. Amounts earned over $1,300 are taxed at the parents' highest marginal rate. Once the child reaches age 14, all annual investment income greater than $650 is taxed at the minor's rate.