Three Smart Strategies If your children are under 10, a college savings plan based on your current household income is a good place to start

(MONEY Magazine) – YOUR INCOME: Below $70,000 YOUR GOAL: Maximize your financial aid

You'll probably qualify for financial aid. "Your best strategy is to keep it simple," says financial adviser Judy Miller of College Solutions in Medford, Ore. "Just save in a taxable account in the parents' name." Low-cost index funds, such as those offered by Vanguard or Fidelity, are sound choices. If your income grows and financial aid is less of a priority, you can move your savings to a 529 or Coverdell for better tax treatment. Above all, avoid custodial accounts such as UGMAs or UTMAs (Uniform Gifts to Minors Act or Uniform Transfers to Minors Act), which put the money in your child's name and hurt your aid chances.

Meantime, save the max in your retirement accounts, which are generally excluded from aid formulas. A second priority is to keep up your mortgage payments. Home equity is not counted in federal aid formulas.

YOUR INCOME: $70,000 to $150,000 YOUR GOAL: Stay flexible

If you have just one child headed for a state college, you probably won't qualify for need-based aid; if you have two or more kids in the Ivy League, you may. Flexibility is especially important for families like yours. Raymond Loewe of College Money in Marlton, N.J. recommends splitting your funds among a taxable account, a Coverdell and a state 529 savings plan. By the time your kids finish middle school, you should have a fairly accurate estimate of your aid eligibility. If your prospects are good, focus on your taxable account and spend down your Coverdell (or an UGMA or UTMA if you have one) on secondary school expenses such as SAT classes or prep school tuition. (Just be sure to stash away the equivalent amount in a taxable account.) If need-based aid looks unlikely, shift more of your savings into a 529.

YOUR INCOME: Over $150,000 YOUR GOAL: Focus on your tax-free saving

Financial assistance is probably not in the picture--though you should run the numbers anyway--so do the bulk of your investing in tax-free accounts. Stash your first $2,000 in a Coverdell, where you can choose any low-cost fund, and the rest in a 529 savings plan. To choose one, look first at the fund company's performance and ethical reputation--avoid those involved in the fund scandals--then at expenses. Don't get carried away by state tax breaks. You may have to pay back your tax benefit if you roll over your account to another state. And unless you receive a hefty deduction, you're likely to come out ahead by simply choosing the best, lowest-cost plan, especially if you're investing a large lump sum.

Consider this example from Dean Knepper, a financial adviser and C.P.A. in Leesburg, Va. The expense ratio for a Vanguard balanced fund in Virginia's VEST 529 plan is 0.93% a year--$465 annually for a $50,000 investment. Residents can deduct $2,000 in contributions a year from their state income tax, saving $86.25 in the 25% bracket; that brings the Virginia plan's cost down to $378.75. By contrast, the same fund in Utah's 529 plan costs 0.35% a year--just $175 on that same $50,000. That's a better deal for Virginians, even without a tax break.