HIGH INFLATION HAS knocked out the traditional ways of saving money for college -- the 5 1/2 percent savings accounts and 6 1/2 percent U.S. savings bonds. College costs have risen an average of 9.5 percent a year since 1970, according to the college scholarship service. It now costs $3,248 dollars a year to send a child to a four-year public university, counting tuition, room, board, fees, books, transportation and personal expenses, and $5,526 for a private college. By 1990, those figures could double.
Long-term savers need yields in the area of 10 percent after taxes, in order to avoid falling behind.
One possibility is the variable-rate four-year savings certificate now guaranteeing around 10 percent a year at banks and savings and loans. Minimum deposits vary by institution, but tend to run in the area of $500.
People with $5,000 or more might consider good-quality corporate bonds at 11 percent, timed to mature in the month that tuition payments will be due.
If you put these investments in your child's name and he has little other income of his own, the annual interest will escape tax-free. Once you give him his money, of course, it's his; you can't take it back if he decides not to go to college.
Some tax-deferred annuities with no sales charges now pay 10 percent, and may make sense for people who don't want to put money into their children's names. But the interest rate is guaranteed only for a year or less, and there may be exit charges when money is withdrawn.
Annuities with lower interest rates and high sales charges make no sense at all, nor do cash-value insurance policies written on the child's life, which are often sold as a way of building up college savings. Insurance policies accumulate much less money than you'd get from passbook bank accounts.
When savings fall short, as they usually do, almost all families today should make a strong bid for college aid. Some of the better-endowed private colleges offer grants to families with income of $30,000 or more if they can show financial need. Among the upper-middle-income families that might qualify for help are those with several children; with one child already in college or prep school; with unusually large medical expenses or with alimony and child-support obligations. A $30,000-income family where both parents work will get more consideration than a family where just one person produces that income.
Colleges vary enormously in the amount of aid they give to upper-middle-income families, and many applicants will be disappointed. But you should at least apply. Fill in the financial aid form available at the high-school guidance office, which covers your income, assets and expenses; a computer analysis of how much you should be able to contribute toward college will be sent to whichever colleges you specify.
In the growing competition for students, some 600 colleges now offer modest merit scholarships, to able students not officially "in need." For a current list of these awards, get "The As & Bs of Academic Scholarships," $1.50 from Octameron Associates, P.O. Box 3437, Alexandria, Va. 22302. Octameron also has an excellent general guide to college aid called "Don't Miss Out" ($1.50).
Many state scholarship programs help families above the middle-income line, who don't get much aid from the federal government. Eligibility is generally limited to state residents attending in-state schools. The American Legion's guide to financial aid has a particularly good section on state programs, and on programs for servicemen and women. Write for "Need a Life,? 50 cents from The American Legion, National Emblem Sales, P.O. Box 1055, Indianapolis, Ind. 46206. The army has just announced a $6,000 education bonus for qualified four-year volunteers.
Other grants awarded regardless of income include athletic scholarships, a growing number of which now go to girls; National Merit scholarships, based on a student's performance on the Scholastic Aptitude Test given in the high schools; National Honor Society Awards, and special-source awards granted by clubs, corporations and so on and listed in a guide available in high-school guidance offices.
If a parent is dead, retired or disabled, and was covered by Social Security, his or her unmarried child age 18 through 21, who is a full-time student, is elibigle for monthly Social Security benefits. These are granted even if the student is being supported by the other parent.
A number of schools help students earn tuition money by combining periods of study with full-time work. For a free list, write to the National Commission for Cooperative Education, 360 Huntington Ave., Boston, Mass. 02115.
Middle-income students can expect more help this year from the federal government. Since last July, eligibility for Federal Basic Educational Opportunity Grants has been expanded, so that families with heavy expenses, few assets and annual earnings of as much as $25,000 may be eligible for help. Most of the BEOG money goes to people with middle incomes and below, but it makes sense for everyone below the $25,000 cut-off point to apply. Self-supporting students may apply based on their income rather than that of their parents. The application forms, available from high-school guidance offices, can be forbidding, but the guidance office will help parents fill them out. BEOGs are based strictly on need, without regard to high-school grades. The maximum award to low-income students is $1,800.
The coordinator of a student's aid package is the college financial aid office, which also administers federal programs for especially needy students. Aid officers say that some eligible students lose out because they apply too late or because their parents fail to clarify their financial situation.
When a family runs out of savings and grants, they turn to loans -- specifically, to government-guaranteed student loans available at participating banks. A student pays no interest on the loan when he's in school (the government pays it for him); repayment doesn't start until nine months after he leaves school, at 7 percent interest over 10 years. Since last year, subsidized loans have been available even to wealthy families thanks to Congressional largess, a family may now keep its savings invested to today's 10 percent interest rates while hitting the taxpayers for a low-rate loan. The maximim annual undergraduate loan is $2,500, but many lenders set lower ceilings.
Bank participation in the subsidized student-loan program is voluntary, and some areas are short of funds. If you can't track down a loan, write for the U.S. Office of Education's free "Student Consumer's Guide," P.O. Box 84, Washington D.C. 20044, which includes the names and phone numbers of state student-loan agencies. The efficiency and helpfulness of these agencies varies a lot, but they may be able to tell you where loans are available.