It's the year 2016 and it's one of the proudest moments in your life- junior's going off to college. Congratulations! But by the time you hear "Pomp and Circumstance" four years later, you will have spent up to over $268,000 [source: Money Guide 1995] for tuition and expenses from that four-year private college.

The lesson is simple: if your child is going to pursue a college education, you probably need to start pursuing a sound investment strategy now.

Over the past ten years, college costs have risen at an average annual rate of 8%. At this rate, it could cost as much as $81,688 to put a child through a four-year public college seventeen years from now.

There is good reason to believe that the price of higher education will continue to rise at a healthy clip. Schools face rising costs to remain competitive and the population of college-age Americans is shrinking steadily. These factors mean that the costs of expanded technology and salary increases will be distributed over a smaller number of students.

What's the best way to prepare? Get a jump on the costs by beginning your financial planning now! The first step is estimating the amount and the timing of your future payments for higher education. Then graduate from step one and examine the sound investment alternatives that are open to you-and your child's future.

Most college funding plans have their foundation in relatively safe, growth-oriented instruments that are invested for the long term. The key is to find investments that provide as high a return as possible, given the desire for reduced risk. Here are just some of the investments you may wish to add to a college-funding portfolio:

* Zero coupon treasury strips. The deeply discounted purchase price of these instruments makes them affordable-plus they offer the highest credit quality available, the "full faith and credit" of the federal government. (Note that these instruments are subject to market fluctuation if sold prior to maturity.) Another advantage: since treasury strips are available in a wide range of maturities, you can structure a "ladder" portfolio of these securities that will mature over a four-year period to coincide with college tuition payments.

As their name implies, zero strips make no periodic interest payments. Instead, accreted interest compounds internally over the life of the bond until maturity, eliminating reinvestment risk for the holder.

* Municipal zero coupon bonds. Zero coupon municipal bonds are federally tax-free investments that pay no current interest, but return full face value when held to maturity. Municipal zeros are also generally exempt from state taxes when bought by a resident of the issuing state. They are sold at a deep discount from par value and compound or accrete at an initial stated tax-exempt rate of return as the bonds grow from their discounted price to their par value at maturity. (Note that, like other zeros, municipal zeros are subject to market fluctuation if sold prior to maturity.) Municipal bonds offer a degree of safety that is second only to U.S. government obligations.

* Mutual funds. Mutual funds own a pool of securities and sell interests in the pool to investors, giving them the benefits of a diverse portfolio and professional management. Every fund has a specified investment objective and buys and sells securities accordingly. The more conservative funds are those invested in U.S. government securities. If your risk tolerance is slightly higher, you might consider a fund that invests in blue-chip stocks.

The cost of mutual fund shares and the price you receive when you sell shares varies according to the market value of the underlying securities. When it's time to make a tuition payment, you would sell shares of the mutual fund at the current market price of the fund. Many mutual funds are subject to a declining sales charge upon redemption. Investors should check the fund's prospectus for more information before investing.

* Unit trusts. A unit trust also sells shares in a pool of professionally selected securities designed to meet a specific investment goal. However, unlike mutual funds, unit trusts have maturity dates and the underlying securities generally remain the same for the life of the trust. As with zero coupon bonds, the maturity of unit trust investments generally can be timed to match expected tuition payment dates. However, investors should be aware of the fact that in some unit trusts, owing to the nature of these investments, maturity will occur prior to the original termination dates.

To reduce the tax liability on any type of investment earmarked for college, consider placing the securities in a custodial account that meets the requirements of either the Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). The taxable status of specific mutual funds will vary, depending upon state law

By depositing securities into these types of accounts, you can take advantage of lower tax rates generally available to minors. Since there are limitations to this, depending on yearly income and age of child, you should consult your tax advisor before opening an account of this type.

Interest on U.S. government securities, such as treasury zeros, is exempt from state and local taxes. However, the federal government taxes the accreted interest on treasury zeros each year as ordinary income. Some mutual funds and unit trusts are designed to provide tax- advantaged or tax-free income by investing in securities such as U.S. Treasuries or municipal bonds. However, you may prefer to purchase a mutual fund or unit trust that invests in securities, such as equities, that are likely to provide greater growth potential.

Since both mutual funds and unit trusts are sold pursuant to a prospectus, it is important that you carefully read and understand the contents of the prospectus before investing in a particular fund or trust.

This article does not constitute tax advice. Investors should consult their tax advisors before making any tax-related investment decisions. Information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed a solicitation on Dean Witter's part with respect to the purchase or sale of securities or commodities.

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