Your child will not be college age for years. But the earlier you begin a college savings plan, the better. Here are five different, inexpensive family ideas to start a tax-free college savings account. Don't rely on financial aid loans and hope for high school scholarships!

529 Savings Plans

Pick which state has the best plan for you, but most offer tax and other benefits for using your home state’s plan. In Michigan, EduGuide's home state, for instance, families can begin with as little as $25 in the Michigan Education Savings Program (MESP). 

  • Pro: Contributions are eligible for state tax deductions. In Michigan, it's a $10,000 tax deduction ($5,000 for single tax filers). Use 529 funds at any accredited postsecondary college in the U.S. and at many schools abroad. 
  • Con: The plan’s tax free status is up for renewal by Congress in 2010. Account value may fluctuate depending on investment options.

529 Prepaid Plans

Pay tuition now; lock in today’s rates. Most states have pre-paid plans. Example: With the Florida Pre-Paid College Plan you can buy your 5-year-old two years of tuition at community college (a lump sum of $4, 193) with $37.14 paid every month until she starts college. Cash up front for four years of tuition and mandatory fees at a public university is $12, 494.40. Four years of room and board adds another $18, 890 and the tuition differential fee adds $4,265.04.

  • Pro: Guarantees against rising tuition costs. Monthly payment contract will motivate you to save. Can be used to pay for   tuition out-of-state and private colleges. Some states offer tax benefits associated with these plans.
  • Con: State residency requirements. Some plans have restrictions on transfers to another child.  The money is tied up until the child starts college.

Education Savings Account

Open an account with any bank, broker or mutual fund, like retirement savings.

  • Pro: Can be used for college or any educational expenses K-12 – including books, private school tuition, computers, tutors. Lets you pick your own investments.
  • Con: Limited to $2,000/year per child. Tax benefits phase out for some families making more than $95,000. May tempt you to spend before child’s college years.

Cash Back

Buy selected goods with a registered credit card and get 1 to 10% cash back for college savings account. Upromise, EdExpress.com, Babymint.com and MBNA Fidelity credit cards offer such programs.

  • Pro: Save while you spend: Average annual savings range from $50 to $500. Registered friends can direct their earnings to your account.
  • Con: Limited dollar value. Fewer investment options. May tempt you to chase rebates and eat up savings you could put into your child’s account.

Roth and Traditional IRAS

Tax laws now let you take money from these retirement accounts to pay for college without penalty. You can open IRA accounts at any bank or investment agency.

  • Pro: Some experts recommend saving for retirement or a home before saving for college; this allows you to save for both and choose how to spend it later. Lets you pick your own investments.
  • Con: Limited to $5,000/year per person if you're 49 or younger in 2008. Some restrictions apply. May confuse your retirement planning; your retirement fund may not attract contributions from Grandpa.