College Savings 101: How to Pay for Your Kid’s Education

Munro likes 529 plans, which encourage flexible and tax-advantaged college savings. You can save up to $200,000 to $300,000 in these plans, and that maximum amount is adjusted periodically. Each state picks a financial services company to manage its plan, and you can choose any plan, regardless of where you reside.

"The first place to look is your own state's 529 plan because many states offer tax incentives," says Munro. "Everybody gets the federal tax incentives. If you cross state lines you may not get your state's tax incentives."

Tax savings aren't the only thing you need to look at when evaluating a 529 plan. You also need to investigate the returns of the mutual funds in which you are investing, as well as any underlying management or start-up fees. Remember that high fees can erase any gains your money might make, no matter how well the fund is managed. Luckily, the Internet provides a wealth of information and calculators that can help you compare plans.

Jennifer Osorio, 31, found that surfing the Web gave her the information she needed to make a wise decision. "I did Internet research, mostly to pick the 529," she shares. "The plans were getting a lot of publicity at the time, so I knew the basics, I just needed help picking one. In the end I just ended up opening a Fidelity 529 through Upromise.com. Any small change that I pick up through Upromise, certain credit cards, and through shopping at certain stores, also gets transferred to the 529 plan."