Help! Can our kids afford college?

With 3 kids ages 6 to 16, the Lazars face years of tuition bills and don't have nearly enough savings. MSN Money helps them get on track to handle the financial strain.

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By Karin Price Mueller, MSN Money

Herb and Marj Lazar's money emergency hasn't hit yet. But they feel it coming. Fast.

The Lazars have three children -- Sarah, 16; Eddie, 11; and Ryan, 6 -- and a lot of nearly back-to-back college bills to prepare for. Plus, they're both 46, so retirement will follow close behind the college bills. That isn't making things any easier. What to save for -- retirement or college?

The couple have been saving for college and retirement simultaneously, with money set aside in Herb Lazar's 401(k) plan and an additional $200 per child per month going toward college. Any cash gifts the children receive also go into one of several college savings accounts. Chart: What they've saved so far

But college for their youngest could cost as much as $264,000. Short of hitting the lottery, the Lazars won't have enough time to save that much cash. Even with no debt, college still seems expensive

But no one says they have to pay the entire bill from savings. These days, few people do. The children may receive scholarships or grants, take out loans or find other sources of financial aid.

MSN Money's tuition savings calculator

Families planning for college need to understand that most colleges depend on a single system for reckoning need and distributing aid. Knowing the system will help families anticipate how much aid they are likely to receive and how they can maximize that aid.

Applying for aid

The first step to qualifying for aid is to fill out the Free Application for Federal Student Aid form, known as the FAFSA. The form has questions for both parents and students about income, savings, tax filings, marital status and residency.

About three weeks after the form is submitted, a student aid report is generated. This will explain how much assistance students will be eligible for and how much money the government expects parents and students to pay (called the expected family contribution).

When it comes time to send a child off to college, families should not hesitate to fill out a FAFSA form. They should do so even if they think they earn too much to qualify for financial aid. It's important to keep in mind that not all aid is need-based. A student may still qualify for federal loans and other programs that offer favorable terms.

The FAFSA is available from many sources. Parents can check with their student's high school or the financial aid office of any college, or call 1-800-4-FED-AID. The application may also be filled out online, which cuts processing time by as much as two weeks.

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The Lazars are going to want to look into the criteria the FAFSA system uses for determining a family's need because there are steps they can take to bring their college savings program into better alignment with those criteria.

For example, the FAFSA system figures that money saved under the names of children can be pretty much exhausted for college. On the other hand, the system recognizes that money saved in the parents' names might be needed for other purposes, such as retirement. Bottom line: It's often better to put college savings in the names of the parents.

Once the FAFSA process is complete, it's time to consider all possible funding sources.

Borrowing it

The Lazars and their children have several loan options available. Here again, it's helpful to look ahead. Interest rates on loans depend on the borrower's credit rating. Now is the time for the Lazars to make sure their credit rating is in good shape.

Federal Stafford Loans

There are two types of Stafford Loans: subsidized and unsubsidized.

Students who demonstrate a financial need are eligible for subsidized Stafford Loans. Students can borrow $3,500 in year one, $4,500 in year two and $5,500 in years three through five. The interest, now fixed at a 6.8% rate, will be paid by the federal government while the student is in school. Repayment begins six months after graduation and can be extended over 10 years.

Unsubsidized Stafford Loans are available to every student, regardless of financial status, but students are responsible for the interest right away. The loan limits are the same. Students can start repayment immediately or defer until six months after graduation, and may take 10 years to repay the loan. For undergraduate loans, the fixed rate is the same as subsidized Stafford Loans.

PLUS federal loans

If the Lazars don't want the kids to take on any debt for college, they can consider a PLUS loan, a Parent Loan for Undergraduate Students. With these loans, parents can borrow the total cost of undergraduate education, minus any other financial aid the student receives. For loans after July 1, 2006, there is a fixed 8.5% interest rate. Repayment usually starts 30 to 60 days after the funds are disbursed, and parents have 10 years to repay the loan.

Ask your employer

Some employers offer tuition reimbursement programs

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for employees and their families. You'd lay out the money, and once your child passed a course, your employer would reimburse you for the cost. Programs vary, so talk to your employer's human resources department about specifics.

Free money: Scholarships and grants

If you do your homework, you and your child may be able to take advantage of some free money that's out there looking for students who fit a particular profile. "How could I turn down Princeton?"

Maybe your aspiring collegian is one step away from meeting the criteria for a particular scholarship. If so, the sooner you become aware of that scholarship, the better, so you can make sure to meet any criteria and deadlines.

The largest online scholarship resource is FastWeb, which boasts listings of 1.3 million scholarships worth more than $3 billion. The site lists all kinds of scholarships, so even if your child isn't the next Einstein or a developing basketball star, there may be money out there for him or her.

Some scholarships come from religious groups; others are intended for disabled people or military personnel. Some are set aside for students whose parents are members of certain unions or other organizations. A few are downright odd, such as awards for left-handers.

Work-study programs

Colleges and universities also offer work-study programs, which help students earn money for school. Students qualify for work-study programs based on need, and, again, a college's calculations of need are based on the FAFSA form. Adjust early to get your college savings program lined up with FAFSA criteria.

What should the Lazars do?

Herb and Marj Lazar have time, and they have options. Their game plan should be to:

  • Check their credit reports. The better their credit, the better their chances of getting the loans they may need. If they check their credit reports now and find trouble or errors, they have time to fix them before they apply for loans.

  • Learn about the FAFSA process.

  • Keep saving. Every penny they add to the kids' 529 plans is one less they'll have to borrow. And the longer the money is invested, the more the account will earn. But remember, all parents should save for retirement first. The kids can take loans for college, but no one will give a loan for retirement.

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  • Look at account ownership. Recent changes in law mean 529 plans owned by students are not reportable on FAFSA forms for 2007-08. But starting in the 2009-10 school year, these will be reported as parental assets, which are counted less than a student-owned asset.

  • Consider consolidating the children's college savings in 529 plans. There may be a tax liability when the savings are consolidated, but the Lazars will benefit when financial aid is calculated. Plus, 529 plans are tax-free.

  • Investigate scholarships. The Lazars should start searching for scholarships for Sarah right away so they don't miss any deadlines.

  • Get a home-equity line of credit, just to have it available if they need it. Better to start it now, rather than rush if it's needed to pay a tuition bill.

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Producer's note: Special thanks to Jack Oujo, a certified financial planner and CPA based in Wall Township, N.J., for his college planning expertise.

Do you have a financial emergency that you'd like help with? If so, e-mail your story to MSN Money's Karin Price Mueller at money911help@hotmail.com.

Published June 17, 2008