Pay now & learn later: here are two innovative ways to finance college costs.

FOR FIVE YEARS, ORENETTIA TODD SOCKED AWAY $64.40 every month toward her granddaughter's college education. Granted, 16-year-old Avia won't be entering college until September of 1996, but Todd has already paid off tuition and fees for Avia's education at a two-year community college and a four-year state university, thanks to Florida's pre-paid college tuition plan.

"I would never want to miss the chance of helping my granddaughter get four years of college, and I wouldn't dare see her take a mediocre job," says Todd, 64, who lives in Miami.

If paying for your child's college education is a priority, then start saving right now. Aside from loans and financial aid, there are other ways to pay for college. They include saving money through cash value life insurance and pre-paid college tuition plans. "Financial planning experts encourage you to begin saving as soon as your child is born, and the sooner you do it the more manageable it is to put money aside monthly," says John Hammang, director of state and campus relations for the American Association of State Colleges and Universities. "Parents can help by saving to pay for college tuition instead of borrowing money.

FREEZING COLLEGE TUITION

Todd is one of almost 6,000 African Americans enrolled in Florida's Prepaid College Program. Under the plan, money down on pre-paid tuition contracts is invested in equities, stocks and bonds by a nonprofit, autonomous organization, which administers contracts for tuition and dormitories. The Program then uses the return on the investment to pay any increase in college tuition costs that may have occurred since the contract was initially purchased. As a rule, the younger the child is at the time you purchase the contract, the less it will cost you.

Todd is a good example. In 1990, she agreed to pay about $3,670, the cost then of two years at a community college and two years at a state university, which does not include dormitory costs. Todd didn't have the $3,670 at the time, so the plan loaned her the money at a rate of 7.5%, low compared with commercial rates. Today's tuition has increased to $5,123, but Todd doesn't have to pay the difference. Consequently, she's saving about $1,500 on her granddaughter's tuition. When Avia starts school, her tuition will be paid at any two-year community college and four-year state university in Florida. Community colleges in Florida have an open access admissions policy, which means that, by law, anyone who has a high school diploma or GED must be accepted. But admission to any four-year state university is not guaranteed.

In addition, if Avia decides to skip community college and enroll in a four-year state university, she would be responsible for the difference between the amount paid by the contract at a community college and the cost of tuition at a four-year state school. The contracts are valid for 10 years after a student's expected enrollment date. However, you can cancel at any time and receive a full refund if the contract hasn't been used. Additionally, the money paid on a contract can be used at a university located out of state.

Florida state representative Al Lawson says pre-paid tuition plans are a great way for African Americans to pay for their children's college education. "It's a good financial planning tool for families because there's a sense of relief when you know you can get money for your kid to go to school," he says.

The Florida Prepaid College Program is the largest of its kind in the country, having sold 327,000 contracts since it started in 1988. According to William Montjoy, the program's executive director, the face value of these contracts is more than $1.5 billion. "It's a pay-now-learn-later approach to financing college education," he says. "We invest the money during the interim to earn the inflationary rate of tuition. You buy today's tuition, and we take your money and invest it."

The three payment options in the Florida program include a lump-sum payment, five monthly installments or monthly installments for up to 18 years, which can be as low as $47, depending on the child's age. There is a $10 per month late fee, but if financial hardship occurs, the account can be put on hold or be exempt from late fees for up to six months.

A disadvantage to the installment plan is that the parents must pay interest on the lump sum that was borrowed to buy the contract. Still, that's less than what it would cost to take out a loan because the contracts freeze the cost of tuition at the time of purchase. The state guarantees the plan.

SIDESTEP RISING

TUITION COSTS

Pre-paid plans are a welcome relief, especially with the rising cost of tuition at colleges around the country. According to Fred Moreno of the College Board in New York, tuition and fees increased 6% at four-year public universities in 1994-95. And undergraduates at four-year institutions can expect to pay on average 6%, or $713, more in 1995-96, he says.

