MONEY PAY NOW, LEARN LATER

Despite saving regularly for their son’s edu- cation since the week he was born. Jerry and Marilyn Gray found them- selves in a quan- dary last year. In the middle of Neal’s freshman year at the University of Pennsylvania, his parents realized their college savings couldn’t stretch another three years. In building their savings, the Richardson couple hadn’t counted on the bloated college costs of the last decade, nor had they figured on Neal’s attending one of the nation’s most expensive private universities. But Neal wants to be an economist. Gray said, and Pennsylvania’s “wonderful, wonderful business school” was their son’s first choice when he graduated last year from J.J. Pearce High School.

Sending Neal to Pennsylvania would be tough financially, they knew, yet they were determined because of the school’s reputation. “If a student is accepted into a school like this, you find the funds. You just will,” Gray says. Still, last year was a shock: Neal’s tuition, fees, and room and board hit a staggering $17.000-never mind spending money. And even conservative estimates project that amount spiraling about 6 percent or more each year.

The Grays’ predicament is a common one today as college costs far outstrip growth of family income. Even discounting inflation, costs of the average private university shot up 40.7 percent since 1981, according to the College Board, while public university charges bounded ahead 25.5 percent. Median family income, meanwhile, rose just 5.3 percent in constant dollars.

The results are intimidating even for solidly middle-class families like the Grays. Twenty years ago, it cost an average of $1,199-room and board included-for a year at a state university; this year, it costs $4,693. Private colleges are even more daunting: one year now costs $12,747, compared with $2,545 in 1967. If total costs rise just 6 percent a year-and historically, that’s low-students entering college in the year 2000 will fork over $43,789 for their diplomas at public universities and $118,939 at private colleges.

Even affluent parents are no longer exempt from the money chase. In the past, the well-off opened trusts and custodial accounts that let them shift income-producing properties to their children, but these parents climbed into the boat with everyone else when last year’s Tax Reform Act wiped out many of their advantages.

Colleges blame the painful increases on a complex mix of reasons. A college’s budget can’t follow regular consumer inflation rates, officials say, because they buy things like foreign magazines and quickly obsolete scientific equipment that aren’t factored into the familiar Consumer Price Index. With student aid falling 6 percent since 198!. some colleges also raid endowments and soak those who can pay so they can continue scholarships for needy students. But whatever the reasons, skyrocketing costs are turning the college dream into a financial nightmare for many families. “There are widespread fears that a college education will be put outside the reach of a middle-income family,” says an aide to Sen. Ted Kennedy. D-Mass. Kennedy is co-sponsoring one of several congressional proposals aimed at alleviating the burden.

But just as parental groans rise to a national chorus, old-fashioned American ingenuity is generating a cornucopia of new ways to help families bear the strain. The ideas are coming from all corners-colleges afraid that students won’t be able to afford their tuitions, concerned state and federal lawmakers, and private businesses who see a new money-making opportunity.

The plans in place so far are still relatively rare and untested over the long haul, but they are certainly innovative. Families shopping for the best deal now can find “tuition futures” guaranteeing four years of college tuition for today’s infants; pay-as-you-go plans; a CD plan linking yield to college inflation rates; education savings bonds; and new twists on traditional investments.

The idea behind all the plans is simple: gather a big pool of money and invest it with enough sophistication that college expenses will be covered. And that’s where the skepticism starts.

Critics worry that students relying on long-term plans could be left outside the college gate if their program can’t deliver. Or almost as bad, taxpayers may have to cough up what the plans can’t. “It sounds real risky,” says Carol McDonald, president of the Independent Colleges and Universities of Texas. “How can you be sure you can invest and get a return like that?” Others denounce financial programs that they believe lock children into particular schools before they are even old enough to know what college is. And some financial planners insist that parents can get a better return by investing on their own.

Despite the criticism, more than thirty state legislatures have some type of tuition-buster plans under consideration, and Congress is batting around a half dozen potential national solutions as well. Texans are eligible for most of the new private programs and individual university plans, even though the Texas legislature rejected a statewide prepayment proposal last spring because of the state’s fragile economy. The Grays, for example, were able to freeze Neal’s tuition for the next three years at the University of Pennsylvania’s current rate of $12,000. They’ll repay the school over ten years.

The most novel idea is “tuition futures,” which originated at Pittsburgh’s Duquesne University in 1985 and have become the basis for a number of more flexible state plans since then.

Duquesne projects its tuition charges in coming years and then charges parents a sum the school thinks it can invest over the years to yield that amount. Parents on the Duquesne plan, adopted now by fourteen other small private colleges, can pay for their child’s college tuition before he learns to walk. Parents of newborns now pay just $8,630 on the premise that eighteen years of investing should cover the inflated tuitions of 2005, says Lois Folino, associate director of alumni relations. Parents of today’s fifteen-year-old must ante up $23,330 because there’s less time for the investment to grow. While these are hefty sums, Folino calls it a bargain. Duquesne projects that its students’ college careers will set the Class of 1994 back an average of $37,189 per sheepskin.

