David M. Dau

It's that time of year when college students across the country reach for their backpacks and head back to campus - while their parents reach for their checkbooks and head for the Tylenol. If your children are still quite young, though, you can take steps now to reduce the headaches that may come from those big college bills.

Just how expensive is it to send a child through college these days? It's pretty expensive. In fact, it costs more than $16,000 for one year at a four-year public college or university, according to the College Board. And college costs have been rising considerably faster than the general rate of inflation, so the high costs of higher education are, in all likelihood, only going to get higher.

Of course, you may not have to foot your child's college bills all by yourself. Scholarships and loans are available, and many students work part-time jobs, both during school and on summer vacations. And yet, you may need, or want, to help pay for a sizable percentage of college expenses. To meet this obligation, you need to save early, save often - and use the right savings vehicles.

Fortunately, you've got some attractive options. Here are some of the most popular ones:

• Coverdell Education Savings Account - Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (ESA). Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses. (Any non-education withdrawals from a Coverdell ESA may be subject to a 10 percent penalty.) You can place your contributions to a Coverdell ESA into virtually any investment you choose - stocks, bonds, certificates of deposit, etc.
• Section 529 savings plan - In a Section 529 savings plan, you put money in specific investments, managed by an investment professional. Contribution limits are quite high - more than $200,000 per beneficiary in many state plans, although special gifting provisions may apply. And all withdrawals will be free from federal income taxes, as long as the money is used for a qualified college or graduate school expense of your child or grandchild. This tax benefit was scheduled to expire in 2010, but it was made permanent by one of the provisions in the Pension Protection Act of 2006. Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes. (Also, Section 529 distributions will appear as income on the child's tax return, which could affect financial aid calculations.) Contributions are tax deductible in certain states for residents who participate in their own state's plan.
• Permanent insurance - If you own some type of "permanent" insurance policy, such as whole life or universal life, you'll have a chance to build cash value. Your earnings have the potential to grow on a tax-deferred basis, and you can take policy loans for virtually any reason you choose - including paying for college. Keep in mind, though, that if you don't fully repay the loan, your policy may lapse, and if you pass away before repaying the loan, the total amount owed, including interest, will be subtracted from the death benefit.

Before making any of these moves, please consult with your tax and financial advisors. But don't wait too long - your children may be young now, but time flies.