5-minute guide to saving for college

By 2020, you'll need an estimated (and heart-stopping) $225,000 to put Junior through a private college or $105,000 for a public university.

Conventional wisdom says the sooner you start saving, the more funds you'll accumulate.

No one savings method is perfect for every family. Consider your tax bracket, your child's age, how much control you want over your investments and how much financial aid you expect to get.

Do your research
First, figure out how much you'll need to save, using your child's age as a yardstick.

Then start comparing plans. Here are the most common methods:

529s, the state-sponsored investment accounts, let you put aside money for college. The money grows tax-deferred and is tax-free when withdrawn to pay qualified education expenses. In addition, for families with multiple children, funds can be moved from one 529 to another, depending on which child can best use the money. When choosing a 529, however, look hard at the fund's commissions, fees and performance.
Coverdell Education Savings Accounts allow earnings to grow tax-deferred and distributions to be tax-free when used to pay for college or technical school. You can contribute up to $2,000 a year and withdraw money tax-free for K-12 expenses. However, unless Congress extends the benefits after 2010, the maximum annual contribution to a Coverdell will fall to $500 and K-12 expenses no longer will qualify.

Prepaid tuition plans allow parents to lock in future tuition at current rates. These tax-deferred plans are designed to remove investment risk. However, some plans allow saving only for tuition, not room and board, which means you'll need an additional source of funds.

U.S. Savings Bonds purchased after 1989 may be redeemed tax-free when the bond owner, spouse or dependent uses the proceeds to pay college tuition and fees. However, the bonds' safety is balanced by low returns, and the tax exclusion is phased out for higher-income tax brackets.

Custodial accounts, which include those under the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act, are not as popular as they once were. Accounts are opened in a child's name, and the income is taxed at the child's rate rather than the parents' presumably higher one. However, 2006 legislation changed "kiddie tax" rules so that children have to wait until they turn 18 to take full advantage of the lower tax rate. In addition, colleges consider custodial accounts to be the students' assets, which count against them in financial-aid packages.

Individual retirement accounts are a method of last resort. Early-withdrawal penalties are waived when Roth or traditional IRAs are used to pay qualified post-secondary education costs for you or your family. However, cashing out could leave you in a bind at retirement time.

Are you running out of time?
If your child is older than elementary-school age and you haven't started saving yet, you still have options.

Assume you'll get financial aid -- just not enough. If you're counting on a lot of aid, you will be unpleasantly surprised to learn how much colleges expect you to contribute.

Start saving now. Even if your savings reduce your aid package, any money you put aside will help reduce the amount of debt later.

A little extra couldn't hurt
Depending on your child's age, look for ways to add to your college fund. Try these ideas:

If your baby is on the way, have a "send my baby to college" shower. Set up a college fund and let guests know how to make deposits.

If you have an infant or toddler, be as aggressive in your investments as your comfort level allows.

For an elementary-age child, set up a savings account together so he or she can be invested and involved in college plans.

If your student is starting high school, move your college fund to safer, less-volatile investments.

No matter how old your child is, consider participating in credit-card rebate and loyalty programs, such as Upromise or BabyMint. Similar to airline frequent-flier programs, these provide rebates or credits to a 529 account in exchange for shopping at particular retailers or purchasing certain products.

When college bills are looming, look for ways to cut costs.

You're on your way
Once you select a method of saving and set it up with the appropriate investment professional, nurture your investments -- both the funds and the kids.

Be enthusiastic about your child's early schoolwork. Kids who love to learn early on grow up to be good students -- and therefore can get scholarships not otherwise available.

Set small financial goals just as you would any other long-term investment.

Use automatic withdrawal so your determination to save doesn't waiver when you write the monthly check.

Increase the amount you save each year to keep up with tuition inflation.

And remember . . .
Some final thoughts:

Don't pay for your child's college at the expense of your own retirement. Your child will have more sources of money for college than you will have for your golden years.

You don't have to save the entire cost of four years of college. Grants and loans can bridge the gap between your savings and tuition bills.

Be flexible. Programs and investments continue to evolve. Tax laws and your own circumstances will change. Review your financial situation periodically and make appropriate adjustments.