DESPITE THE emergence of a buyer's market in higher education (the nation's colleges and universities now accept roughly four of every five applicants), no one expects the cost to drop. This fall, for the fifth year in a row, the average cost of a college education again will move upward at more than double the rate of inflation, and most experts believe that more of the same is on the way.

With forecasts that four years at a top-ranked private college or university will cost more than $150,000 by the year 2000, it's not surprising that parents are panic-stricken. More than three-quarters of the parents questioned in a recent survey said they believed that college costs are climbing beyond the reach of the average family.

Yet there is some good news. Although the price of a college education may seem out of sight, it isn't yet out of reach. The truth is that the vast majority of families with children in college are not spending an appreciably higher share of their incomes on educational expenses than they would have spent a decade ago.

Part of the reason is the phenomenon of financial aid.

The various studies and forecasts that point to skyrocketing educational costs are based on the "list prices" advertised by colleges and universities. Thanks to financial aid the actual prices many families wind up paying are much lower. Think of it this way: A college education is one of the few things in life whose price generally is pegged to the buyer's ability to pay.

This year, more than $20 billion in financial aid -- typically a mix of scholarships or grants, loans and student jobs -- was distributed to some 5 million students by the federal government and by state and private sources -- including, of course, colleges and universities themselves.

Financial aid is nothing more than a discount from a college or university's list price. In this respect, the nation's institutions of higher education have something in common with the airlines. The airlines offer various discounts to people who book or buy their tickets early, who fly frequently, or who stay somewhere over a weekend, for example. Most colleges charge different prices for identical "seats," too, but with one important distinction: the discounts generally go only to those who need them.

Suppose, for a moment, that expenses at Blue Chip College -- tuition, room and board, books, supplies, travel and spending money -- add up to $16,000 a year. For Family A, which can easily afford that kind of annual outlay, no discounts are available. The list price is the same as the actual price. For Family B, however, which can afford to put up just $6,000 a year in educational expenses, a deep discount is available. Blue Chip College offers to close the gap between its list price and what the family is able to pay with a $10,000 financial aid package. In Family B's case, then, the actual price for a year at Blue Chip works out to $6,000.

Now consider Home State University, where annual expenses add up to just $6,000. Both families can afford to pay Home State's list price; consequently, neither qualifies for financial aid. Family A, of course, would save $10,000 a year by sending its child to the less expensive school. For Family B, it's probably a wash -- with one important caveat.

Because Blue Chip's financial aid package is heavily weighted with loans, the student from Family B will have to consider whether a diploma from the college is worth the additional indebtedness. While there's reason to believe that Blue Chip alumni have better jobs and earn more money than their Home State U. counterparts, the flip side of the coin is that many students are ill-equipped to repay large loans in the years immediately after they graduate. According to the latest report from the U.S. Department of Education, the number of student-loan defaulters nationwide is edging toward one million, and nearly $6 billion in defaulted student loans remains uncollected. (This October, the Education Department will start dunning student-loan defaulters for collection costs.)

Through the Maze

THAT'S JUST one of the many financial-aid wrinkles families should consider as they prepare to pay for college expenses. The entire system, some experts say, is riddled with inconsistencies, inequities and, above all, complexities.

The standard application forms for financial aid are so complicated that many families have trouble figuring out the most advantageous way to complete them. According to admissions officers, more than half of all financial aid forms are completed improperly.

Many parents don't even bother to fill out the forms because they mistakenly believe that their comparatively high incomes preclude the possibility of financial aid. That's often not the case, particularly if they have -- or will have -- more than one child in college at the same time, or if their children will be attending high-cost institutions.

"Parents always ask, 'How much can we make and still qualify for financial aid?'" says Kalman Chany, president of Campus Consultants, Inc., a New York-based financial aid consulting firm. "And that's a mistake on their part. I'd say 95 percent of them don't realize the amount of aid is based on the cost of the school."

Neither do most parents understand how eligibility for aid is computed. Because the basic application forms don't even mention -- let alone explain -- the "asset protection allowance" built into the financial aid formula, for example, parents frequently don't understand at what point they may be expected to liquidate investments, dig into their savings, or even take out a second mortgage. Even families whose assets are fully protected by the allowance sometimes are so frightened by the unknown that they may resort to lying on the application forms, a tactic that can keep their children from receiving any aid at all.

The financial aid system rewards those who best understand its intricacies -- often the very families least in need of help. The incentives sometimes border on the perverse. The system can, for example, reward students or parents who draw down their savings -- and thus qualify for more financial aid -- by buying a new car or taking an extended vacation.It's important for parents to assume an early and active role in figuring out how financial aid might help them meet future educational expenses. Waiting until children reach the last year or two of high school, experts say, is waiting too long. "I think students and parents really need to sit down and rethink how they're going to pay for college," says Joe Re of Octameron Associates. "I think the message is that you can still get an education, but you're going to have to look beyond Uncle Sam for help."

The magic number in the financial aid equation is the "expected family contribution" -- how much, in effect, the parents and student can afford to contribute each year to college expenses. Nearly all college and scholarship programs, as well as the federal government, compute financial need with one of two standardized forms: the Financial Aid Form of the College Scholarship Service (CSS) or the Family Financial Statement of the American College Testing Program (ACT). Using a uniform methodology developed in 1974 and updated annually, both services analyze financial need by taking into account the annual incomes, expenses, and assets of the parents and student.

Families can get a ball-park fix on whether they are likely to qualify for aid (and, if so, how much) by estimating their total expected contribution and comparing it to projected costs at various schools. The two services that publish and process financial aid forms offer free booklets that make such calculations a relatively painless exercise.

Armed with this kind of information, parents can begin to map out realistic and more sophisticated strategies for meeting college expenses. Once they understand exactly how financial need is computed, in fact, parents also can test how various "what-if?" situations might affect both their tax liability and their eligibility for aid. (One rule of thumb: Anything that legitimately lowers a family's adjusted gross income is likely to help.) A variety of techniques then can be employed to maximize the family's eligibility for guaranteed student loans and other forms of financial aid.

Keep in mind, however, that college financial aid officers frequently adjust a family's expected contribution if there are special circumstances (unusually large medical or educational expenses, for example), or if they suspect that income and assets are being shielded in some way. Many ask families to provide copies of tax returns or other documents before making financial aid decisions.

Moreover, many schools simply can't afford to meet the full financial need of all admitted students. So just as it pays to shop around for the "right" college, it probably pays to shop around for the "right" financial aid package. And, if circumstances warrant, it may be a good idea to negotiate with financial aid officers for a better package.

In recent years, increasing numbers of families also have been turning to financial-aid professionals for help. For relatively modest fees, these independent advisers can help them navigate the murkiest waters of the financial aid system, and frequently saved them thousands of dollars in the process.

"Colleges do a very poor job of explaining financial aid, and going to the financial aid office for help is like going to the IRS and asking how to save money on your income taxes," says Chany of Campus Consultants Inc. "That's why people like me are in business."

Finally, students and parents should realize that college shouldn't be viewed simply as an expense. It's really an investment, and an exceptionally good one at that. Even when foregone earnings during a student's college years are taken into account, it's still difficult to make an investment-oriented argument for not going to college. Listen, for a moment, to Secretary of Education William Bennett make the case: "On average," he says, "college graduates earn $640,000 more over their lifetimes than nongraduates do."

As bottom lines go, that one's not bad at all.

Bill Hogan writes for The City Desk, a news bureau for many city and regional magazines.