For the past 10 years, John and Cathy Hopson have been salting away money toward the day when their sons, Scott and Christopher, would be ready for college. That day came this fall when Scott, 18, entered Salisbury State College to study sports medicine -- a four-year education his father figures will cost about $24,000.
Three years from now, Christopher, 15, a high school sophomore, will be ready to enter college. His father estimates that Christopher's schooling will cost about $35,000 at a state school; more if he goes out of state.
For the Hopsons, the total cost of sending their two sons to college: $59,000.
It will not be easy to accumulate that much money, said John Hopson, 46, a senior financial analyst at GE Information Services in Rockville. But he and his wife, Cathy, a nursery school teacher, are confident they will find a way.
"We feel it is important and well worth the sacrifice," Hopson said.
"Sacrifice" is a word heard frequently when parents and financial planners talk about the formidable task of paying for college educations in an era when tuition is rising 5 percent to 8 percent a year -- faster than the rate of inflation -- and tuition for a bachelor's degree at a prestigious private college or university is about $75,000.
Strategies for finding college money are many and varied, but generally involve a regular savings plan, government loans, academic or athletic scholarships and money earned by the student. For most families, it will take a combination of the four to pay the bill, although higher-income families might not be eligible for government help.
Moreover, the Tax Reform Act of 1986 and other recent tax law changes wiped out several strategies that permitted parents to accumulate educational funds by channeling money into their children's accounts, where the interest was then taxed at the children's tax rate. These included the so-called Clifford Trust and various kinds of annuities.
Still available is the help provided by the law that gives children under 14 a tax exemption on the first $500 of interest income and taxes the second $500 of income at the child's tax rate. Income above $1,000 is taxed at the parent's rate. For children over 14, all income is taxed at the child's rate.
"Start saving early," is the advice offered by most financial planners.
That thought has been uppermost in the minds of John and Cathy Hopson for some years. With a joint annual income of $60,000, the Hopsons might not be eligible for some government loans. As a result, much of the money needed for college is likely to come from their savings and personal loans, along with whatever money Scott and Christopher earn working part-time and during summers.
John Hopson's main savings vehicle is the GE Savings and Security Plan, for which he earmarks 7 percent of his income that goes into a GE money market fund. GE matches half of his savings, or 3.5 percent, which he puts into GE stock.
The stock market's recent plunge took GE stock down about 30 percent. "Some of us lost a year's tuition on that," said Hopson. "But I believe it will come back."
Hopson said Scott's education will be financed, in part, by $9,000 that recently came to him from his father's estate and, in part, by money from his GE savings plan.
"We've got Scott's education covered," he said. But paying for Christopher's schooling will be more difficult. For one thing, costs will be higher, and when Christopher becomes a college freshman, Scott will be in his senior year.
"We have been thinking about that. We're not quite sure what approach we'll take. It will depend on where Christopher is going to school," said John Hopson. He thinks he may wind up borrowing money to help bridge the gap.
One complicating factor is that funds taken out of the GE plan will reduce money available to the Hopsons when they retire. The loss could be 30 percent to 40 percent of his retirement income, Hopson said.
While each family's situation differs, one important key to saving for college is time, said John A. MacIntyre, a financial planner at Alexandra Armstrong Advisors in Washington.
"Start a regular pattern of saving as early as possible and do it on a regular basis. It is a hard thing to do because we are all faced with today's expenses. But it is time that gives you the power of compounding," he said.
Designing a college-savings plan for the 7-year-old daughter of a professional Washington couple, MacIntyre estimated that when the student enters college in 1998, $57,955 will be needed for a four-year education at a public college.
He bases his figure on the College Board's recent estimate that a state college education currently costs $5,789 a year. He has added an 8 percent annual increase in that figure over the next 11 years and has figured in $11,300 of savings in shares of stock and shares in a bond fund.
To accumulate $57,955 in 11 years, assuming the parents can earn an 8 percent return on their investment, the parents will have to put in $9,297 now, or $1,302 each year, or $106 a month, MacIntyre said.
At a private college or university, the cost will be even higher. For a four-year education at a private school, the parents will need an estimated $119,952. That is based on projecting the current annual cost of $11,982 a year to include the 8 percent annual increases in college costs. To reach that goal, MacIntyre said, the parents would need to invest a lump sum of $42,637 now -- $5,972 each year, or $487 each month.
