If you expect to qualify for financial aid, 5.64% of your and your child's assets must be used for college. If you don't expect to qualify for financial aid, you can make annual gifts, up to $12,000 as of 2006 ($24,000 if your spouse also makes a gift), to each child, and these gifts are free from federal tax. By making a gift, you remove these assets from your estate and any income on these assets becomes taxable to your child.

As of 2008, if your child is under age 19 (or under 23 and a full-time student), he/she is subject to the "kiddie tax" rules:

• the first $900 of investment income is free from federal tax
• the second $900 is taxed at the child's marginal tax rate
• remaining investment income is taxed at the parents' tax rate.

Above the specified "kiddie tax" ages, all investment income for your child is taxed at his/her marginal tax rate.

These investments are placed in plans usually referred to as an Universal Gift to Minors Act (UGMA) or Universal Transfer to Minors Act (UTMA). These plans were widely used prior to the existence of the Education IRA and now the 529 Plans. Now, they are used less often because of their key disadvantage. The money in the account belongs to the child when they become an adult (18 or 21 years of age, depending on the state), and they can use the money for any purpose they desire. If your 18 year-old child decides to skip college and buy a new car with the funds, there is absolutely nothing you can do to prevent it. That said, the one big advantage is that these accounts allow you to invest as much as you like, and where and how you wish.