Ease the tuition squeeze

Posted by SooYeon(Pia), Shin

(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.

1. Use your savings strategically
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.

2. Apply higher - and lower
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.

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.

3. Play it safer
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."

4. Borrow smart
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.

5. Make tuition less taxing
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.

6. Stop worrying (at least for now)
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.

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