College Costs: Coping with the Meltdown

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Other kinds of loans are also available to students, including a Perkins Loan, which is administered by individual educational institutions. Under the Perkins program, undergraduates are eligible for $4,000 per year and graduate students can receive up to $6,000 annually, with maximums of $20,000 and $40,000, respectively. Other financing options include a Stafford Loan, which can cover up to $7,500 in costs for borrowers. In addition, parents or guardians of undergraduate students can get a PLUS loan, which is non-need based and has a current interest rate of 8.25%.

Keep in mind that colleges do not reassess financial aid packages for a drop in portfolio assets. However, more often than not, schools will reassess financial aid if there is a change in employment status, Bugarin says.

Escaping the 10% IRA Penalty

Once you've tapped all the resources from your financial aid office, there are some other funding options available. Even with declining home prices, Sentinel's Jordan says a home equity line of credit or cash-out refinancing can be a good source of educational funding, assuming you qualify. In most cases, you'll need a credit score of at least 680 to be considered, Jordan says.

What about tapping your retirement account? Conventional wisdom says that retirement money is sacrosanct, but some advisers say you should do it if all else fails. "This is a controversial and very personal decision to make and should be made only after consulting a professional adviser who can run the numbers," says David Barnett, a financial adviser at Barnett Financial Planning in Tustin, Calif. A last-ditch effort is worth it, especially if it means your child won't have to drop out of college. (Students who drop out tend not to go back, Barnett notes.)

Another compelling reason why parents may consider using retirement nest eggs to pay for college is that qualified educational expenses escape the 10% penalty on early Individual Retirement Account withdrawals. (You still have to pay the income taxes, though.)

Talk Frankly About Finances

If your child is heading to college in the next year or two, it's a good idea to have a frank talk about finances, says June Walbert, a certified financial planner at USAA Financial Services. Set the agenda now, which means encouraging your child to consider an in-state school as well as working before and during school to help cover expenses. "Maybe kids need to look into a part-time job, even if they are only using the proceeds to fund some of their entertainment expenses," Walbert says.

It may be time to rethink educational plans and consider starting off at a community college, says Robert Wasilewski, a financial adviser at Baltimore-Washington Financial Advisers in Baltimore who also teaches economics at Howard Community College in the evening. He says more of his students are attending community college, where tuition is $3,000. "They plan to transfer to a four-year institution for their last two years. I believe this is a viable option for the serious student," Wasilewski says.

Financial aid experts also say it is a smart idea to encourage high school-aged children to take advantage of Advanced Placement tests and summer classes to graduate from college in less than four years and cut down on tuition payments. Some colleges allow courses taken before college to count toward college graduation credit.

An Opportunity to Adjust

For parents with children who aren't in high school yet, the market's swoon should give them a kick to get college savings on track. An age-based 529 plan is a good choice "for any age you are starting a 529 plan because it is invested more conservatively as the child gets older, when there is a higher probability of needing to withdraw money from the account," says Lisa Dickholtz, a certified financial planner at Dickholtz Wealth Management in Northbrook, Ill.

For example, the investment mix for a child up to 4 years old can be as high as 85% equities with 15% fixed-income while the allocation for a 5- to-7-year-old may be 70% equities and 30% fixed income. Because the money is automatically rebalanced as your child matures, "you can avoid not having enough time to make up market declines by being too heavily invested in equities," Dickholtz says.

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Young is a Personal Business editor for BusinessWeek .