Ease the tuition squeeze

Your college fund is way down, but costs are way up. These strategies will help you pay for your kid's BA without breaking the family bank.

(Money Magazine) -- You've been waiting for this moment for nearly 18 years: Your baby is almost ready for college. Your finances, not so much. The market's protracted free fall means that your college fund is now worth just a fraction of what you need. Your home's value has no doubt dropped sharply too - no help there. The only thing that keeps going up, you guessed it, is college tuition. So it's goodbye, Dream School U., hello, Central State, right?

Wrong. While there's no denying times are tough, you have more options to help pay for that BA than you think. From targeting the right schools to taking advantage of new financial aid rules and tax breaks, you can get the price to a manageable level. These steps will ensure your kid ends up at a great school you can really afford.

The typical 529 college savings plan of a high school junior or senior has dropped 12.5% in value over the past year. And if you didn't invest in an age-based portfolio that automatically shifted into safer investments as your child got older, your losses may be far worse. The big question before you: Should you try to hold off withdrawing money from the account to give your savings time to bounce back?

Unless you have another source of ready cash you can use to pay college bills - if you can squeeze more out of current income, say, or have other non-retirement savings you can tap - the answer is no. Since most of the money in your 529 is (or should be) in cash or other fixed-income investments by now, a big surge in stocks won't help you much.

And it would be a Hail Mary strategy to shift back into stocks in the hope of catching a meteoric market rise in the next year or two. Certainly it makes more sense to pull money out of a 529 than to take out a college loan before it's absolutely necessary; borrowing sooner will probably add to your interest expenses in the long run.

Don't worry that using 529 funds early will hurt your chances of getting financial help later. Although withdrawals used to be treated as income, which is counted more heavily in financial aid formulas than savings, that's no longer the case. To see how much assistance you may get, use a financial aid calculator, like the one at finaid.com. For the most accurate assessment, do both the federal calculation, used by public colleges, and the institutional one, used by private schools.

With endowments down 25% to 30% in the past year, colleges have been slashing budgets, cutting everything from new construction to faculty. One program that top-tier schools haven't cut: the more generous aid packages they began offering families last year in response to congressional criticism over their use of endowments.

More than 50 elite schools - from Pomona to Princeton, Stanford to Swarthmore - now have programs that limit or eliminate loans, or otherwise help defray costs, even (in many cases) for families that make well over $100,000 a year. The effect is to make these schools less expensive than many state colleges.

At Harvard, for one, families earning less than $180,000 now pay only 10% of their income; if you make $150,000, you'd owe just $15,000 a year, even though the sticker price for tuition, room, and board is $47,215. By contrast, the cost for an in-state student at University of Texas at Austin is $17,778. (Find schools with no-loan aid programs at projectonstudentdebt.org.)

Of course, even if your child has the academic chops, you can't bank on admission to a highly selective college. The competition this year is greater than ever - at Dartmouth, applications are up 9%; at Stanford, 20%. A strategy with much better odds of lowering your costs: Have your child apply to at least two or three private schools with median SAT scores and grade-point averages that are lower than hers.

These colleges haven't cut financial aid either, and many are eager to burnish their reputations by attracting more high-quality students. So they may award sizable merit money just to entice your kid to enroll, says financial adviser Tim Higgins, author of "Pay for College Without Sacrificing Your Retirement." (To find out about awards at individual colleges, go to meritaid.com.)

Tip: Make sure you fill out the federal application for financial aid, known as FAFSA, even if you think your income is too high for help - for many merit awards, it's the only way to qualify. And check the colleges' websites to see whether there are additional requirements for merit aid; some scholarships require a separate application that may have an early deadline.

Nowadays you need not only a Plan B, but also a Plan C and maybe a Plan D. So be sure your child applies to two or three safety schools that you know you can afford and he would be happy (or at least willing) to attend. Public colleges will probably be high on that list. But don't assume your state's flagship university is a sure-fire backup, since your teen isn't the only one seeking safety these days. Says Lisa Jacobson, CEO of Inspirica, a New York City college consulting service: "For the first time I'm seeing many upper-middle-class and wealthy parents encouraging their children to apply to their state schools - just in case."

All this translates into intense competition to get into the best public colleges. At the State University of New York at Binghamton (tuition, room, and board: $15,846 a year), admissions director Cheryl Brown says that applications for next fall's freshman class are up 14% over last year, and transfer applications are up 60%.

