>Leave Debt in the Dust: Map your own path out of the financial minefield

	• Intro Credit Cards • Parental Care • Tuition • What a Pay Raise Means • Your Best Investment • Debt Toolkit Take the Quiz • Exiting the Spend Cycle Related Articles • Avoiding Financial Trouble: Ten Tips • Make a Budget • Your Repayment Options Tools & Calculators: • How Much Am I Spending? • How to Reduce My Spending • How to Pay Off My Balance Discussions: • Getting Out of Debt

Before Your Kids Start College

What to do:

• Check out state savings programs. Choose carefully when you select a loan because your financial circumstances may be different by the time your child graduates from college. One loan option, the so-called Section 529 plan, varies from state to state. It usually lets you lock in your savings for college at a particular interest rate. You can use the money to pay for college tuition anywhere in the country and plans often are open to residents of other states. And, as long as the money is spent on tuition, the earnings are taxed at the student's lower federal tax rate. An older loan program that falls under Section 529 allows you to lock in future tuition at a public university at current tuition rates by paying the money now. This isn't a savings plan and it's only available in some states and only to residents of that state.

• Investigate government loans. Look into government-backed loans, either directly through the government or through a bank, rather than private bank loans. The government loans usually charge a much lower interest rate, according to Mark Kantrowitz, publisher of finaid.com, a financial aid Web site.

• Try for private scholarships. Best bet is to check fastweb.com. It not only lists hundreds of scholarships, but also helps you figure out which ones you're eligible for.

• Watch out for financial aid no-no's. For starters, take capital gains two years before your child matriculates. That's because if you apply for need-based financial aid, officers will look at your income and assets for the prior tax year. Result: If you have capital gains in that year, it will hurt your chances of receiving aid.

• Second, save money in your name, not your child's. With mom and dad, the first $40,000 in assets are ignored, as is money in retirement funds and, for federal aid, the value of your primary residence. Plus, federal financial aid assesses you at a bracketed rate, with a maximum of 5.64 percent. Students, on the other hand, have no similar protections and are assessed at a flat rate of 35 percent.

  According to the federal formula, assets held in your name will reduce aid for your child up to 6 cents for every dollar. This means, for example, that if you exceed your exempt assets by $20,000, then a $10,000 grant for your child will be reduced by $1,200 (.06 x 20,000) to $8,800. Based on the same federal formula, assets held in your child's name will reduce aid by a flat rate of 35 cents for every dollar. In this scenario, a $10,000 grant will be reduced by $ 7,000 (.35 x 20,000) to $3,000.

• Take advantage of deferment options. If you got a PLUS loan from the federal government, which is only for parents, you have to start paying it back 60 days after disbursement. But there are deferment provisions. If the student is enrolled at least half-time, you can defer the principal until after graduation. If you can't find full-time employment, you can also make interest-only payments for up to three years.

• Come up with a plan with your kids. If you're going to help your kids pay back their loans, set up a schedule together that will let them do so gradually. And remember that students can get a hardship forbearance of up to three years on their loans after graduation. Next: What a Pay Raise Means >

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