Most students hope to avoid college loans (http://www.nextstudent.com/private-loans/private-loans.asp), but the reality is that today’s graduates leave school with more than $20,000 in student loan debt.

Many parents don’t realize that the federal financial aid formula, which determines how much money in federal grants and college loans a student qualifies for, anticipates a significant family contribution to the student’s cost of college. As a result, families often underestimate the amount of money you’ll be required to provide when your children enroll at a college or university.

With college savings plans and investments having taken a hit over the past two years, a number of parents may not have the cash to meet their expected contribution. While most 529 college savings plans (http://www.savingforcollege.com/) are invested somewhat conservatively, recent investment losses mean that the college savings account you set up for your child may have lost as much as one-third of its pre-recession value.

Helping Your Children Pay for College

1) Parent Loans

While government-backed parent loans, known as PLUS loans, are available through the Department of Education, financial advisors haven’t entirely warmed to the idea of parents taking on new debt at a time in your lives when your financial focus should be on saving for retirement.

Conventional wisdom holds that a worker shouldn’t retire during a recession, and to that end, many currently employed older workers have delayed their retirement plans in favor of working longer. The fact that you may be keeping your job as a protective move during the financial uncertainty of a recession, however, doesn’t necessarily mean that you should take on additional debt to help your children pay for college.

2) 401(k) Loans

An even bigger mistake parents may sometimes be tempted to make is borrowing from a 401(k) retirement account. Retirement account loans (http://www.irs.gov/retirement/article/0,,id=162415,00.html ) are available for certain expenditures, including college tuition and other education expenses for your children, but borrowing from retirement funds can be extremely risky, particularly during times like these of layoffs, employer cutbacks, and shuttered businesses.

Although 401(k) loans typically carry a repayment term of five years, if you lose your job for any reason while you’re still repaying the loan, you’ll have to replace any outstanding loan amount within typically 30-90 days of separation from your employer or face a steep tax bill and penalty charge.

If you’re unable to replace the 401(k) funds you borrowed, or if your employer goes out of business before you’ve repaid the loan, the IRS will treat the 401(k) loan as an early withdrawal and will tax it as income. State income taxes could also apply. The IRS will also assess a 10-percent early-withdrawal penalty.

3) Cutting College Costs

The key to reducing your children’s overall burden of debt from student loans is to reduce the cost of college upfront. For your college-bound children, cutting school expenses may involve considering a public university rather than a private one, attending an in-state school to take advantage of lower resident tuition rates, living at home to avoid room and board costs, working part-time while enrolled in college, or even working for a year or two to build up savings before enrolling.

4) Financial Aid

As a first step, you and your children should complete the Free Application for Federal Student Aid (FAFSA), which determines how much federal financial aid money will be awarded to you in the form of federal grants and federal student loans.

Because of relatively low annual borrowing limits on federal student loans, your children may use up all their available federal student loan dollars and still have school expenses left to meet. Once students have exhausted all their federal financial aid options, non-federal, private student loans may be used to cover their remaining college costs.

Since private student loans generally carry higher interest rates and fewer borrower protections than federal student loans, financial aid officials will generally advise students to take advantage of all their federal financial aid options -- including federal parent loans -- before turning to private student loans. In these cases, be prepared to discuss with your children’s financial aid office the extent of your willingness to take out any parent loans.

In addition to applying for federal financial aid, your children should seek out college scholarships and other grants, which provide money for school that doesn’t need to be repaid.