The rush to public colleges comes at a tough time. In addition to hiking tuition, some public schools are making even deeper budget cuts than private schools. At Arizona State University, for one, plans are being drawn to shut 40 academic programs, close two campuses, and eliminate a merit scholarship program. And some states, such as Florida and California, are capping student enrollments.

Still, plenty of excellent programs remain - your child's college adviser should be able to identify the top ones in your state - and the price will generally be half of what a comparable private school charges. For more on the best values in public colleges, look in the college Rankings and Lists section at princetonreview.com.

Face it: No matter how diligently you seek out scholarships or how savvy you are about the schools you target, chances are you're going to have to borrow money at some point to pay college bills.

Tapping your home equity used to be a smart way to go - you could borrow at a lower rate than for federal or private college loans, and the interest expense was often fully deductible. But with the recent collapse in home values, many banks have frozen home-equity lines of credit, even for people with a pristine credit score. So you can't count on it as an option. Besides, tapping your home equity now looks a lot riskier than it did a few years ago - what if your home value keeps dropping or, heaven forbid, you lose your job?

Not to worry. While the credit crunch threatened the availability of college loans last year, you'll have no problems now, thanks to swift action by Congress to keep the federal money flowing. And while the rates aren't as cheap as on a HELOC, they're reasonable. The best deals are on loans made directly to students. Freshmen can take out up to $5,500 in Stafford loans this year (the limit rises to $7,500 for seniors), and the top rate is 6.8%. If you need to borrow more, getting a federal loan for parents, called a PLUS, is a snap. Just about anyone with a halfway decent credit history can get one and borrow up to the full cost of attendance, minus any aid received, at a maximum 8.5% rate.

Private loans can still be hard to get, since many lenders have exited that end of the business. But the high costs of these loans - rates often run to as much as 15% - make them poor options anyway. Says Lauren Asher, associate director of the Project on Student Debt: "This is no time to saddle your child or yourself with expensive loans that cannot be repaid."

Thanks again, Congress. The recently passed economic stimulus legislation included a welcome provision for tuition-paying parents: an expansion of the Hope Credit for educational expenses - now called the American Opportunity Tax Credit - to $2,500, from $1,500. It will be available for the 2009 and 2010 tax years.

Unlike the Hope, which could be used only for expenses in the first two years of college, this new credit can be claimed for costs over four years. And more middle- and upper-middle-income families will qualify; if you make $180,000 or less ($90,000 for singles), you'll get at least a partial credit. (The Hope phased out if you earned more than $120,000.) You can even claim the credit if you fall under the alternative minimum tax.

There are other breaks available, like the Lifetime Learning credit (up to $2,000) and a tuition deduction of up to $4,000. But you can claim only one tax break per child each year, and the American Opportunity is the best of the bunch. One other benefit you may be entitled to: You can deduct all or part of the interest you pay on college loans, up to $2,500, if you make $150,000 or less ($75,000 for singles). Finally, the new rules from Washington also expanded the kind of bills you can pay from a 529 account to include computers and related equipment if it's required by the college, as well as Internet access.

Your biggest concern may not be how to pay college bills now but how you'll pay if you get axed at work - a not unreasonable fear, given today's high and rising unemployment rate. But if your financial circumstances change dramatically during the year, many colleges will give you what amounts to a do-over on aid.

If the worst happens, call the school's financial aid office and explain the change in your situation. They'll probably schedule a meeting or phone conference to review your finances and consider whether to give you additional aid, asking you to supply documentation of your current income, assets, and additional expenses (for example, if you now have to pay for health insurance out of pocket). Be aware, however, that many schools require you to have been out of work for at least 10 weeks before they'll consider granting additional help.

If the college's well has run dry - after all, there are a lot of families these days who are coming back to ask for more - you can always take out a PLUS loan to close the gap between what the college costs and what you can pay. Although the school's filing deadline for aid may have passed, parents can apply for federal loans anytime during the school year; you don't even have to file a FAFSA to do so.

If your job search drags on or your next position pays a lot less than your old one, you may get more help the following year (income is the biggest factor in determining how much aid you qualify for). Then too, your child could transfer to a less expensive but still academically solid school. You don't want to rack up serious debt if there are attractive alternatives. And when the economy finally recovers, you can always kick in a few extra bucks to help your kid pay for grad school.