Got kids? Start saving for college now

Getting a college education just got more expensive.

That’s because on July 1, interest rates for federal education loans to students and parents increased by 1.84 percentage points and now range from 6.54 percent to 8.5 percent.

Before abandoning plans to send your children to college, however, keep this in mind: According to a U.S. Census Bureau study, high school graduates can expect to earn an average of $1.2 million over a lifetime of work, while someone with a bachelor’s degree will average $2.1 million – a whopping $900,000 more. That disparity is a powerful incentive to examine your options.

Ideally, you started setting aside money for college while the baby was still in the crib. But even starting later, you still have plenty of savings and financial assistance options.

Consider opening a 529 Qualified State Tuition Plan, where you contribute to an account to fund a child’s education. Account earnings are exempt from federal taxes when withdrawn if used for tuition, books or other qualified expenses. As a further incentive, some states also allow contributions to be deductible on state income taxes.

With a 529 plan you can change beneficiaries at any time, so if one child decides not to attend college, you can transfer the account to another. Other people, such as grandparents, can also contribute. All 50 states and the District of Columbia sponsor 529 plans, and many are open to nonresidents. Because fees, allowable contributions and investment options vary, you should shop around.

Numerous Web sites explain how 529 Plans work, including those of the U.S. Securities and Exchange Commission and Savingforcollege.com.

Another tax-advantageous solution is the Coverdell Education Savings Account (formerly called the Education IRA). With these accounts, you can put aside up to $2,000 per child each year. Although your contributions are not tax deductible, earnings grow tax-free until withdrawn – and withdrawals that do not exceed your child’s qualified education expenses such as tuition, fees, books and supplies, will not be taxed. Check out the IRS Web site for more information.

Once your child approaches college age, be sure to file for financial aid. Many options are available including scholarships, low-income grants and merit-based assistance. Your first step is to complete the Free Application for Federal Student Aid (FAFSA) form, which is required by all public and private schools. You can get a copy from your child’s high school guidance counselor, or by calling 1-800-4-FED-AID. An online version is available at studentaid.gov.

If you do need to take out a loan, federally sponsored loans to students and parents can be considerably less expensive than other kinds of borrowing, despite the recently raised interest rates – and they may be partially tax deductible. Visa Inc.’s free personal finance site, www.practicalmoneyskills.com, offers tips for finding financial aid and loans.

More than $100 billion in financial aid for education is offered each year and two-thirds of college graduates now finish with sizeable loans, so you’ll be in good company.

College isn’t necessarily right for everyone, but don’t rule it out just because of the cost: In the long run, it could be the best investment you ever made in your kids.