FROM CRIB TO COLLEGE MANY PARENTS AND GRANDPARENTS DON'T KNOW THEY CAN BUILD A FUND FOR THEIR CHILDREN'S EDUCATION BILLS.

Byline: Barbara Correa Staff Writer

High school junior Cindy Kite lives less than 25 miles from the University of California, Riverside (tuition: $4,500 a year.) But ever since a second-grade teacher told her she could do anything she wanted, the Alta Loma honors student has had one ambition: to attend Harvard University (tuition: $26,300 a year).

``My teacher said I could be president,'' says Kite, ``and Harvard has the most presidents.''

Lucky for Cindy, single Mom Teri Kite anticipated her daughter's academic ambitions.

And she knew the importance of saving what she could from her own experience attending California State Polytechnic University, Pomona. ``I couldn't afford it, and I was working full time,'' says Kite. ``I didn't want her to have to go through that.''

So she set up a savings account for Cindy when she was still in kindergarten.

Turns out Kite was way ahead of her time.

Soaring national college tuition, along with new state tax breaks, are prompting Southern California's parents and grandparents to make saving for college as much a priority as saving for retirement or saving for a home.

Nationwide, 2002-03 tuition at four-year public colleges jumped 9.6 percent from last year to an average $4,081, the largest gain in a decade, the College Board reports. At private schools across the country, tuition rose 5.8 percent to $18,273, bad news for parents of ivy-bound children.

Parents who can convince their kids to attend college locally are in better shape. In California, with arguably the highest-quality, most-affordable public university system in the country, tuition rates haven't increased at all at many schools.

Of 13 University of California or California State University schools in Southern California, just four increased California-resident tuition from last year. The most expensive four-year state school is UC Davis, where tuition is $4,601 a year.

The 529 arrives

As tuition has increased nationally, state-sponsored 529 college-saving programs have emerged the last few years as a way to offset those hikes.

On Jan. 1 this year, funds invested through 529 college savings plans became exempt from federal taxes (that exemption expires 2010). Then, in May, Gov. Davis signed legislation eliminating state taxes on 529 withdrawals, making them a better deal for Southern Californians than some of the other mechanisms parents have traditionally used to save for college.

Unlike Uniform Gift/Transfer to Minor Act custodial accounts, which sign funds over to a child when he turns 18, the 529 stays in the parent's name. Also, 529s can be passed to other family members, retaining tax-free status as long as withdrawals are used for education. (If the money is tapped for another purpose, there's a 10-percent penalty.)

Educational IRA accounts cap contributions at $2,000 a year, whereas 529 contributors can put in a total of up to $300,000 for some programs.

Another popular option, the prepaid college savings plan, allows parents to buy credits of tuition at the school of their choice, locking in today's rates for future use. These plans, which have been around longer, have all the tax advantages of a 529. But what if Junior is bent on going to college out of state, and you bought him tuition for Occidental College or University of Southern California?

Possibly the greatest advantage to the 529 is how it impacts a students' financial aid eligibility.

Assets registered in a parent's name, like 529 funds, factor into financial aid eligibility at a rate of 5.6 percent, whereas 35 percent of accounts in kids' names - like custodial accounts, IRAs or bank savings accounts - go on the aid applications, according to federal rules, said Scott Trulik, a financial adviser at Waddell & Reed's Pasadena office.

So, if a parent had $100,000 in a 529 portfolio, just $5,600 would be counted as assets on his kid's financial aid application, while an IRA in the kid's name would count as $35,000 in assets on that application, possibly compromising aid eligibility.

Financial aid rules vary from school to school, and the laws regarding the newer savings plans are still evolving, said Dean Kulju, director of financial aid at California State University, Long Beach. He pointed to support from the College Savings Plans Network, a state treasurers group that promotes college financing, for changing current federal methodology to treat both prepaid and savings 529s as parental assets.

The kiddie 401(k)

It helps to think of a 529 account as a sort of 401(k) for the preschool set, though the plans can benefit education savers at any age. As with a 401(k), 529s are managed independently, like mutual funds, and their investment allocations vary. That means the onus is on the investor to study up on a plan's management style, fees and specific options, such as a fixed return.

Back in 1999, when 529s first appeared on the public radar, the stock market was still an unbeatable investment. Since then, as investors have watched their 401(k)s dwindle, many 529 plans have responded by introducing guaranteed returns averaging 4.5-4.8 percent for people who'd rather not gamble on their kids' education.

Right now, persistent market volatility makes a fixed return attractive, said Tom Pinto, a spokesman for the Teachers Insurance and Annuity Association College Retirement Equities Fund, which manages the only California-sponsored 529 plan, ScholarShare.

However, parents shouldn't invest college funds too conservatively, especially if the recipient is still in diapers.

Enter ScholarShare's age-based asset allocation option, which uses age to determine how aggressive investment should be, just like a retirement plan would. Just as a 30-year-old with decades of years left to work should be more heavily invested in stocks, so a 3-year-old with 15 years until college should be a more aggressive investor than a 10-year-old with just 8 years to save.

Think infant investing is a bit extreme?

``This is not a high school issue,'' said Linda Zimring, director of college and gifted programs for the L.A. Unified School District. ``This is an elementary school (or earlier) issue.''

Crib to College

Kevin Wright and James Ocon, financial and retirement planning advisers at Prudential Financial's Encino office, have spent much of the last year making the crib-to-college savings pitch at college fairs, elementary schools and day-care centers from San Bernardino to Long Beach.

``It's never too late or too early to start savings - especially for college,'' said Ocon, whose feverish speaking schedule has taken him and his partner to parent meetings at preschools and to AARP chapters to talk to grandparents who want to help out in the saving. ``A very low percentage of parents and educators have or understand the information out there. Some people have heard of 529, but it's like a 401(k) when that first came out.''

The information is spreading fast.

``The response is overwhelming,'' said Ocon, adding that of his three areas of focus - general financial planning, 401(k) retirement and college - planning for college has moved to the second position in terms of his business.

About 86,000 families have opened ScholarShare 529s since 1999, most of them California residents, said Steve Ludwig, a spokesman for the Los Angeles office of TIAA-CREF.

Of course, for the average Southern California family struggling to cover its monthly nut and continue 401(k) contributions - which these days evaporate as soon as they are deposited - putting aside hundreds of dollars every month for college is a distant fantasy.

Some parents have already put their kids on notice that support will come in the form of room and board instead of tuition savings.

``I haven't saved,'' said Scott Stacey, a father of five college hopefuls, including a daughter already enrolled at Orange Coast College and a son who really wants to go to Pepperdine.

``It's $1,100 a month,'' said Stacey. (Actually, it's more than that: $26,280/year.) ``I'm not going to deplete my savings.''

Financial planners counter that strapped parents can contribute as little as $25 a month to a 529. But for some, even that is too big a burden.

``I do worry about it,'' said Rubina Dejam, a Tarzana tour organizer and mother of a first-grader and third-grader. ``But with living expenses so high, you're just trying to make your monthly bills. ... There is no way (to save for college).''

Dejam's kids do contribute a bit to a Washington Mutual savings account, but it's usually one dollar at a time. ``I guess it's better than nothing,'' she said.

CAPTION(S):

photo, box, 2 charts

Photo:

(color) no caption (Blocks)

Staff photo illustration by Charlotte Schmid-Maybach and Warren Huskey

Box:

CALCULATING COLLEGE SAVINGS

Chart:

(1) PUBLIC COLLEGE SAVINGS

(2) PRIVATE COLLEGE SAVINGS

SOURCE: TIAA-CREF college savings calculator