Author: By Mary Sit, Globe Correspondent

Date: MONDAY, January 26, 1998

Page: A10

Section: Business

Almost as soon as their baby Nicholas was born 21 months ago, Michele Ciurea, a 34-year-old research economist, and her math professor husband, Christopher King, 39, began worrying about how to pay for their son's college education.

Should they move from their Somerville neighborhood to a pricier one with better schools, or stay where they are and enroll their son in a private elementary school -- and which alternative would net more savings for college in later years?

Finally, the worrying prompted the couple to seek professional advice.

"The main thing we've done is worry," confesses Ciurea. "We've gone to a financial planner and through him we're taking a global approach to financial planning rather than the piecemeal approach we had before. We've basically allocated our investments according to our investment profile, which is more aggressive than it was before. But we haven't set aside money specifically for education -- although we plan in the next few weeks to open up a Roth IRA and an educational IRA."

Ciurea and King have reason to worry. These days the average cost of a college degree is about $70,000 at a private university and $25,000 at a public school. And at the current rate of increase, costs are expected to double by the year 2015, says the Council for Aid to Education.

At most colleges, tuition outpaces inflation, with tuition and fees rising 3 to 5 percent each year. Compare that with the 2.5 percent increase over the past year of the consumer price index, the government's measuring stick for inflation.

Massachusetts state colleges, however, have reversed the trend and decrease tuition by 5 percent each year for the past five years, says Judy Keyes, director of student financial assistance at the University of Massachusetts at Lowell.

If you are starting to panic over how to pay for your child's college education, there are steps you can take to help manage the cost. Here are some suggestions from financial planners and university officials.

- Set a goal.

Many parents wake up when their kids are teen-agers and suddenly realize college expenses are looming ahead. If they don't have savings, parents will end up spending $1,000 a month as their kids go through college. "You must decide: Am I going to prepare to send my children to Yale and Harvard? A state university, junior college, or trade school?" says Ralph Schroeder, managing principal of Schroeder and Associates, a division of American Express Financial Advisors Inc.

Determine where you are financially and how much you can save monthly, and calculate how much you'll need to save. Be sure to use the rising costs of college, not the current inflation factor.

- Open a custodial account.

This is the simplest way to save money for college. You can contribute up to $10,000 a year into a custodial account and put it in mutual funds, bank accounts, or stocks. Parents control the account until the child is age 18.

Nancy Walser, author of "The Parent's Guide to Cambridge Schools" (Huron Village Press), says she and her husband have started a mutual fund earmarked for education for each of their children -- a 4-year-old son and 5 1/2-year-old daughter.

"Our accountant was telling us we need to sock away $7,000 a year for each year for each child if we want them to go to a private university. That's pretty daunting," says Walser. "I can't say we've even come close."

Bob Glovsky, director of the financial planning program at Boston University and co-host of "The Money Experts," a call-in talk show on WRKO-AM radio, says parents should not put money in the child's name.

"Money in the child's name counts six times more against you than in the parents' name when applying for financial aid," says Glovsky. The federal financial aid form analyzes the child's assets and will count 35 percent of that as the child's contribution. But the parents' assets count as only 5.6 percent of contributions.

"The rationale is that parents have other uses for their money. By putting money in your child's name you are hurting yourself for financial aid," says Glovsky. You are also giving up control, since the money belongs to the child at age 18.

How much should you save? That, of course, depends on your personal situation. But the younger the children, the more aggressive you can afford to be with your investments. Most financial planners recommend stocks and equities if you have at least 10 years before the kids head off to college.

If you set up a trust instead of a custodial account, you must hire an attorney to draft the trust agreement and then file a tax return yearly, paying an income tax on interest, capital gains, or income earned on that investment.

- Consider locking in tuition with the U. Plan.

This is a prepaid college tuition program that allows families to lock in their children's future tuition and fees at today's rates. The U. Plan locks in a percentage of tuition at 83 public and private universities in Massachusetts. For example, if a family invested $1,000 this year, which paid for 10 percent of current tuition at school A, that family would be guaranteed 10 percent of their tuition at that school in the future, regardless of how much tuition will have increased. "Each year you buy and continue to lock in tuition the year you buy it," explains Peter Mazareas, executive director of the Massachusetts Education Financing Authority, which oversees the U. Plan.

You may prepay up to 100 percent of your child's future tuition at today's rates by buying Tuition Certificates that mature in the years when your child will be in college. Each certificate can be redeemed upon maturity for a guaranteed percentage of tuition and fees at any participating college.

The U. Plan buys tax-exempt state bonds, allowing any interest earned to be tax-free. Parents can invest as little as $300 in a lump sum or $25 a month. The next enrollment period starts April 15 and runs to the end of May, says Mazareas.

If a child goes to an out-of-state college, parents get their money back without a penalty and with interest paid at the rate of the consumer price index.

Glovsky, the financial adviser, warns that the U. Plan may not be the smartest investment for families. "If your child is going to one of these schools, then it's a good investment. If your child doesn't end up at one of these schools, then it's not a good deal. Then it's become a conservative investment, and the rate of return is probably lower than the inflationary cost of college."

- Explore the financial aid package offered at your child's university.

At Boston University, where tuition, fees, room and board on-campus cost $31,700 for the 1997-98 academic year, most students rely on institutional funding, says Ryan Williams, director of the office of financial assistance at BU. "In most cases, the inflation rate for an academic year is higher than the rate of inflation for most consumer products. However, most institutions are able to also increase their ability to put more financial aid into their programs," says Williams.