Moreno says that despite rising tuition costs, college is still affordable for many. "The fact is, on average, the cost of going to a public university is in the range of about $2,500 to $3,000," he says. "And there's over $45 billion available in financial aid every year."

BANKING ON CASH VALUE

So far, pre-paid tuition plans are available in Alabama, Alaska, Florida, Massachusetts, Michigan, Ohio, Pennsylvania, Texas and Virginia. But there's another option for those who live in a state that doesn't offer pre-paid college tuition plans. It's possible to use a cash value life insurance policy to save money to pay for college.

Charles Harris, for example, pays a monthly $175 premium for his $300,000 universal life insurance policy. He will accumulate $2,100 a year, or $18,900 by 2004, the year that his nine-year-old son, Scott, will reach college age. Eight years from now, Harris can withdraw the $18,900 tax-free because the money is a return on premiums.

Harris sees cash value life insurance as an alternative vehicle for saving for college. His policy currently earns an interest rate of 6.25%. "People talk about using bonds and mutual funds, but this option had a double advantage to it," he says. "One, I'm providing protection for my family and two, I can take some funds that have accrued from the account."

Cash value life insurance is not a typical way to save for a child's college education. But Reuben Brown, a financial advisor with American Express, touts it as a little-known investment vehicle. He sells cash value life insurance through American Express subsidiary IDS. The interest rates paid range from 4.75% to 6.25%. "It means that you can accumulate a significant amount of dollars within a life insurance contract, without being taxed by the Internal Revenue Service, he says. "Very few people understand the real advantages of it. "

Permanent, whole life, universal life and variable universal life are all forms of cash value life insurance. They differ according to where the investments are made. Universal life, for example, is invested in fixed income instruments, such as money market funds and long-term bonds, while variable life insurance is invested in the stock market.

The first thing to remember about using cash value life insurance as an investment vehicle is that although a return of premiums is permissible, canceling the policy and withdrawing the interest accrued is considered a full surrender and is subject to surrender charges. They can run as high as two years of premiums, especially if the contract is 10 years or younger. Secondly, know that canceling the policy results in a loss of death benefits.

The disadvantages to using a life insurance contract as an investment vehicle is that it requires a long-term commitment. And it's best not to let the policy lapse, because you'll lose your tax benefits. Brown notes, "The main reason for not letting the policy lapse would be to maintain the tax advantages, which include access to earnings via a loan."

LOW-COST MONEY

Parents may consider borrowing money against the insurance policy as a way to take advantage of a life insurance policy without a return of premiums. With a loan, parents can access their tax-deferred earnings and still allow the remaining balance to accumulate on a tax-deferred basis.

For example, Brown says, during the first 10 years of your variable universal life policy, if you want to borrow money against the balance accrued, you will pay a 6% interest rate. However, the money in your life insurance policy is continually accruing a market interest rate of 4%, so your net interest cost would be 2%. Brown adds that if the policy is more than I 0 years old, you would pay a 4% interest rate. You don't have to pay back the loan as long as the policy stays in force," he says. "The loan is subtracted from the death benefit."

Of course, the terms and interest rates of loans differ from policy to policy, and some insurance companies make borrowing easier than others.

Brown says, "It's important to work with someone you can trust. Some people will be uncomfortable about the stock market, and so they should stay away from variable life insurance. But it offers the greatest potential for growth because the stock market gives you the greatest return."

INNOVATIVE WAYS TO PAY FOR COLLEGE

Alabama Massachusetts Pennsylvania Prepaid Affordable Education Financing Tuition Account College Tuition Authority Program 800-252-7228 800-449-6332 800-440-4000

Alaska Michigan Texas Advance College Education Trust Tomorrow Fund Tuition 800-MET-4-KID 800-252-5555 907-474-7469

Ohio Virginia Florida Tuition Trust Authority Prepaid Tuition Prepaid College Prepaid Tuition Program Program Program 800-792-5626, ext. 2 800-552-4723 800-233-6734