Many of us expect to help our kids pay for college. Whether you plan to foot the entire bill, or whether you plan to just help out in some specific areas, chances are that you will need to save up some money to help pay for kids’ college. This is important, since you want to have as little to do with student loans as possible. And, while a scholarship would be nice, you can’t always count on one.

You can, however, make use of extra income to help save up for college expenses. Supplemental income can be used to fund college savings accounts. The two main types of college savings accounts are 529 plans and Coverdell Educational Savings Accounts. These plans usually allow you to invest in funds that will put your money to work for you through the power of compounding interest. These plans come with tax advantages, so that withdrawals used for education purposes by the beneficiary are not taxed. (You won’t get a federal tax deduction for contributions, but you might be eligible for a state deduction.)

Extra Income and the Power of Compounding Interest

When you earn supplemental income through extra activities, such as a web site, a side business or some type of passive income, you can put that toward college savings. Compound interest through some sort of account can be a real help. For example, if you put $200 a month in an account that grows at 6% (that’s $2,400 a year), and let it grow for 10 years, you will end up with $33,890.11. A compound interest calculator can help you estimate the possibilities.

Of course, the earlier you start, the better. Start five years earlier (for 15 total years) and that $200 will grow until you end up with $54,793.77 – even if you are only getting 5% annually.  Play with the calculator a little bit to figure out how much extra income you need each month to reach your desired goal. Then, create a plan to create supplemental income that can reach that goal.

Some parents decide to start when their children are born (or even before) to get a jump on college expenses. This can be a good idea, since college costs are always rising. Besides, it’s much easier to save up a little at a time, rather than try to pay for it at once. And, of course, once you take out loans, you are paying interest. Using extra income to save up for college can mean financial freedom, since you won’t need to take out as much in student loans.

You can encourage your child to help as well. Since it is his or her education, you can give him or her jobs to do as part of your supplemental income business. Have them participate in research, or do some other job to contribute. You can also encourage them to contribute to their own college savings when they have their own jobs. Make saving for college with extra income a family project, and everyone will benefit while learning valuable money lessons.