If you're starting a family of your own, you may want to consider ways to help your children pay for education. You may have felt (or still feel) a heavy burden from paying off student loans and wish to spare your children that misery. If so, it's never too early to look at strategies for making higher education more affordable.

Saving for College

One way to help children pay for college is to accumulate funds that can be used to pay for their education. You can do this in a variety of ways, and your preferences will dictate the best ways. You can use college savings plans, retirement accounts, insurance contracts, and more.

529 Plans

The most recent addition to the college savings arsenal is the Section 529 college savings plan. This is a plan sponsored by each state for the purpose of helping people save for higher education. Higher education can mean college, graduate school, trade school, and a number of foreign institutions. 529 plans have become popular for their tax benefits, high contribution limits, and flexibility.

You can put away a lot of money in a 529—hundreds of thousands per year. However, most folks just put away a few bucks per month. If you use your state's 529 plan, you may be eligible for a state income tax deduction on your contributions. Furthermore, the earnings in the account occur without taxes, like the earnings in an IRA. Finally, if you spend the money on qualified higher education expenses (which are defined quite broadly), you don't have to pay any income tax when you take the money out, similar to a Roth.

529 plans are flexible. If your child does not go to college, you can always transfer the funds toward another family member without penalty. You can even use the funds yourself — for a graduate degree, for example. This control is important to many parents. They prefer this arrangement to the type of accounts that automatically go to the child at age eighteen. If your child is not mature enough for the money, you get to keep it or do something else with it.

Keep in mind that 529 plans are designed for higher education. If nobody uses the funds for higher education, you may have to pay taxes and penalties. The penalties are reduced or eliminated, however, in the event that your child gets a scholarship and doesn't need the money.

Advanced Strategies

If you think that you or your child will have to borrow to pay for education, set the stage early. The sooner you strategize, the better you'll do. For example, keep an eye on how assets are titled as soon as possible. Assets in your name or the child's name can affect how your child qualifies for loans, scholarships, and gift aid. If your parents want to help their grandchild, plan ahead on how their assets can accomplish this. For example, 529 accounts can often receive favorable student aid treatment, so have Grandma and Grandpa consider 529 contributions.

If you're self-employed and your kids are old enough to do some work, put 'em to work. You can pay them for tasks such as filing, stuffing envelopes, and cleaning. You'll get a tax deduction, and they'll have earned income that they might put into an IRA or college savings plan. For example, the child could fund a Roth IRA, and take the contributions back out (without taxes or penalties) at college time.