Only take out student loans after you have exhausted other scholarship, grant and 529 funds.

Smart Ways to Mix Student Loans, College Savings

Families should use 529 plan funds and other sources before turning to loans.

Only take out student loans after you have exhausted other scholarship, grant and 529 funds.
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The 2008 plunge in stock values eroded Phillip Orzech's college savings.

The Connecticut parent's 529 plans, tax-advantaged investment accounts, were primarily comprised of stock-based investments. The accounts, which had held enough to pay for four-year educations for each of his two children, now only covered one year of tuition.

"We had less money saved than we thought there was going to be," he says. "We used what we had to pay everything that we could." He and his wife then borrowed student loans for their children to make up the difference.

[See 10 ways to save on college costs.]

For families who will use both student loans and 529 plan savings to pay for college, experts recommend the following.

1. Use available funds from other sources first: Families shouldn't take out student loans before considering payment plans, grants and scholarships.

Those who can afford to save some money from regular paychecks throughout the year can consider tuition payment plans. Also, students can contribute income from working part-time jobs during college.

"There is current income that can be used," says Charlie Rocha, senior vice president at Sallie Mae. "Most schools do have tuition payment plans."

Payment plan time frames vary but do give families at least a few extra months to pay tuition, Rocha says. Fees for payment plans are normally lower than student loan interest rates. If a family qualifies for an education tax credit, choosing a payment plan may allow parents to wait for a tax refund check, he says.

[Avoid these myths about prepaid college tuition plans.]

2. Don't pay back student loans with 529 plan funds: Paying back student loans with 529 plan contributions could be pricey.

"Student loan payments are not a qualified higher education expense," says Joan Marshall, executive director of the College Savings Plans of Maryland. "So if you borrow for college now, you cannot use funds saved in a 529 plan years later to pay student loans without also paying tax on any earnings, plus a 10 percent federal penalty on those earnings."

3. Pay close attention to cost of attendance: Every school lists the cost of attendance on its website. Student loans can be used to pay for any expense listed within the cost of attendance, but 529 plan withdrawals can only be used for what's known as qualified education expenses.

"Use 529 funds for college expenses while the student is in college, like tuition, room, board – if the student is attending at least half-time – and books before relying on student loans," Marshall says.

[Learn about expanded qualified expenses in 2013.]

For example, the University of North Texas lists an average annual cost of attendance for the 2013-2014 school year as $19,324 for in-state residents. Tuition, fees, room and board and books and supplies account for $15,196 of that in-state total.

While families should try and pay as much as possible using sources other than loans, the $4,128 for transportation, personal expenses and federal student loan fees can't be paid with 529 plan funds without the possibility of paying a potential tax penalty. Families should try to pay for these costs with non-529 plan sources.

While it's hard to cover $15,000 every year without borrowing, families who saved for college reduce students' future student loan debt and payments.

"One of the main reasons families save for college in 529 plans is to reduce reliance on student loans, so now is the time to reap the benefits of those savings," Marshall says.

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.