It's graduation season and your young niece or nephew is one grade closer to college. With the current recession, some parents have had to dig into their kids college fund - or not add to it - in order to pay the bills.

As the younger ones end their school season, perhaps it's time to think about helping them save for college.

You can make contributions of  your own to your niece or nephew's college fund. With the advent of the 529 plan, a tax-advantage investment plan sponsored by the state, state agencies or educational institution, Aunts can participate in saving for higher education expenses of a designated niece or nephew.

But Aunties, as generous as we know you are, before you begin to think about this wonderful investment, make sure you are contributing enough to your retirement fund.  Your nieces and nephews can borrow money for college but you cannot borrow money for retirement.  Even if you plan on working for the rest of your life, you still want to be prepared in the event you do choose to retire.

529 Plans

Once you have your retirement plan set in place, you can now start preparing for your niece or nephew’s future.  An important decision to make is a Public or Private University for the child.  If you feel confident the parents will be sending your niece or nephew to Public University, verify if your state has a prepaid college savings plan.  Your money will go much further, but your child must use the money for a state university.

If you aren’t sure whether to your niece or nephew will want to attend a Public or Private University and you want to leave your options open, then the 529 plan is a better choice.  There are many great benefits to the 529 plan which include:

    * When the money comes out for an accredited college, it is free of federal taxes.
    * The money in the 529 plan grows tax deferred.
    * Many states offer an upfront tax deduction on your contribution and a tax break when you take the money out (if you go with your state plan).
    * The donor has control.
    * Very easy to use and can be made automatic.  In fact, if you don’t have the minimum to invest, you can set up automatic contributions for as little as $25 a month.
    * Most plans have an age-based investment option that makes it very easy for investors to build a properly diversified investment portfolio.

Other Savings Options

Visit savingforcollege.com for more information about your state’s plan.  You can contribute up to $12,000 tax-free per child annually or $60,000 spread over five years under the gift tax law.  Overall, you can contribute (or the account can grow) to more than $200,000.

Another way to get more bang for your buck is through Upromise. This company gets you free money for your 529 plan by shopping for everyday things from a long list of vendors (that you are probably using already).

One final thing you can do to make the most out of your niece's or nephew's college savings plan is to go online and use a savings calculator to see how much you should save.  T. Rowe Price has a sophisticated yet easy-to-use site.  Also, if you are worried that the 529 plan may hurt your niece's or nephew's chances of receiving financial aid, don’t. Investing in a 529 plan will have a minimal affect because the assets are in the name of the donor not the child.

Parts of this article were published in July 2008.