As the parents of a newborn baby, toddler or school-age child, you may be wondering which education savings plan is the best for you and your family. Today, parents have a choice between three tax-free plans for their children: a Coverdell education savings account, a prepaid tuition plan or a 529 savings plan.

If your children's grandparents are in a financial position to help fund your children's education, they can contribute to an account you set up, or they can set up their own account. In either case, funds saved in grandparent-owned 529s may not be considered when you file the Free Application for Federal Student Aid, or FAFSA.

There are five major factors to consider before making your selection. You need to look at the tax benefit, the financial aid impact, can the account can be rolled over, tax consequences and student loan implications.

Comparing college savings plans

529 savings plan Prepaid tuition plan Coverdell education savings account Uses Higher education Higher education K-12 and higher education Tax benefit Earnings grow tax free Earnings grow tax free Earnings grow tax free Withdrawals Tax free as long as money is used for higher education Tax free as long as the money is used for higher education Tax free if they do not exceed the beneficiary's qualified education expenses for the tax year Who owns account? Asset of account owner Asset of account owner Asset of account owner Financial aid impact Parents expected to contribute 5.64 percent of the money toward college expenses annually Parents expected to contribute 5.64 percent of the money toward college expenses annually Reduces child's eligibility for federal student aid by a maximum 5.64 percent of the value at the time of application Rollover status Can be transferred tax free to the 529 plan of a family member Can be transferred tax free to the prepaid tuition plan of a family member Can be transferred into a Coverdell account for a family member Tax consequences Contributions qualify for the $12,000 annual gift-tax exclusion Contributions between $12,000 and $60,000 can be spread over five years Exempt from federal income tax and often exempt from state and local taxes No tax consequences if new beneficiary is under the age of 30. If money is not used for education, earnings subject to tax and penalty.