And don’t expect any extra help from student aid. Over the past decade, as the real value of federal aid went steadily down, state and private programs filled the gap. Now they’re also running out of steam. In the past year, 35 states have chopped their higher-education budgets.

Baby boomers, in particular, will find college costs much more of a challenge than their parents did. As a group, boomers tended to have children later in life. So they’ll go mano a mano with the college bursar when they’re 55 or 60 and retirement is upon them.

What you need is a way of saving,for your kids’ education and your own retirement at the same time. Tough but not impossible, says Richard Anderson, vice chancellor of Washington University in St. Louis, who offers this strategy:

Buy a house and keep it. Don’t trade up or take out any home-equity loans. Save your borrowing power for college costs.

Start a tax-deferred retirement plan like a Keogh or company 401(k) plan and fund it to the maximum. These plans take priority, for two reasons: (1) Your contributions are pretax. (2) With many plans, your employer will match the money you put in.

Chuck any extra money into a college savings account. Tell your children they’ll have to work and save for college, too.

The year your child starts college, quit adding to your retirement plan. Don’t borrow against it, either; save all those funds for your own future. The money you otherwise would have contributed to the plan each year should now go for tuition. Add any college savings you have. Fill the gap with a loan against your home equity whose interest costs are tax-deductible (you get no deduction on education loans). Washington University, for one, makes low-rate home-equity loans to parents who want to prepay four years of college at today’s price.

When your children are through college, use current income to repay the loans.

Obviously, this strategy could go wrong. Your house might not gain enough in value. You might be forced into early retirement. If these things happen, your children will have to downsize their education plans. You cannot impoverish yourself in old age to finance an expensive school. Parents who can’t, or won’t, save for college are saying to their kids, “Pay it yourself”

If you do have a college savings plan, where should the money go? Almost universally, financial planners advise that-for young children-you should buy mutual funds that invest in stocks. Straight interest-paying investments such as bonds and certificates of deposit are pretty much no-growth, after taxes and inflation. Only stocks have a chance of exceeding the high rate of increase in college costs.

Don’t worry if the market drops. It will eventually spring back. As college draws closer, however, stocks get too risky. At that point, you should gradually move your money into places that preserve capital.

Here’s a sample investment cycle for you to follow: From your child’s birth until age 12, buy shares in stock-owning mutual funds. From 12 to 14, hold on to all past investments in mutual funds but start putting new money into safer havens, such as Series EE Savings Bonds, Treasury securities and certificates of deposit. Or you might consider a balanced fund such as Vanguard’s Wellesley or Wellington Funds (in Valley Forge, Pa.), which divide your money between stocks and bonds. When your child reaches 14, move the freshman-year money out of stocks and into a guaranteed four-year investment like a CD. At 15, move out the sophomore-year money, and so on.

To make college saving as painless as possible, automate it. Arrange for money to be taken from your bank account each month and invested in a mutual fund.

When you use bank drafts, some funds even waive the minimum investment–typically $1,000 to $3,000-which they normally require to open an account. For example, all the Janus funds in Denver let you start with drafts as small as $50 a month. The T. Rowe Price funds in Baltimore will accept $100 a month. The Gabelli Asset fund in New York City completely eliminates its huge $25,000 minimum in return for automatic monthly payments of $100 or more. Many other. funds that don’t advertise it do the same. The Twentieth Century funds in Kansas City, Mo., which have no minimums, accept drafts as low as $25 a month, although there’s a $10 annual fee on accounts under $1,000.

If you want to invest a lump sum of money, Janet Briaud, a financial planner in Bryan, Texas, suggests a portfolio of funds: a small-company growth fund, a big-company fund, a “value” fund (whose manager seeks out promising stocks selling at low prices) and maybe an international fund. But buy these funds gradually, making monthly investments over two years, advises William Brennan of the accounting firm Ernst & Young. That’s called dollar-cost averaging and usually nets you a lower average price than if you bought your shares all at once.

Are you terrified of the stock market? Try putting just half of your money into stock-owning mutual funds and storing the rest in various safe holes. But over time, I’ll wager that your stock funds will win. Here are some bum college investments:

(1) Passbook accounts, short-term CDs and money-market mutual funds. Their after-tax return is too low. Money funds, for example, now average only 5.2 percent.

