Everyone knows that the cost of college has gotten out of hand. Few people seem to know what to do about it. According to a survey by money management firm Edward Jones, almost 75% of Americans are not familiar with the primary tax-advantaged investment tool designed to help people save for college—a 529 plan.

Here’s how to use such a plan to save for college.

### Figure Out How Much College Might Cost

If you have college-bound kids at home, the first step is to estimate how much college is likely to cost by the time they’re ready to go.

The best free online calculator for estimating college costs is the appropriately named “World’s Simplest College Cost Calculator.” Just enter your child’s current age (let’s use age one as an example), and the calculator will use some assumptions to give you a number. A big number.

For a child who is now one, the calculator says his or her total college tab would be over \$200,000 and that a parent wishing to pay that amount would need to start saving \$487 per month. But now let’s get more specific.

Where it says, “Your child: will be attending a college that currently costs \$25,000 annually,” hover over the \$25,000 and you’ll be able to pick a school. That will show you the current in-state and out-of-state costs for that school. I used Arizona State University and found that the current in-state cost for tuition and room and board for a student living on campus is about \$23,000.

For even more details, go to the National Center for Education Statistics’ College Navigator. Using that site, clicking on the “Financial Aid” tab shows that over 85 percent of beginning students at the University of Arizona receive scholarship or grant aid averaging about \$11,000. So, you could go back to the World’s Simplest College Cost Calculator and change \$25,000 to \$12,000.

### Determine How Much of the Tab You’ll Pay

Different parents have different philosophies. Some want to pay for all of their kids’ college expenses, while others want their kids to pay for at least a portion of the cost. Talk it over with your spouse. Let’s say you decide to pay 75 percent of the cost:

• Enter 75 percent into the calculator as the percentage of the cost you plan to cover
• Decide whether you want to have all the money saved by the time your child starts college or whether you plan to keep investing while he or she is in school (I chose the latter)
• Indicate how much you have saved so far (I put in zero)
• Pick the rate at which you think college costs will rise each year (I entered 3 percent, which is the current rate of increase, according to the College Board)
• Pick an expected rate of return on the money you invest (I chose 7 percent)

Hit “Submit,” and it’ll tell you how much you need to save. In this example, that’s \$132 per month.

### Use a 529 Plan

Every state offers a 529 college savings plan. It’s a tax-advantaged way to invest for college, with any investment earnings coming to you tax-free, as long as the money is used for college costs.

You can choose any state’s plan and, in most cases, the money can be used for qualified expenses at schools in any state—not just the one whose 529 plan you are using.

One reason to consider your own state’s plan is that in some states you get a state income tax deduction or, even better, a tax credit on the money you contribute.

These plans offer several investment choices, usually including an age-based fund that’ll automatically shift to a more conservative investment mix as your child gets older. The SavingForCollege.com web site rates each state’s plan and provides a lot more information about 529 plans.

Another tax-advantaged way to save for college is through the use of a Coverdell Education Savings Account. While you’re much more limited in how much you’re allowed to save each year in such an account, the money can be used for elementary and secondary school expenses—not just college costs.

### Start Early

The earlier you get compound interest working for you, the less you should have to set aside each month or year.

In the above example, if you wait until your child is 12 instead of starting to invest when he or she is one, you’ll have to invest \$331 each month.

### Get Relatives Involved

Encourage your kids’ grandparents or other relatives to contribute to their college fund as birthday or Christmas gifts.

When your kids are very young, it’s probably unrealistic to get them to save for such a distant goal as college. However, when they get to be 12 to 14-years-old, you may be able to motivate them by matching some of the money they invest.

How else have you tackled the college funding challenge?