But there’s a big catch. If an enrolled child doesn’t make the grades in high school, doesn’t pass the entrance exams, or drops out, parents get back only what they paid- which may not be worth very much by the time today’s preschooler hits college age. Duquesne points out, however, that students can transfer after their freshman year and the college will foot the bill up to its current tuition level. Patrick Fleming, who created Duquesne’s plan, said the college should have no problem meeting its obligations because the plan can absorb tuition wallops of 11 percent annually.

The University of Pennsylvania’s Penn Plan, under which Neal Gray is registered, also permits prepayment, but it avoids some of the criticism leveled at Duquesne because the program is open only to high school seniors who already have been accepted at the university. Parents can prepay or borrow four years’ tuition at this year’s price- $12,000-and take ten years to pay back the $48,000. The program has proven enormously popular, drawing 3,500 of the private university’s 8,000 undergraduates this year, says Diane Louise Wormley, the Penn Plan’s assistant director.

While the most innovative options are at out-of-state schools, various Texas schools have started their own cost-control plans. Four-year state universities, for example, let families dribble out the current semester’s tuition in installments. A few private colleges also are trying to help. Kerrville’s Schreiner College, for instance, gives tuition breaks for Hill Country students.

Southern Methodist University, like the University of Pennsylvania, lets freshmen lock in four years’ tuition at the current rate, which this year is $7,444. Lawrence Landry, vice president for finance and administration, says the university devised the program three years ago because “more and more parents are having difficulties meeting the costs of attending a private school from their savings.” Parents can repay borrowed tuition over ten years. If students leave SMU, parents get back their investment minus the tuition increases since their child enrolled, Landry says. However, he thinks SMU may need to promote the program better because fewer than 5 percent of students have taken advantage of it.

Under a second program, annual tuition increases normally, but SMU lets parents take two-and-one-half years to pay off each year. Landry reports that 15 to 20 percent of SMU’s 7,500 undergraduates opt for that payment plan.

Weighing both the popularity of prepayment plans like Duquesne’s and the strength of its criticisms, many states are trying to formulate less restrictive plans. Michigan’s governor developed the first statewide prepayment plan for Michigan residents, open to students at any of its fifteen state univer- , sities and twenty-nine junior colleges. If the Internal Revenue Service passes on tax deferral, Michiganders can pay the newly minted Michigan Education Trust $4,500- now or in installments-to guarantee their newborn’s tuition and fees starting in 2005. If the child doesn’t go to college, the family gets back the equivalent of four years’ tuition at the state’s cheapest public college. Michigan will pay its average tuition level for students opting for a private Michigan college or an out-of-state school.

Five other states so far have copied Michigan’s plan, but concerns about long-term viability have arisen as well. Last fall, California’s governor vetoed a similiar plan, saying the state’s general fund would have to bail out the system if it failed. Michigan doesn’t worry about that happening, however. The state can always charge newcomers more for the plan if there is a shortfall, says Lynne Schaefer, president of the Michigan Education Trust.

A number of federal lawmakers also are trying to devise national programs to help defray the soaring costs of college. Under one, introduced by Senators Ted Kennedy and Claiborne Pell, D-Rhode Island, parents saving for college could sign over regular U.S. Savings Bonds to a college tax-free. “There are no downside risks, ” says the Kennedy aide. “If the beneficiary doesn’t go to college you simply cash in the bonds and pay the tax as you would now.”

But the states and the feds don’t have all the ideas. The private sector also has plans to solve the tuition crunch. Peter Roberts, formerly a general partner of the New York investment house Lazard Freres & Co., last fall created the College Savings Bank in Princeton, N.J. The bank sells regular Certificates of Deposit, but has tied their yield to the annual inflation of college costs, as determined by a College Board index of the nation’s 500 largest private colleges. If college costs should leap 10 percent or more in a single year, the investment is still covered, Roberts says. The College Savings Bank is, for now, the only program of national scope open to parents anywhere. On maturity, the CollegeSure CDs can be used at any college.

Another private company, Academic Management Services, administers programs at 1,000 colleges, including Texas’s Trinity University and Southwest Texas State University, that let students pay off each semester through short-term installments. “People who use our plan tend to be monthly budgeters who pay for college along with the mortgage and car payments,” says the company’s president, Kevin Whalen.

There are also new ways of using private savings. Fidelity Investments of Dallas touts the purchase of mutual funds and variable life insurance as flexible ways to save for college. “It doesn’t tie you to one school or state, and you can get your money out when you want it,” says Humphrey Bogart, president.

Don’t wait, advise the experts. Develop a savings plan now and stick with it. If a better plan comes along later, money can be transferred then. Don’t discount the imaginative programs available to Texans now, even though the state doesn’t have a state-sponsored prepayment plan.

“The key thing is that every family withaspirations for its children needs to plan asearly as possible,” says Kathleen Brouder ofthe College Board’s College ScholarshipService. “You can’t start too early. Thetoughest way to pay for college is to do it outof current income.”