Saving for college has never been a more daunting task.  According to www.collegeboard.com, the 2007-08 average yearly cost of a private four-year college is now $23, 712 (an increase of 6.3 percent from the previous year) and a public four-year college is now $6,185 (an increase of 6.6 percent from last year).  Even though our child is a newborn, we realized that, with these numbers, it is not too early to start saving.

The projected future cost of college can send the savviest financial expert running for the hills.  So what to do?  The best way to stockpile savings for college is to open a state-run college savings plan, or 529 plan.  What are the benefits?

• The earnings on your investments grow federal tax-deferred, as long as the withdrawals are used to pay qualified educational expenses.  The distributions are also tax-free. 
• Your own state plan may also offer tax breaks, such as a state tax deduction on your contributions into the plan.  However, if you live in a state with no state income tax, like Florida, you might find it more advantageous to open a 529 plan in another state. 
•  You as the donor control the funds in the 529 account.  You can designate another beneficiary and you can actually reclaim the funds in the plan, if you find that you need the money later for other expenses.  However, you will owe taxes on the earnings portion of the funds that you withdraw from the account.
• 529 funds set up by grandparents are not counted in the analysis of a family’s finances for purposes of federal financial aid.
• As a donor, you can contribute up to $300,000 into the plan and you don’t need to worry about exceeding the current limit of $12,000 on tax-free gifts.  

The website, www.savingforcollege.com, contains all of this information and  more on all 50 states’ 529 plans.  It is a good place to research which plans offer the biggest bang for your buck.

With all of its tax benefits and its flexibility, setting up a 529 plan seems like a no-brainer.  However, setting up the plan is only the beginning.  The college calculator at www.savingforcollege.com, which provides comprehensive information regarding 529 college savings plans, calculates that in 18 years, it will cost a total of $312,000 for a college whose tuition is $23,712 a year.  Assuming that the 529 plan has returns of 7 percent per year, I would need to make monthly contributions of $612.00 into the 529 plan, starting right now.  All the expenses that come with having a baby may be a greater weight on you right now, but it might be a good idea to bite the bullet and start contributing now to take advantage of the longer time period and compounding returns.  If you do wait another 5 years to start contributing, your monthly contribution would rise to nearly $1,000 per month.  With all of the other expenses associated with raising a child, delaying the inevitable may be more painful financially down the road.