(2) Bonds that mature later than the money is needed. For example, take a 30-year bond. If it’s sold after just 15 years, you risk losing capital. Bond-maturity dates should always match the dates when tuition will be due.

(3) Short-term bond funds. Their yield won’t keep up with the rise in college inflation (which is higher than the general inflation rate). You might try these funds in the couple of years before matriculation, but you risk losing capital if interest rates rise. A safer choice is a two-year CD.

(4)Rental real estate. You can’t count on a high return after costs, nor can you count on selling quickly when tuition falls due.

(5) Life-insurance cash values. Because of sales commissions and other costs, savings in- cash-value policies don’t grow fast enough to be interesting. Furthermore, their current interest rates are more likely to go down than up. As for a life-insurance policy on your child, forget it. Don’t waste precious college savings on something designed to pay you if your child dies.

(6)Any long-term CD or bond. Relative to the rise in college costs, these investments usually don’t grow. They appeal to savers because they are allegedly “safe.” At maturity, you get your money back. But bonds are never safe from inflation. In fact, they’ll probably lose college purchasing power after tax. These low performers include zero-coupon bonds (you buy zeros at a fraction of their face value and watch their worth increase every year); “baccalaureate” bonds (tax-free zeros sold by many states); even Series EE savings bonds.

Series EE bonds are superficially attractive. You pay no taxes on the income if you meet certain requirements, such as holding the bonds in your name rather than in your child’s, using them for college tuition and falling within a middle-income range. But the rate of interest currently 6.57 percent-won’t keep up with college costs.

There’s one place for bonds in a college investment portfolio: as a hedge against the small risk that stocks will do poorly over 10 or 15 years. For hedging purposes, zero-coupon bonds generally yield more than Series EEs. Small investors might try zero-coupon bond mutual funds, available from Benham Target in Mountain View, Calif., and the Scudder group in Boston. The only advantage to EE bonds: their interest rate changes every six months, so they offer modest inflation protection.

Assuming that income and savings won’t hand you the keys to Princeton or even Michigan State, you’ll probably have to borrow money. The best loans: (1) home-equity loans; (2) government-financed Perkins or Stafford loans, available to students with low or middle incomes. Current interest rate on Perkins loans: 5 percent. On Staffords: 8 percent for the first four years of repayment, 10 percent thereafter. Payments are deferred until the child gets out of school. (3) Government-authorized PLUS/SLS loans. Current interest rate: 9.34 percent with a 12 percent cap, Student borrowers (but not parents) can let interest accrue while deferring repayment until they leave school. Ask about these loans at banks, S&Ls and college financial-aid offices.

If you still come up short, or don’t have home equity, try commercial loans. Some require no collateral and also let you defer payments. Among the most cost-effective lenders today, according to Steven Sesit of American University in Washington, D.C., who analyzes college loans: The Education Resources Institute in Boston. Creditworthy borrowers can get up to $20,000 a year, at variable rates now at prime plus 1.5 to 2 percentage points. A good loan without a deferred-payment option: the Extended Repayment Plan offered by Knight Tuition Payment Plans in Boston.

Some parents claim that you’re a sucker to save. The greater your assets, the less you’ll get in college aid. But the size of your student-aid package depends mostly on your family income. Spendthrift families with low savings might pick up an extra $1,000 in loans or grants. But they’ll still owe a huge sum of money for college and won’t have the money to cover it. Trust me, savers win the day.

If you have no college savings, here’s a rough guide to how much you should start putting away each month. This table assumes (1) the average cost of college; (2) a 7 percent annual increase in college costs; (3) an 8 percent return on your money.

Years to Monthly investment Years to Monthly investment college Public* Private college Public* Private 1 $2,881 $6,065 10 $360 $759 2 $1,480 $3,115 11 $335 $705 3 $1,013 $2,133 12 $314 $661 4 $780 $1,642 13 $296 $623 5 $640 $1,347 14 $281 $591 6 $547 $1,151 15 $267 $563 7 $480 $1,011 16 $256 $538 8 $430 $906 17 $245 $516 9 $391 $824 18 $236 $497

*FOR A SCHOOL IN YOUR STATE

SOURCE: T.ROWE PRICE