By Michael Collins, Investing Across Borders

For Banc One Investment Advisers

August 2001

There’s a scene in the movie "Shawshank Redemption" where an inmate played by Tim Robbins is acting as a financial advisor for one of the prison guards. The first question he asks is, "Now, do your want your kids to go to Harvard or Stanford?"

It’s kind of hard to plan for that possibility when your kids are a week old -- or when you're trying to figure out how to pay for back-to-school fashions and other needs -- but as with retirement, it's never too early to start saving and investing for college. So when you're shopping for that first lunch box, or better yet, when you're shopping for the crib - you should be shopping for college investment plans as well.

Don't get overwhelmed by the need for huge amounts of college savings. As you can see from the chart to the left, with an early start and the benefit of compounding returns, relatively modest savings can lead to a good-sized college fund by the time your child is ready to use it.

Believe it or not, the government is here to help.

You've probably heard of Education IRAs, a savings plan allowing tax-free earnings if the money is used for higher education. But the EIRA is just one of four main government-influenced options when it comes to investing for college.

There are also two kinds of state-offered education investment education plans - known as 529 plans for the section of the Internal Revenue Code that allows them to grow tax-free. The 529 plans are divided into prepaid tuition plans and state savings and investment plans.

The fourth category of education savings plans includes UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) accounts.

Just as few of us can afford to buy a house with all cash, remember that most people draw on a variety of resources to pay for college. Your college savings fund is an important part of the equation, just as your down payment is a crucial part of affording a house. And remember, financial aid is often available to help pay for college.

In general, financial aid comes in two categories: loans and grants or scholarships. According to the College Board, about 60 percent or more of total financial aid is loans - mostly government-backed student loans.

The College Board advises parents that saving for college pays off, even when it comes to calculating eligibility for financial aid. But keep in mind that how you save, and in whose name the savings are held, will affect financial aid calculations. There may be short-term tax advantages to holding college funds in your child's name, but they could be outweighed by a reduced ability to get financial aid.

According to the National Association of Student Financial Aid Administrators, aid calculations assume that 50 percent of a student's income and 35 percent of assets held in a students name should be available to pay for college. When calculating the Expected Family Contribution, the parents share can be affected by income level, the size of the family and other variables. But generally, the NASFAA says, aid calculations assume that just over 5 percent of savings and other assets in the parents’ name (excluding the house and retirement accounts) and from 20-50 percent of parents' income could go toward college.

Parents are used to sacrificing for their children. But if it comes to a choice between saving for retirement and saving for college, sacrifice may not be the right answer.