Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: THURSDAY, July 12, 1990                   TAG: 9008080257
SECTION: PARENTS' GUIDE                    PAGE: 14   EDITION: METRO 
SOURCE: SARAH COX
DATELINE:                                 LENGTH: Long

TIME TO SAVE FOR COLLEGE IS SOONER THAN LATER

They have the advantage, if they start when their children are very young, of investing in long-term growth opportunities in equity investments, said Tyler Pugh, vice president and Branch Manager of Wheat First Securities in Roanoke.

"I emphasize `long term' and `new parents," he said. "Fifteen to 18 years can take advantage of long-term growth."

There are several approaches to take. One approach, Pugh said, that is relatively safe and doesn't demand a lot of investment money up front is a high-quality growth mutual fund, one that invests in blue chip, high-quality issues.

John Parrott, senior vice president and investment officer with Wheat, said that mutual funds allow parents to begin with a small purchase and add on in intervals over the years, therefore averaging the cost of the shares over a period of time.

"It allows you to invest smaller amounts and reinvest it efficiently. It's also attractive for gifts."

He suggested that in lieu of a more traditional baby gift, that parents ask for contributions toward a college savings plan.

Another approach to take is zero-coupon bonds, which is an investment that pays no interest but pays growth in the future.

Pugh suggested selecting one that is secured by the federal government. They are very convenient, he said, because they can conform to every financial situation.

If parents begin saving today, 18 years from now, they would be cashing in the bonds in the fall of 2008. A $1,000 bond costing $216.75 today would continuously be compounded at a fixed rate of 8.65 percent, according to current rates.

Parrott said he personally uses nothing but U.S. government securities. "It's the safest thing you can buy."

But there are other alternatives. For an investment that gives you more than just a college education, look to a life insurance policy. Roger Rakes, Senior Account Agent with Allstate, suggested Universal Life, which is "an excellent investment vehicle. Not only do you have life insurance, but excess funds earning 8.3 percent interest." And, he said, it's tax-deferred at a variable rate, with a minimum interest of 4.5 percent.

"Checking accounts are only 5.25 percent. We've had this product six or seven years, and it's never gone below 8 percent, but it's gone as high as 11 percent."

The costs are broken down into three categories: the cost of the insurance premium, the administrative charges and then the excess funds, which you can add to, and which is the investment that earns interest for you.

The minimum policy is $50,000. For a newborn, the premium is $167 a year, but if the policy is taken out in an older person's name, the premium goes up.

Another advantage of this investment is that the money is available without penalty, although taxes would have to be paid on the interest earned. For Nedra Gordon, assistant vice president and branch manager of Dominion Bank's Tower office, saving for college is a very personal task. Her daughter just graduated from college in December, she said, and the scholarships and grants that everyone says are out there just aren't. If you are in a particular tax bracket, your child either has to earn straight A's or be on an athletic scholarship. Otherwise, the alternative is to save ahead.

Banks offer a couple of more choices. The first, and most conservative, is the traditional savings account, with a 5 percent compounded interest. For the parent with very little money to start, this may be the answer.

Gordon said that once a nest egg has been established, it can be rolled over into a bond or certificate of deposit - the minimum on the latter is $500, but the one-year CD is currently 8 percent, with a yield of 8.24. And it's insured by the F.D.I.C.

Another CD to keep in mind is the one-year that charges no penalty for early withdrawal and gives a 7.9 percent interest rate with a yield of 8.14 percent. The only restriction is that you must maintain it for seven days; this CD allows you to cash in and reinvest at a higher rate if the rates go up.

Series EE Education Bonds are U.S. federally guaranteed, very safe and designed for the long-haul. The minimum investment is $25, which will buy a bond eventually worth $50. Since the rate is variable, the maturity depends upon the market.

For a 1-year old child, said Gordon, parents can invest $25 monthly. Figured on an average interest rate of 6 percent, this will yield $17,356 at age 18.

Bonds mature in about seven years, but continue to earn interest for 30 years. Series E bonds, no longer sold, earn interest for 40 years.

For more information about bonds, banks have brochures, or you may call 1-800-872-6637 for daily rates. The bond representative for this area is Larry Harding, at 982-6350, said Gordon.

Gordon cautioned that saving for college does not just entail tuition. Clothing, car, sorority dues - all that must be taken into account. "That is a hard fact, that you need this money, too," she said. According to an article by Robert L. Brown II in the June 10 Richmond Times-Dispatch, "Tuition, room, board and miscellaneous expenses for four years at a Virginia public university can exceed $25,000 today, while private colleges can be more than twice as much.

"Looking only at the $25,000 figure, an average annual increase of 6 percent will put costs at $33,000 in five years, almost $45,000 in 10 years and about $60,000 in 15 years."

Director of Budget and Financial Planning at Virginia Tech Katherine Johnston said that parents should figure a steady increase in college tuition at a rate of between 5 and 7 percent annually. Currently, the University of Virginia in-state annual (two-semester) tuition is $2,140, while Tech is $2,352, she said. "Historically, it's grown at a rate of 5 to 7 percent a year."

She said that part of the reason for this steady increase is that the tuition is very labor-intensive. "We have faculty here - it's no different than working for a car company or a newspaper - and if salaries increase, students must pay a portion of the increase."

She also confirmed that scholarships are scarce for higher income brackets - she and her husband have a child going to college next year, she said, and they have invested in savings bonds for years.

Both have MBA's. He is an accountant. She said their being financially conservative, plus the fact that playing the stock market has burned them several times, has taught them that savings bonds are the safest.

"You don't have to rely on someone else's advice, and they are tax-deferred. It's not the most sophisticated way, but at least we can be assured."

Treat it like an insurance or light bill and figure it into the budget, said Parrott. "The most important thing is maybe not the vehicle you use, but the sooner you do it. Long-term compounding is really what works in this situation. If you wait until the child is 12, the compounding period is cut way down."