Cashing out a college fund in a down market
By Lucy Lazarony • Bankrate.com

Paying for college in a down market is a tricky proposition.

Watching your kid's future tuition money shrink with everything else in a sluggish stock market in not fun.

You wonder, should I cut my losses and pull out when the market is in the tank or wait (fingers crossed) for a future rebound?

A lot depends on your risk tolerance and how much other money you have available for college. The biggest factor is the age of that future college freshman.

The basic rule: Get more conservative
"The closer you get to college the more conservative your investments become," says Rick Darvis, president of College Funding Inc. "You don't want to blow it at the end."

It helps if you think about paying for a college one year at the time. Focus on the freshman year first. Ideally, you would try to put aside the money you'll need anywhere from two to four years before you write your first college tuition check.

The more conservative you are, the earlier you'll start pulling your money from the market. A cautious parent would set aside money for the freshman year of college during a teen's freshman year of high school.

"If they don't have other money and they want to be more conservative, they might want to bring it out in the freshman year rather than the sophomore year," says Vickie Hampton, a certified financial planner and associate professor at Texas Tech University in Lubbock, Texas.

If you'd sleep easier knowing that year one of college is covered, go ahead and cash out, down market and all.

No less than 2 years
Other parents may choose to wait until a teen's junior year of high school before they start cashing out stock investments.

"Give yourself a two-year lag time if you can," says Gary Pressley, president of Academic Funding Group in St. Paul, Minn.

When the market is down I wouldn't sell more than what your current needs are, says Ben Tobias, a certified financial planner in Plantation, Fla. "As soon as there's a rally, then I would start to liquidate."

Tobias sees things this way: If you have to choose between using cash or selling some stocks to pay for college, use the cash first. If you have to choose between borrowing for college or selling off some stock -- sell.

"My philosophy is essentially cut your losses and run," Tobias says. "Because if you borrow money you have a chance of greater losses."

Shortfall? Don't rob your retirement account
It's also important for parents to keep a close eye on their retirement savings. Cashing in all their investments to pay for college is not a good idea.

"College is the tail. Retirement is the dog. Don't let the tail wag the dog," Darvis says. "Don't rob retirement to pay for college. It sounds harsh but answer me this 'Can you borrow for retirement?' Any kid in America can borrow and go to school."

Ready for some good news? If your family has to borrow to pay for college, there has never been a better time to do so.

Student loans, installment plans
Interest rates on Stafford loans, the largest source of student loan funds in the country, and Parent Loan for Undergraduate Students (PLUS) loans, a popular loan program for parents, are at record lows.

On July 1, the interest rate on federal Stafford loans dropped from 3.42 percent to 3.37 percent and the interest rate on federal PLUS loans dropped from 4.22 percent to 4.17 percent.

Does the thought of running up big debt for college make you cringe? Paying a portion of your education bills by installment plan can help.

An installment plan lets you pay for tuition with several payments over the course of a school year. Many plans allow monthly payments. Others allow up to three payments each semester.

Most installment plans are interest-free and come with setup fees of $40 or $50. Some colleges offer their own payment plans. Others use outside agencies. Be sure to ask.

An online calculator on the Academic Management Services Web site called TuitionPlanner can help a family determine how much of an education bill to pay with an installment plan and how much to pay with a loan.

Don't give up on scholarships. There are lots of scholarships targeted toward college sophomores, juniors and seniors. Many merit-based awards are geared toward upperclassmen in a particular major or area of study.

A son or daughter who missed out on a scholarship when they entered college could land a hefty award later on. If they do, fourth-year tuition won't be much of a worry at all.