How much you support your children in college is a very personal decision. Use your experience to decide what is right for your child. Is your goal to fully fund your child's college or pay some or most of the costs? Every dollar you save for your kids’ college is a dollar you might not be saving for your own future or spending for yourself — or for whomever else relies on you. 

Most people have to choose between college savings and personal savings or spending, and can’t do both. Saving a bunch for education may not make sense if it means you’ll face growing credit card debt or will have too little saved for retirement. If your choice is saving for your own retirement or for your child's education, save for retirement first. Your child can always borrow to go to college, but you can't borrow to live in retirement.

• See also: Retirement

3. Understand different kinds of saving options.

When you have an amount that you plan to set aside, you need to figure out what exactly to do with it. We recommend a Section 529 College Savings Plan as the most cost-effective and tax-advantaged way to save for college. Here's how it stacks up against your other options:

• Section 529 College Savings Plan
  Regardless of the amount, look into Section 529 college savings plans. Your money grows tax-deferred and all earnings and gains are not taxed if they are used for education expenses. Some states even offer a tax break on contributions. You can put a lot of money into a 529 account before you hit the contribution limit, which is different from the Coverdell. 529 accounts can also be used as a single account to gather gifts from grandparents and relatives. Some sites for learning about these plans are:
  
  • Saving for College: www.savingforcollege.com
  • College Savings Plan Network: www.collegesavings.org

• Coverdell Education Savings Plan
  If the amount is $2,000 per year or less, look into Coverdell Education Savings Accounts. Also known as the “Education IRA,” a Coverdell ESA can be opened at low cost with many mutual fund companies and brokerage firms. Investment options vary depending on where you open it. The money grows tax-deferred, and there’s no tax at all on your withdrawals as long as the money is used for education expenses. The benefit to this option is that you can also use it for books, computers and K-12 private school tuition.

• Prepaid tuition plansIf you have a very specific school in mind, like your alma mater, do some research on Prepaid Tuition Plans to see if one covers your school. These are another variation on the 529 plan and include tax breaks.

• U.S. savings bonds
  For smaller amounts, you can also consider U.S. Savings Bonds. The interest on this super-safe investment isn’t taxed when you cash them in during a year that you pay college costs, if you meet the income requirements. "Safe" means relatively low earnings, but it can be an option—just be sure to understand the special rules about that education tax break.
  
  • See also: Bonds

4. Decide on a plan and put it in motion.

Maybe you decided to add $200 each month to your home state’s 529 plan. Get online, get the forms and open the account right now — you can open an account direct or through a broker. Schedule automatic deposits so you don't have to think about it, which also spreads out your deposits over the course of the year and can help you avoid paying service fees. 

When opening the account, we recommend putting the account in your name so that you are the owner and then adding your child as a beneficiary. When picking a fund, we recommend an age-based fund that invests your money up to the year your child enters college.

5. Increase your saving amount over time.

To get started saving, save at least the minimum monthly amount to avoid fees and increase it over time if you feel that the money is available. If you can't save the minimum, save what you can.

• See also: Saving

6. Know how saving affects financial aid.

For most people, having savings means it’ll be harder to borrow money for college. That might not be a huge problem, because you’ll have the savings there to meet the need. But, it’s an issue that may cause you to favor some options over others, depending on how much your child will need to borrow or find through other sources. Keep in mind that the financial aid rules may be different by the time your child applies for college.

• See also: Financial aid

Links we like

Here are some online resources you might find useful:

• Saving for College: www.savingforcollege.com
• College Savings Plan Network: www.collegesavings.org
• College Board: www.collegeboard.org