Use local Freecycle or other trading organizations to find materials for free. Many people keep old clothes around the house that need to go to charity, or even swatches of leftover material that need to be tossed.
Convert old clothes into costumes. If you're clothing young children, you can alter adult teen and adult outfits to suit your needs. Consider chopping off pants and shirts and doing a quick hem job to clothe your child for her school play.
Request clothes and raw materials from local retailers. Many department stores and specialty shops allocate a certain amount of money or materials for charity each year. If you don't ask, you'll never know what is available.
Visit charity shops like Goodwill or Salvation Army for inexpensive costume options. Charity shops often have real children's costumes that require little renovation. Your school will also be helping a good cause by buying from these establishments.