By William J. Berrall, Financial Advisor
Morgan Stanley Dean Witter

"You're going to be a grandparent!" As soon as you hear these words, you start to imagine your future grandchild: a beautiful toddler crawling around the house. A youngster playing catch in the backyard on weekend visits. And, in the not-too-distant future, a young person standing proudly in a cap and gown at college graduation.

Then reality sets in. Annual public college tuition, according to the College Board, is estimated to reach $40,000 by about the year 2018, and private college tuition will be much higher. Your children may therefore need help with educating their (and your) little bundle of joy.

Start Saving and Investing Now
To be able to provide financial help at the time the college bills come around, your best strategy may be to start saving and investing now so that the money you put aside has the potential to grow over time.

Investing for College with Zero Coupon Bonds
A good choice for investing for future education costs may be a type of bond known as "zero coupon U.S. Treasury STRIPS." Zero coupon bonds are high-quality investments backed by the full faith and credit of the U.S. Government as to the timely payment of principal and interest.

With these zero coupon bonds, you will always know your investment's exact maturity date and what its value will be at maturity. Zeros are sold at a deep discount to their par value, and those zeros with distant maturity dates sell for very little money in comparison to maturity value. Keep in mind that market value will fluctuate, so if you sell a zero prior to its maturity you may receive more or less than the original cost. Also, when a zero coupon bond is held in a taxable account, although it's interest is not paid out, it is federally taxable as it accrues.

Using zeros, you could invest an initial lump sum that in time would be able to pay for your grandchild's future tuition. Or you could construct a "ladder portfolio" of individual zero coupon bonds maturing in sequence in August of each school year over a four-year period.

Taking steps now to ease the burden of future college costs may provide relief for your family in the future, and a strategy involving zero coupon bonds may be one way to help reach this goal. Your financial advisor can give you more information about how zero coupon bonds may help you plan early for college costs farther down the road.

This article does not constitute tax or legal advice. Consult your tax or legal advisors before making any tax-related or legally related investment decisions. This article is published for general information purposes and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your circumstances and objectives.

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