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Financing a college education: Prepare now for the future

Do you dream of a college education for your child?

Experts estimate that you'll need about $195,000 for a four-year, in-state public college.

Count on a lot more if a private school or out-of-state tuition is part of the equation.

What if they take longer to graduate?

Getting started now will help ease the sticker shock of tuition when the time comes.

Long-term investment options

There are many different ways to pay for college, and it's likely that you will use a combination of several methods.

Don't be afraid to start small.

Small savings can add up over time. For example, saving $50 a month, starting when your child is born, would yield about $20,000 by the time your child turns 17, assuming a 7 percent return on investment.

Saving $200 a month would yield almost $80,000.

But it makes a big difference where you invest that money.

Section 529 Plans

Section 529 plans are state-sponsored college savings programs.

The two major types are Prepaid Tuition Plans, which lock in current tuition rates, and State College Savings Plans, which offer more flexible investing options.

You can start a 529 plan even if your child is just a few years away from college.

Your contributions can grow tax-deferred and distributed income tax-free as long as distributions are used for qualified education expenses such as tuition, fees, room and board at higher education institutions.

Coverdell Education Savings Accounts

Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs.

ESAs may also be withdrawn tax-free for primary and secondary school expenses before 2013.

U.S. Savings Bonds

EE and I bonds purchased after 1989 by someone at least 24 years old may be redeemed tax-free when the bond owners, their spouses, or dependents pay for college tuition and fees.

In 2011, the tax exclusion is phased out for incomes between $71,100 and $86,100 (between $106,650 and $136,650 for married taxpayers filing jointly).

These income limits increase each year.