SAN FRANCISCO--With the credit crunch crimping the student-loan market and financial-market upheaval crunching investments in college-savings plans, what's a parent to do? That depends somewhat on when your child will need those college funds.

If you've got a long time horizon, some say investing in the tax-advantaged college-savings tools known as 529 plans still makes sense. Investors contribute after-tax dollars; investment gains are tax-free if the money is used for qualified education expenses.

"The long-term appeal of 529 plans, despite all the painful losses in recent months, is still very much intact," said Marta Norton, senior mutual fund analyst with investment research firm Morningstar Inc., in Chicago.

"If you saw higher expenses or a management team that had changed, those would be reasons to consider switching funds, but solely because of painful performance over a year's span isn't reason to jump ship," she said. Search for "529 plans" on Morningstar.com to see the firm's take on the five best and worst plans. Note that, with some exceptions, 529 plan investors can generally change their investment options only once per year.

Overall, the investment portfolios offered through all 529 plans tracked by Morningstar were down 6.09% on average for the year ending Aug. 31, while they were up 6.06% over five years, annualized. An individual investor's return will depend on specific investment choices.

Some argue that even those with kids closer to college age might consider 529 plans' conservative, principal-protection choices. Even with a kid in high school, "it's never too late to save money," said Ray Loewe, president of College Money, a Marlton, N.J., financial-planning firm that counsels parents on college funding. "You're going to be very conservative. But you still have the opportunity" to enjoy the tax-free earnings if the money is used to pay for college.

Still, the recent stomach-turning stock market volatility might make investing for college a tough route for some. If you're in panic mode and want to pull your money out of a 529 plan, ask the college about prepaying so you still get the tax benefits, Loewe said. Also, ask the college about any possible discounts for prepaying. "It never hurts to ask," he said.

Loan market crimped

Now matter how you save, saving something is getting more important as the credit crunch limits loan availability. Fewer lenders are participating in the federal student-loan program, and about 33 lenders have stopped offering new private loans, said Mark Kantrowitz, publisher of FinAid.org, a financial-aid information site.

Still, Congress shored up the federal program by increasing the maximum annual unsubsidized loan amount for some students by $2,000, among other measures in a law enacted in May.

Strategies

To improve your chances of being able to fund college, consider the following strategies:

Apply to many schools to increase the number of financial-aid offers you receive. "We recommend kids apply to 10 schools, so they get accepted to three or four schools. That's going to increase their financial-aid options," said Dave Kenney, chief executive officer of CollegeZapps, a Littleton, Colo.-based provider of college application tools. Don't rule out private colleges. Their tuition costs are steep, but these schools often have more ability than state schools to offer scholarships or tap endowment funds to help students, Kenney said. Talk to family members. Grandparents are often willing to help with a gift or loan. Set up a savings plan and ask for matching contributions, Loewe said. Talk to the financial-aid office. School financial-aid officers have a good handle on available grants, scholarships and loans. Once a school offers admission, it's invested a chunk of money so will usually want to help figure out financing. Also, ask your student's high school about local scholarships, and your employer, too. Seek federal loans first. They're more available and generally cheaper. Meanwhile, improve parents' and student's credit scores by paying down debt to help ensure you're eligible for the lowest rates if you need a private loan with a co-signer.

Copyright © 2008 MarketWatch, Inc.