I would put in a drop ceiling, drywall a room out for the kids, and cover the drywall with a pretty light paneling. That way you dont have to finish the drywall...or you could use a ceiling paint and get it colored to your choice and make the walls textured with a putty knife. We used the paneling in our billiard room and textured the walls in our bar. We even covered the theater walls with a cotton batting and then used curatins to hide the drywall. We spent about 8,000 on our basement including the tvs, pool table, pinball machine, and carpet. Not bad, huh?

Here is a link that might be useful: Our basement

Forget the attic! Here's where you can get extra living space cheap.

Even if it's out of your budget for the moment, leave space for a future bath. You've got a laundry there, so there's supply and drain and you can always add a breather outside if you have to. ("Cottage" vents aren't usually allowed.)

Instead of doing a drop ceiling, and reducing your headroom even further, you could go for the "industrial" or "loft" look with exposed services and the ceiling sprayed a flat black.

And, whatever you do, don't insulate with fiberglass and a tight polyetheylene vapour barrier.