The parents, MacIntyre said, decided to put $100 a month into the existing bond fund and $400 a month into a conservative stock fund, taking advantage of what is called "dollar cost averaging."
Under "dollar cost averaging," the investor puts in the same amount of money each month. When the price of a fund's shares falls, the investor can buy more shares for his money; when the price rises, he can buy fewer. But over a period of time, he attains an average cost for his shares, no matter how the market behaves.
John R. May, executive vice president of Manna Financial Planning Corp. in Fairfax, suggested what he considers two attractive options for saving for college.
One is the purchase of a single-premium life insurance policy; the other, regular investment in a conservative growth stock mutual fund.
A lump sum investment in a single-premium life insurance policy has several benefits, May said. First, it provides insurance coverage and, second, it is a tax-preferred way to save for college. It is, in fact, one of the few tax-advantaged ways remaining, because under current law the interest in the policy is tax-free.
One other advantage, he noted, is that the cash values in the policy are not considered part of a family's assets when the family is filling out forms for government loan or aid programs.
May cited this example of the way a single-premium policy could work for a parents trying to prepare for the day, 15 years away, when they would send their child to a college. May used a current college cost of $10,000 a year and assumed that it will increase at 6 percent a year. At that rate, he said, the four-year education would cost $96,000.
To accumulate that amount of money, an individual could make a single payment of $30,000 and buy an insurance policy providing $285,000 worth of death benefit. Assuming an 8 percent return on the funds invested for 15 years, the policy-holder would have $96,000 that he could borrow. Under a "wash loan" provision in which interest earned and interest paid equal out, loans on single-premium life policies can be made without out-of-pocket cost.
But single-premium life policies have their drawbacks.
Interest rates are not guaranteed for any extended period of time, excessive borrowing can trigger a lapse in the policy, and borrowing reduces the death benefit or amount available for retirement. In addition, the "wash loan" technique and other tax benefits are coming under scrutiny from congressional revenue-raisers.
On the other hand, May said, the policies carry a minimum interest rate and one cannot lose his principal unless the insurance company folds.
May's suggestion for a mutual fund investment program that could accomplish some of the same goals involves saving $192 a month for 15 years while realizing a 12 percent annual return. At that rate, an investor would achieve the $96,000 needed for college. Or the investor could make a $23,000 lump sum payment and reach the same total.
Despite the recent stock market plunge, which quickly cut mutual fund assets by 20 percent, May said history provides ample proof that stocks are reliable, long-term investments.
"The times are few when stocks did not perform better than other investments over the long run," he said.
Theodore L. Bracken, director of federal relations for the Consortium on Financing Higher Education, represents a group of 30 private colleges and universities whose costs average $17,000 a year.
Swiftly rising college costs have produced a torrent of proposals for solving the tuition crisis, Bracken said. "The industry has exploded in the last year or two," he said.
The ideas take several forms. Several colleges have plans that permit parents to earmark money years in advance that, with interest added, will pay for tuition when a student is ready to enter school.
Duquesne University, for instance, allows parents to make a lump-sum payment that years later will pay for tuition at whatever the future cost. Although the cost of the education would be higher than the lump sum payment, the difference would not be taxable because it is considered a prepayment of services, Bracken said. If the child does not choose to attend Duquesne, the parents would receive only their principal back.
At the state level, Bracken said, 36 states have plans in effect or under consideration that would accomplish similar goals. There are, however, unresolved tax questions about some of these plans.
Over the years, Bracken said, there has been a transition in the way parents paid for college costs. When costs were relatively low, parents paid on a year-by-year, out-of-pocket basis. Later they began to stretch the costs over 10 to 15 years, after college, by using loans. When that became too difficult, they began to move in the direction of early funding.
Bracken said the 18 years between a child's birth and his or her graduation from high school represent "a significant amount of time" for saving, which if used properly can reduce the hardships of either trying to pay out-of-pocket or of taking loans.
Bracken said he favored a recent proposal by Sen. Edward M. Kennedy (D-Mass.) to allow the interest on U.S. savings bonds to be tax-free when the money invested in the bonds is used for college educations.
He called savings bonds a "nice, simple, straightforward" investment plan that could easily be used by most peopl