NEW YORK - Hard as it may be to believe, the baby boom generation now has its fair share of grandparents.

Once the shock of becoming a grandparent subsides, boomers often are inspired to set aside some money for their pride and joys' future - especially for college, which is skyrocketing in cost at a rate well beyond inflation.

But contributing to an education fund is not easy, especially for boomers who are planning for their own retirement and, perhaps, helping to care for their own elderly parents.

As director of communications for Centre College in Danville, Ky., Mike Norris, 55, is quite familiar with the cost and importance of education. That's why Norris is launching a college fund for his first grandchild, Samuel, born just two months ago.

Norris still is figuring out how much to contribute, but at a minimum, he will invest $500 a year, probably in a tax-favored education fund, and expects it to reap $20,000 in 15 years. If he can manage to put away $2,400 annually, Norris expects to be able to give Samuel $94,000.

Norris' 85-year-old mother plans to chip in, too. But creating a fund for Samuel or any future grandchildren won't be painless. That's because Norris also is investing as much as he can into his own retirement fund and doesn't want to skimp on that.

So, he plans to cut back on some discretionary items - perhaps buying a new car less frequently or taking simpler vacations.

"You realize when you get into your 50s that the next generation is your legacy for the future," Norris said. "My parents put me through college, with some help from my mother's mother, and it just seems like continuing the tradition."

Section 529 plans

Financial planners suggest boomer grandparents consider funds known as Section 529 plans. These education funds, run by states but privately managed, grow tax-free, have generous contribution limits, and they remain in the donor's control.

"Let's say you set it up for grandkid A, and grandkid A turns out to be a bum," said Clark Randall, a financial planner in Dallas. "You can switch it to grandkid B."

Also, if a grandmother who sets up a 529 fund today has a personal financial crisis tomorrow, she can use some or all of the money for herself, although it becomes subject to income taxes and a 10 percent penalty.

Financial planners like how the 529 funds generally are allowed to receive contributions until they contain $200,000 to $300,000 - a healthy amount to cover tuition, books, fees, room and board. After that cap, the funds can't get any more donations, but still grow tax-free.

The funds can be automatically invested more conservatively over time, to reduce the chance that a volatile year can drain college money close to when it's finally needed.

Each grandparent - or anyone else - can give an unlimited amount to the fund each year, although contributions beyond $11,000 per donor per year are subject to gift taxes. However, 529 plans can get five years' worth of tax-free contributions - $55,000 - up front, as long as no additional donations are made in the following four years.

Because of all these pluses, there was about $40 billion invested in 5.7 million Section 529 accounts in 2003, according to the College Savings Plan Network, a national clearinghouse for the state programs.

Other options

Another tax-free option is a Coverdell Education Savings Account, but its contribution limit is just $2,000 a year per child.

Grandparents also can set up a Roth IRA, a trust or a life insurance policy with an interest-free loan for their grandchildren, as long as they can accept that the youngsters would be free to spend the money as they choose - not necessarily on school.

Debbie Dachowski, 56, an office manager from Oradell, N.J., buys her three grandchildren $100 savings bonds for their birthdays, Christmas or other big events. She figures the investment will help the kids meet education expenses or make a down payment on a car to get them to school.

"I'm just keeping them in a safe deposit box," Dachowski said. "When they get older, they'll know they're there."

A 2002 report from AARP said the average age that people become grandparents is 48 - smack in the middle of today's age range for baby boomers, who were born between 1946 and 1964. AARP also found that 52 percent of grandparents spend money on their grandkids' educational needs.

Younger grandparents need to begin planning for that now, said Joseph Hurley, an accountant who heads SavingForCollege.com LLC from Pittsford, N.Y. Because by the time the little ones actually get to college, the grandparents likely will be retired on a fixed income and might find it harder to chip in.

That tip comes with a caveat

"What grandparents do can affect a student's eligibility for financial aid," Hurley said. "It should be a family issue, with communication with the parents. Make sure everybody's in synch."