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Is your child college bound? How do you pay for it?

Millions of college-bound high school seniors are receiving college acceptance letters and financial aid award packages this month. Now it's decision time—not only for the student, but for Mom and Dad too—forcing families to grapple with how to pay for it all.

Many parents may be overwhelmed by the cost of college, which has ballooned since they were undergrads. A Sallie Mae report found families spent an average of $21,178 on total college costs last year. But there's no need to panic. The good news is, financial advisors say, you don't have to pay for the whole thing. There are various funding options for college.

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Most families pay for nearly a third of college costs with "free money"—scholarships and grants—according to Sallie Mae. More than a quarter—27 percent—of the total college tab is covered by loans. Another 27 percent comes from parents' income and savings.

A plain-vanilla savings account is often their top choice for savings, though 529 college savings plans offer more tax breaks.

"These accounts are built to give people tax benefits in saving for college and people who aren't using them are missing out on those tax benefits and potentially have less money for college when it comes time to pay for that," said Stuart Ritter, a certified financial planner with T. Rowe Price.

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With 529 plans, funds can be withdrawn federally "tax free" to pay for "qualified education expenses," including tuition and fees, room and board, books, supplies and equipment. But how much should parents withdraw each year?

Savingforcollege.com founder Joseph Hurley said withdrawing as much as you need as quickly as possible is the best strategy to ensure you lock in your tax-free gains.

Families may be able to take advantage of other tax breaks too. The "American Opportunity Tax Credit" offers a tax credit of up to $2,500 on the first $4,000 of education expenses. Parents with 529 plans may want to wait to withdraw those funds, some financial experts say, so they don't miss out on these tax advantages.

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Parents "should not take that $4,000 from their 529 plan," Hurley warned. "They should be taking that (money) from other sources—out of pocket, or loans. You cannot double dip and take that tax credit and take tax-free distributions from your 529 plan for those same expenses."

Many families may also need to turn to loans to pay at least a portion of the college bill. If your child qualifies for the federal Stafford loan, Hurley said, that's a "good deal," with zero percent interest while in college and a very low interest rate after graduation.

—By CNBC's Sharon Epperson.

If you have comments or questions about paying for college, send them to me at yourmoney@cnbc.com or tweet me @sharon_epperson #GetAPlan

Personal Finance

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