Take full advantage of the best savings options. When your kid reaches junior high, estimate your financial aid eligibility. Pay off consumer debts before your child starts high school. You'll feel the pinch, but this move could qualify you for a better aid package. Try to save at least a third of the amount you think you'll need, figure you or your kids will get financial aid or borrow to make up the difference, and take comfort in knowing that you're way ahead of most parents, who have almost nothing set aside for college when their kids turn 18.
Many families routinely funnel college savings into a custodial account in their kid's name.
The biggest drawback of a custodial account, though, is that it may eventually cost you thousands in financial aid. That's because formulas for determining aid require a child to contribute as much as 35 percent of his or her assets each year, while parents are expected to ante up only 5.6 percent of theirs. Moreover, if you contribute to an Education IRA, you cannot put money in a 529 plan in that same year for the same kid. If you earmark your IRA for college costs, however, make sure you are saving enough for your own retirement elsewhere. Now for the 529s.