Financial aid consists of three aspects: loans, grants (free money), and work-study programs, in which students are given jobs, usually on campus.

There are two types of loans -- subsidized and nonsubsidized. In a nonsubsidized loan, parents and students can borrow money, regardless of income. While the student is in school, he pays interest only, not principal. In a subsidized loan, students do not pay interest on the loan until they stop attending school.

"Get organized," advises Susan Smolin, a Needham consultant who helps families navigate the maze of financial aid. "Set out a folder for each college. Make sure you have the requirements and deadlines. Make sure you keep copies of everything. You'll have to complete forms in subsequent years. Keep notes, including dates and names of conversations."

- If your child is smart, encourage him or her to take advanced placement courses.

Smolin says if a student is eligible and qualified, he or she can take the courses, then must pass an exam to earn college credit. "They're a lot of hard work. You have to take the tests that show you will earn advanced placement status. Not everyone will be eligible. It's for highly qualified academic students," she says.

- Open a Roth IRA.

If you are single and have less than $95,000 in adjusted gross income -- or married with income below $150,000 -- you can set aside a maximum of $2,000 per person into a new Roth individual retirement account. The money grows tax-free, and can be tapped without penalty to pay for qualified educational expenses.

"You could put money away, you wouldn't pay any tax on the earnings, and when the child reaches college age, you can withdraw your initial contribution tax-free," says John Czyzewski, a certified public accountant and partner at Samet & Co. in Chestnut Hill. "And if you have to go into the earnings, you can take the money out and not be subject to any penalty."

- Take advantage of the new educational provisions in the tax law.

The Taxpayer Relief Act of 1997 offers four educational incentives: Hope scholarship credit; lifetime learning credit; educational IRAs; and student loan interest deductions.

The Hope scholarship credit, available in 1998, allows you to deduct from your taxes, dollar for dollar, qualified tuition and related expenses for the student's first two years of post-secondary education.

The lifetime learning credit allows you to deduct 20 percent of expenses up to $10,000. For example, if you incur $5,000 in expenses for your child in her third year of college, you get credit for 20 percent of that. "That's $1,000 you don't pay in taxes," says Schroeder, the financial planner.

The educational IRA allows you to put in a nondeductible contribution of $500 per year per child until the child is 18 years old. So if you have three kids, you can shield $1,500 from taxes each year.

In the student loan interest deduction, you can deduct the interest payment during the first 60 months on a higher education loan. For example, let's say you have an $8,300 loan at 12 percent interest. That generates $1,000 of interest, which can be deducted from your taxes.

- Consider savings bonds.

In 1990, the Treasury Department initiated the Education Bond Program, which allows interest to be completely or partially excluded from federal income tax. Payments to state tuition plans became eligible this year.

Bonds pay 90 percent of the five-year Treasury rate, increase in value monthly, and can earn interest for 30 years. "Bonds are an excellent way to save for college. They're safe, they pay market-based rates, federal tax is deferred, and, depending on your income, the interest can be excluded from your income," says Pete Hollenbach, public affairs officer at the Bureau of Public Debt in Washington. "They are easy to buy and can be registered in the parents' names or the child's name."

Interest can be fully excluded if the taxpayer meets certain income guidelines. For the 1997 tax year, single taxpayers' incomes must be between $50,850 and $65,850; taxpayers who are married filing jointly must have incomes of $76,250 to $106,250. For the 1998 tax year, income limits for single taxpayers are $52,250 to $67,250; for married couples filing jointly, $78,350 to $108,350.

- Report interest income annually on your child's savings bonds.

Many children receive bonds as gifts from relatives, and parents usually ignore the bonds until they mature, then pay tax on the interest income. Instead, parents should report interest on the bonds each year.

"If the child has minimal income or no income, you can report interest and not pay any tax on the earnings," says Czyzewski. By following this strategy rather than waiting to pay taxes when you cash in the bond, you could save 30 to 35 percent in taxes.

- Consider community colleges for the first two years.

Community colleges are the basement bargains of higher education. At Massachusetts Bay Community College in Wellesley, one credit costs $75, says spokeswoman Pam Eddinger. That means a full-time, liberal arts student would pay $1,800 for one year of college.

Freshmen can sign up for joint admissions, finish two years at a community college, and then automatically transfer to a state college or university with a 30 percent discount off tuition -- as long as they have maintained a 2.5 grade point average or higher, says Paula Ogden, director of financial aid at MBCC.

- www.finaid.org. This is the granddaddy of all Web sites. It takes time to get through this, but it links you to almost anything you are searching for, including scholarships.

- www.collegeboard.org. This is easy to navigate and provides on-line scholarship applications.

- www.collegenet.com. This one requires a password and user identity to access, but you can save your account profile and refer to it when necessary.

- www.studentservices.com. This one is time-consuming because you must search for scholarships by major. It doesn't screen you by eligibility criteria.

- If you can't surf the Web or feel more comfortable using the telephone, there's a hotline sponsored by the Massachusetts Association of Financial Aid Administrators. Members will help guide you through the financial aid application or answer any questions. The hotline is staffed through Feb. 19, 5 p.m. to 9 p.m. Call 617-536-0200 or 800-442-1171.

- www.mefa.org. This is the Web site of the Massachusetts Financing Authority, which oversees both the U. Plan and the Mass Plan, a loan program for families of students attending a university in Massachusetts. The interest rate is 7.5 percent, and is expected to be about 7 percent next school year.

For information about the U. Plan by phone, call the U. Plan hotline at 800-449-MEFA.

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