American families are not saving enough for their children's college education, presenting an opportunity which fund companies are only beginning to exploit.

The failure of families to adequately prepare for their children's education was underscored in a new survey conducted in November by the Mosaic Funds, a no-load fund family based in Madison, Wis.

The study found that parents are more likely to use low-yield investments like savings accounts rather than equities or mutual funds to save for their children's educations. That is because many parents believe their children will be able to obtain grants or scholarships for their higher education, the study found. Also, most Americans are unsophisticated about investing.

However, the study did find that 90 percent of the 600-families surveyed expect their children to go to college and more than half of those questioned said they had begun saving for their children's college education. All respondents had children under 12 years old.

While the majority of these families have begun to save, many have saved relatively little compared with the cost of a four-year college education. Forty-three percent of the families who have begun to set aside money for college have saved less than $5,000.

In general, the public is caught in a state of "inertia" when it comes to investing, says Larry Tabak, vice president of marketing and communications for Mosaic.

"The money that they do invest isn't growing very much. You don't see a lot of disciplined investing... It's not disciplined and regular. Those people that have done that are going to have more than a few thousand dollars," Tabak said.

The low level of savings, as well as the lack of aggressive investing, may have to do with parents' expectations that their children will receive scholarships. The study found that families with a range of incomes believe that grants and scholarships will be the most important source of college funding for their children.

But Mosaic says that these families are naive about financial aid. In reality, 80 percent of all college aid is distributed through loans, which must be paid back by either the parents or the children, the company says.

Like many other fund companies, Mosaic offers its own Education IRA, called Education IRA Plus, which it introduced in January. Last year's survey was used in marketing materials for the product and the new study will be used to update those materials.

Education IRAs were approved under the federal Taxpayer Relief Act of 1997 and went into effect in January. As a result, few taxpayers have taken advantage of the measure. Only five percent of families surveyed are putting money into an Education IRA, according to the Mosaic study. Sixty-six percent are saving through a bank savings account. Thirty-one percent are saving through bonds or bond funds, and 27 percent are saving through stock funds. However, 22 percent of those questioned have considered investing in an Education IRA, the study found.

Another investment product aimed at parents saving for college are state-sponsored education investment programs run by fund companies. According to the survey, only eight percent have enrolled in such programs, while 21 percent have considered it.

Fidelity, for example, runs New Hampshire's investment plans, named the UNIQUE College Investing Plan, which was launched in the summer. TIAA, part of TIAA-CREF, runs New York state's new college savings program, which was introduced in September. That program has gathered over $22 million in 8,000 accounts in the first two months. However, a majority of those who have invested in the program are saving for children age 16 and older, just years away from college, says TIAA-CREF spokesperson Cindy Hebert.

"Eventually, we definitely want to try to reach people with newborn children," Hebert said. TIAA-CREF not only manages th money for the program, but it also markets it, with advertising, direct mail and a website which has received over 300,000 hits since the program began.

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