Forget Yale -- Go State

They put the money into a 529 account, a state-sponsored, tax-advantaged savings plan that financial planners agree is the best way to save for college. An unlimited number of people -- parents, grandparents -- can each contribute up to $12,000 a year per child without triggering gift-tax rules. Earnings on the money grows tax-free if it's used for higher education, a benefit that had been set to expire in a few years but that Congress just made permanent. Another feature of 529s, unlike traditional trust accounts, is that if the student the money was intended for ends up not needing it -- perhaps he received a scholarship -- it can be used for another child's education.

But savers should keep in mind that 529 funds are much like mutual fund investments, with the accompanying risk of loss as well as gains. They are run by financial firms on behalf of each state, which means the way money is invested varies, as does an investor's ability to control those decisions. Families should check and compare plans.

Many state plans -- including those offered by Virginia, Maryland and the District -- feature the added bonus of state tax breaks for contributions. One trick for the truly organized: Set up a 529 fund for yourself in the years before having a baby, and then transfer it to the child's name once he or she arrives.

Education savings strategies should be adjusted as a child's college enrollment date draws closer, financial planners say. Money should be shifted from stocks to safer investments, such as bonds and money-market accounts, so sudden market shifts don't erode gains just as they are needed.

Reality Check

Before children begin to look seriously at schools, planners recommend that parents calculate what they can spend.

"Whenever you start, involve your kids and make sure they understand what you expect to pay, if anything, and the trade-off between public and private school costs," says William Harmon of Collegiate Funding Solutions a firm in North Carolina that provides college-funding strategies to financial planners.

Tom and Janet McGinnis decided early on -- and made clear to their three children -- that they could afford to pay for each to attend a Virginia state college. The children would have to pay their own way for extras like summer travel. And for graduate school, the kids were on their own.

Their eldest daughter, who works in computer science, studied at James Madison University. Their second daughter went to the College of William & Mary and is now on scholarship at Washington University in St. Louis pursuing an advanced medical degree. Their son, the youngest child, is to graduate from William & Mary this year and plans to go to law school. His choice will depend on which institution offers him more money.

"Why would I have spent $45,000 a year to send them somewhere else?" says Tom McGinnis, a retired Army captain who is proud to say he paid the college bills for all three without incurring any debt.

Planners argue against sending children to a costly, brand-name college just to impress friends and relatives. At the same time, they urge families not to rule out a school that suits a child's needs simply because of price. That's because it's possible that a family's expected contribution could be the same at a college that costs $8,000 a year and at one that costs $35,000, with both institutions offering aid to make up the difference.

How much a family is expected to contribute is largely based on a complicated form the government uses to determine a student's qualifications for federal aid. The form, the Free Application for Federal Student Aid, is available at http://www.fafsa.ed.gov/. Many colleges ask for additional information that could adjust that figure.

Parents should get an estimate of what their expected family contribution will be -- and compare it with what they can afford -- using worksheets, also available at http://www.fafsa.ed.gov/, before submitting their final form. As they crunch the numbers, financial planners say, parents should ask their children why they are drawn to certain schools and gauge whether those goals can be met less expensively.