Saving for college is one of the biggest things parents worry about, but when you're pregnant or caring for a newborn, the need can seem far-off. Although you have eighteen years to find the money for college, starting to plan now can give you a big head start on the huge costs involved.

There are many ways to save for college. Before your baby is born, it probably makes sense to start a generalized savings plan, where you place money into a money market or other interest-bearing account. You can use these funds for a variety of things, such as baby equipment, a down payment on a new home, a minivan, and so on, as well as the beginning of a college nest egg.

Once your baby is born, you may wish to begin a formal college savings plan. There are two types of college savings plans, but it is important to remember that you can save money for college without placing it in one of these kinds of accounts. It is important to talk to your financial planner about the options available to you and your family.

529 Plans

A 529, or Qualified Tuition Plan, is a savings plan with tax advantages to help students save money for college costs. Each state sponsors its own 529 plan, and each is different, so you will need to do research and some comparison-shopping before you decide on one.

There are two types of 529 plans. One is prepaid. Under this type of plan, you pay your child's tuition at current prices. This can be a good deal, considering that college costs are always rising. However, this type of plan only guarantees tuition at an in-state public college. If your child goes out of state or attends a private college, you'll be able to apply the cash value to tuition, but it won't be fully paid. The other type of 529 is a savings plan, in which you add funds to the account and it slowly grows over the years. When your child goes to college, these funds can then be used for expenses.

Funds placed in a 529 plan are not taxed, and interest is tax exempt. Most accounts can be opened with a very small initial investment, as little as $25. The money in the account can be used to pay for tuition, room and board, books, and other college costs. If the funds are used for other purposes, there is a 10 percent penalty. You can create an automatic monthly transfer to the account from your bank account if you want it automated, or you can make deposits whenever you wish. The caps on the contribution levels are quite high; research each individual plan to find out its limits. Another way to make contributions, at no cost to yourself, is to sign up for a plan like Upromise (www.upromise.com). You register your credit cards and grocery cards with the plan. and when you purchase qualifying products, you earn money that is transferred to your 529 plan. Grandparents can also sign up to have their credits go to your child's account.

Some parents worry they will create a college savings account and their child will choose not to go to college. In that case, funds from a 529 plan can be transferred to another family member. Additionally, if your child does not go to college, you can simply refund the money in the account to yourself, less the penalty.

When choosing a 529 plan, it is important to shop around. Just because you live in New York, for example, you do not need to sign up with the New York plan. Most plans do not require that you use the money at a school within that state, so your child will not be restricted to a college in any particular state.

Coverdell Education Savings

Coverdell Education Savings Accounts (also called Coverdell ESAs) were previously called education IRAs. This type of plan allows the parent to control where and how the money is invested. This is different from a 529 plan, where you choose a plan and the plan administrators manage your investment. You can contribute up to $2,000 per year, per child. This limit applies no matter how many accounts your child has. For example, if you open one and a grandparent each open one, the total added to both accounts cannot exceed $2,000 in one year.

The money placed in the account is not taxed as long you meet certain income requirements (currently, joint income must be under $190,000 and individual income must be under $95,000). The funds in a Coverdell ESA are not taxed if they total less than the child's total education costs (including elementary and secondary schools, as well as colleges and universities).

Coverdell funds can be used for tuition, books, and school fees. Funds used for other purposes are taxed and subjected to a 10 percent penalty. You cannot contribute to the account after the child reaches age 18, and the money in the account must be used before the child turns 30. Money remaining in the account after this point becomes property of the child and cannot be refunded to the parent. You can contribute to both a Coverdell ESA and a 529 plan simultaneously.