Tuition Intuition Investing When Kids Are Small Can Help Get A Jump On High Costs Of College

The experts who tell you that your house will be the biggest investment you ever make probably don’t have children in college. These days, it costs $30,000 for a year at a top-notch private college, which means a total outlay of $120,000.

And that’s if your child gets through in four years (many don’t), if he or she doesn’t go to graduate school and if you only have one kid.

You can get away with spending less than $10,000 a year at many state universities, but costs at all colleges have been climbing about 6 percent a year. That’s much faster than the inflation rate, and if you have a couple of infants at home, you may well be spending six-figure sums over four years at public colleges in the next century.

“By the time the child is sleeping through the night, you ought to start thinking about how you are going to save for college,” says W. Gordon Snyder, executive vice president of the American Century in Kansas City.

If you start investing when the kids are small, the magic of compounding will magnify the sums you have when those tuition bills arrive.

In order to get the most out of your savings, Snyder says, “You ought to be investing aggressively.” That means putting money into instruments that offer the potential of high returns without worrying too much about the volatility in their prices.

Snyder says, “My 6-year-old is invested as aggressively as can be - emerging growth stocks, emerging equities, small cap - he’s got it as volatile as you can get. But he will begin to be less aggressively invested when he’s 10 or 12. At that point, we may move to more large cap stocks that are less volatile, and when he turns 16, I suspect I’ll turn it down even more. The basic idea is that you need to dial down as you near your goal line - you need to lower your risks as your horizon gets shorter.”

For those with less risk tolerance than an investment professional like Snyder, financial planner Michael Hines, president of Consolidated Planning Corp. in Atlanta, says, “A good strategy would be to start out with a growth mutual fund.”

But he adds, “About four years before college, start putting it into fixed-income investments - you have to start looking at things like bonds, bond funds and bank CDs.”

In fact, if you have considerable money to invest when the kids are young, says John Isaacson, executive vice president of Payden & Rygel, an investment management firm in Los Angeles, “the simplest thing to do is go out and buy good-quality, long-term bonds and sit on them.” That way, he says, “you know it’s taken care of.”

The reason for the transition is simple, Isaacson says. “The last thing you want is to find that on the kid’s 17th birthday the 1987 crash happens and you lose 25 percent of the value of the investments. So you start locking in values with fixed-income investments.”

However, that’s not an option for most people. Snyder recommends investing specific sums at regular intervals, known as dollar cost averaging. He adds, “If you dollar cost average your way in, you should dollar cost average your way out.”

Don’t sell all the stocks and put all the money in bonds precisely at midnight on the child’s 14th birthday. Instead, he says, “Slowly sell off your equities and make sure you have the first couple of years’ tuition locked up.” Then move the rest of the portfolio into fixed-income securities.

If you buy individual securities instead of funds, target them to mature each August and December in time to pay tuition bills. While you can do the rebalancing yourself, American Century’s College Investment Program will automatically shift money from its clients’ growth stock fund to its money market fund at a predetermined pace.

In saving money for your children, you not only need to think about instruments, but also structure. You can put money aside in custodial accounts for your children and get a nice tax break.

Those who think only poor people and geniuses get scholarships are out of touch. About half of all students get financial aid in the form of scholarships, loans and campus jobs. Even if family income is well into six figures, a student may qualify for aid if he or she is applying to an expensive private college and already has a sibling in college.

So if you’re planning to ask for aid, stuffing money into your child’s name may not be beneficial.

Besides studying adolescent psychology, it turns out Investing 101 is a required course for parents trying to get through the college years. You should do your homework, Isaacson warns, because “you don’t want to be a walking junk bond when your kids are through with college.”

Graphic: Go to college, it pays