(FORTUNE Small Business) – Ed Tomlinson is determined to make sure his five children are ready for college financially as well as intellectually. So as they get old enough, he puts them to work at California Keyboards, his Bakersfield, Calif., piano retailing business.

Can a few kids really make much difference in a business? No. But they can sweep up, stuff envelopes, and even help recondition pianos, thereby learning the craft. By paying them, meantime, Tomlinson incurs a tax-deductible expense at the same time he's moving money out of the business. The kids don't pay much in taxes, and they put most of their earnings into Roth individual retirement accounts (IRAs), where the money grows tax-free for college.

These are the unconventional tactics that small business owners use to help ease the burden universally feared by American families: the cost of a college education. You've heard the numbers: Four years at such elite institutions as Harvard and Stanford costs more than $100,000. Tuition increases have outstripped inflation for years, and small business owners often earn too much to qualify for need-based aid. The result can be a painful financial hit, and that's to say nothing of graduate school.

As bad as the college crunch is these days, there is good news for entrepreneurs. First, most colleges just aren't that expensive. Among full-time students at four-year institutions, half attend colleges charging less than $4,000 a year in tuition and fees, while 72% of the total full-timers attend schools charging under $8,000. Many are excellent academically. Second, getting financial aid is possible even if you run a profitable business. Merit-based aid is on the increase, especially among the not-quite-top-tier private institutions, and if you play the financial aid game right, you might even qualify for need-based assistance. (See "Getting Through the Financial Aid Maze," page 86.)

Owning a small business gives you some special opportunities to save for college that aren't available to everyone else. As Ed Tomlinson demonstrated, putting your kids on the payroll is one of the simplest and most effective tactics. Phil Johnson, a certified financial planner in Clifton Park, N.Y., notes several advantages. When you hire your kids, their paychecks are tax-deductible to the business. The recipients, meanwhile, pay little or no tax on the money, and until age 18 they're even exempt from the Social Security payroll tax.

Many astute financial planners push this sort of benign child labor a step further by urging clients to set up a Roth IRA for the offspring working in their businesses. By having one, the kids not only enjoy tax-free growth and (if handled right) withdrawals, but also the money disappears from the radar of college financial aid officials, who don't count retirement funds in assessing a family's ability to pay. Business owners can start on something like this as soon as the child is old enough to perform even the most basic tasks, such as dusting or alphabetizing. The Internal Revenue Service is likely to look askance at a three-year-old chief financial officer, but a nine-year-old errand boy is more plausible. And yes, the child does have to perform real work.

If you do put your child to work in the business, consider a company-paid educational assistance program to reimburse employees for tuition. Such a benefit cannot be limited to your children, but if you're careful it can be structured to apply mainly to them--although you might decide that a plan covering more employees would benefit your entire firm. The courses don't have to be work-related, although the IRS requires they be at the undergraduate level. And the payments, which can cover tuition, fees, textbooks, and equipment, are tax-free to the recipient up to $5,250 a year.

Another strategy is to establish a special class of nonvoting stock for your children. "Say you give class B nonvoting stock to a 14-year-old," says James Lund, a certified financial planner in Minneapolis. "As the child goes through college, you could declare dividends to the class B holders." The dividends aren't deductible to the corporation, but the recipient (your child) enjoys a lower income-tax rate than you do. Lund notes that these things have to be structured properly to constitute a bona fide investment relationship, and they can't be done in an S corporation, which only permits a single class of stock. But beware: Increasing your kids' assets can hurt their chances for financial aid.

Of course, entrepreneurs can also try to take advantage of the full panoply of grants, loans, special scholarships, and government programs that are available to all families sending their kids to college. The most common include Education IRAs, Pell Grants, Perkins loans, and Stafford loans. (You can get a full rundown at Websites such as finaid.org.) But business owners are affluent almost by definition, which will make many of these programs difficult to take part in, although it's worth a try. You can put away $500 a year in an Education IRA, for instance, but Lund notes that joint filers lose this benefit entirely when taxable income surpasses $160,000.

Perhaps the best bet for business owners is a new generation of state-sponsored college savings plans known as Section 529 plans. The plans, which are often open to residents of other states as well, typically offer professional investment management, a diversified portfolio of stocks and bonds, and deferred taxes on your earnings, which must be spent on tuition. Even then, gains are taxed at the student's low rate, usually 15%, rather than the 39.6% top federal rate that many business owners must pay. An added benefit is that the parent retains control of the money; if it's withdrawn early for any reason, taxes and a 10% penalty are levied on the gains.

Finally, entrepreneurs shouldn't park their financial acumen at the edge of campus when looking for a way to pay for higher education. Very affluent business owners, who have less chance of getting financial aid, should seek out schools willing to offer merit money. One approach, Johnson says, is to identify competing institutions of lesser renown to see if you can make a deal. If your child is interested in Colgate University, for instance, consider Alfred University, Hartwick College, or St. Lawrence University, all upstate New York liberal arts institutions that may offer a comparable experience but be more willing to pony up aid for a desirable student.

But in the end your child's high school grades, test scores, and extracurricular activities will count for more than the best bargaining skills. Remember, you're not the one going to college. You just get stuck with the bills.