What are they?
State-run investment accounts that allow your money to grow tax-free. Withdrawals are exempt from federal taxes as long as the money is used for college expenses. Check out the options in your own territory first, since you may get an additional tax break by joining a local plan, but keep in mind that you're free to roam to any of the 50 states.
+ 529s are flexible and very purse-string friendly. "In some plans, you can contribute as little as $15 a month, an ideal savings option for parents who don't have a lot of money to sock away," says Joseph Hurley, founder of savingforcollege.com. Many 529s offer the option of shifting your money from high- to lower-risk investments as your child gets closer to college age.
- Most 529 plans carry fees for opening and maintaining an account (on average, about $25 per year), and since money in a 529 is considered a parental asset, it will eventually affect your child's eligibility for need-based financial aid. One way around this is to ask Grandma and Grandpa to open a 529 in your baby's name -- with the bonus of reducing the value of their estate. To compare 529 plans by state, visit savingforcollege.com.
What are they?
A type of 529 plan, they allow you to pay your child's way at the public state university in advance, at a set price. You can buy individual credits or a semester's or year's worth of tuition at a time.
+ Prepaid plans work like insurance policies. "By locking in a steady rate, you won't have to worry about inflation and skyrocketing costs come matriculation time," says Hurley.
- Only 15 states offer prepaid-tuition plans, which are often limited to public colleges and universities within that state. "It's impossible to predict what your child is going to want to do," says Kathy Kristoff, author of Taming the Tuition Tiger. "Your child may not choose to go to the state school, or may not even be able to get in." Many plans will let you use the money you've saved to pay another school's tuition, but you'll want to confirm this before the acceptance letters start rolling in.
Coverdell Education Savings Accounts
What are they?
Similar to retirement IRAs, these plans let you contribute up to $2,000 in post-tax dollars per child annually. The money grows tax-free, invested in a portfolio you design.
+ Unlike other college savings plans, you can use withdrawals to pay for earlier education expenses as well, including private elementary or high school tuition, textbooks, tutoring, and after-school programs.
- If you make more than $220,000 as a married couple (or $110,000 as a single parent), you can't open a Coverdell. And buyer beware: Certain Coverdell benefits are set to expire at the end of 2010, after which noncollege expenses will no longer qualify and the annual per-child contribution will be reduced to $500.
SPEND AND SAVE
You're off to a good start by putting those first-birthday checks in a college fund, but if paying for diapers, groceries, and gas (cha-ching!) leaves you strapped for cash, a rewards program like upromise.com or futuretrust.com may be your ticket to additional savings. How they work: You make purchases from participating retailers, and "cash-back" incentives bounce straight to your 529 plan. Pampers bought today can pay for college in the future!