Top 5 tips for saving for collage or university

How early should you start saving for college? College is expensive…there’s no getting around it unless your child qualifies for scholarships. But you can’t plan on those years in advance unless your budding young Einstein just invented the next internet (in which case they can pay their own way through college!). With tuition costs skyrocketing (they now double every nine years), parents need to start planning earlier than ever before.

The first thing you need to do is figure out how much you need to save. That varies greatly depending on when your child will be going to college, and the type of school (Ivy League, private or public) they are planning on attending.

So what are the best ways to save for your child’s college education? Here are five tips on how to get started saving for your – or your child’s – education:

1. 529 Plans

A 529 college savings plan is one way to save tax-free. And when it’s time to pay for college, withdrawals are free from federal taxes as long as the money is used to pay for education expenses like tuition, books, or room & board. These State-sponsored accounts are sheltered from both federal and state income tax. Depending upon what state you live in, contributions to a 529 may also provide a tax benefit, such as a state tax deduction. But be cautious. 529s aren’t regulated by the SEC, fees can be expensive and they’re tough to understand. Definitely do your homework, and investigate any funds you’re considering on Morningstar.com.

2. Upromise

You know all those plastic thingies on your keychain? Well, here’s one that actually offers more than just convenience: money back for college! Upromise is a program administered by Sally Mae, the nation’s largest student loan provider to help both the college-bound and the college debt-laden to set aside money rewards for educational expenses.

Shop online, at the grocery store, or at local restaurants…tons of things you pay for everyday can earn money for college. Once the money is in your Upromise account, you have the choice of using it pay student loans, or save it in a 529 Plan for future educational expenses. It works even better when other family members use cards tied to your account to help you save more. On average, Upromise members who have family and friends helping them save twice as much.

3. Savings Bonds

If yield takes a back seat to keeping the money safe and growing modestly, you’ll want to consider Education Savings Bonds. ESBs are risk-free and offer tax breaks to eligible parents.

4. Coverdell Education Savings Account

Coverdell Education Savings Account plans are an increasingly popular alternative to a 529 Plan. They grow money tax deferred, but – similar to 401ks – there’s a $2,000 annual contribution limit. There are some other limitations you need to be aware of, like annual fees and penalties if the money is not spent between the child’s 18th and 30th birthdays. A Coverdell plan can help defray the costs of college, but you need to start using them when your child is quite young to achieve the best returns, and pay close attention to the plan’s requirements and restrictions.

5. Custodial Accounts

When saving for your children, it’s important to weight tax considerations against financial aid eligibility limits. Generally, it is wise to keep assets out of your child’s name since the tax gains will be outweighed by the reductions in financial aid eligibility. Parents who have set up custodial Uniform Gift to Minors accounts (UTMA/UGMA) will find their children less eligible for aid. And if you are counting on financial aid, it is critical to avoid custodial accounts.

Saving for your child’s education is serious business, and with education costs soaring it’s important to get started on the right track as early as possible.

What are you doing – or what have you already done to save for your child’s education?