Taken from one of my favorite magazine's. Cookie for the entire article, please click here :
http://www.cookiemag.com/homefront/2007/01/saveforcollegeWhether your heart is set on raising a Buckeye or a Hawkeye, a Spartan or a Seminole, paying for college is going to cost you dearly. The price of tuition plus room and board currently averages nearly $30,000 a year for a private four-year institution—and these fees consistently outpace inflation (a particularly depressing fact for those of us who have just paid off our own student loans).
An easy solution to the skyrocketing fees, of course, is a rich, generous relative (family members can pay tuition costs directly to universities without getting hit with a gift tax). But in case your Dad's last name isn't Warbucks, we've laid out the three best college-savings options. A broker can set up any of these accounts, or you can go directly to an online brokerage to start putting away the pennies.
The Max-savings Strategy
What it is: A 529 plan
How it works: This state-sponsored college-savings investment program lets you choose from preselected mutual funds or asset-allocation portfolios.
Pros: Most plans allow you to put away between $150,000 and $250,000 per child, which, with accrued interest, should cover most expenses.
Cons: Money can be used for college tuition and housing, but little else.
Good to know: Plans vary widely from state to state, so do a bit of online research (Savingforcollege.com is a good resource). Start with your state, since it may offer an additional tax incentive. If not, and another state has a plan with a lower fee, or one that is run by a mutual-fund company you trust more, by all means cross state lines.
The Flex Plan
What it is: A Coverdell Education Savings Account (ESA)
How it works: Like an IRA, an ESA is a tax-free savings account that lets you choose which stocks, bonds, or mutual funds you invest in.
Pros: Money can be withdrawn to pay for elementary or high school as well as for college, and can be used for a variety of expenses, including computers and uniforms.
Cons: Contributions are limited to $2,000 per kid per year. Families earning more than $220,000 are not eligible for an ESA.
Good to know: If the account isn't distributed by the time your child turns 30, you'll need to name another child as the beneficiary.
The Budget Option
What it is: A Roth IRA
How it works: This tax-free retirement-savings vehicle can also be used for education, with some limitations. As with ESAs, you choose which stocks, bonds, or mutual funds to put your money in.
Pros: Most financial planners recommend that parents on a limited budget make retirement savings a priority over a college fund, since there are more options for paying for school (loans, scholarships) than for retirement. Still, a Roth IRA lets you take out money for college, should you need it.
Cons: When you withdraw for education, your initial-contribution money will be tax-free, but any earnings you withdraw may be taxable (so you're sacrificing any tax break).
Good to know: Distributions can be figured into financial-aid equations as income, so some experts suggest waiting until your child's junior year of college to tap into these accounts
