How to pay for college

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If you’re intimidated by the rising cost of college tuition, you’re not alone. Paying for college is a major challenge, with student debt currently the second-highest consumer debt category in the country, following mortgage debt.

However, there are ways to help ease the overall financial burden facing students and their families. Here are some of the top tips to help defray the cost of college in the United States.

The rising cost of college tuition

Between the 1989-90 and 2019-20 school years, the average cost of college tuition and fees tripled at public four-year colleges and more than doubled at public two-year and private non-profit four-year institutions, according to College Board.

Meanwhile, nearly 43 million Americans, or about one-sixth of the country’s population above 18 years old, has a federal student loan. These loan holders owe $1.5 trillion in federal student loan debt – a figure that doesn’t even account for private student loans, which totals another $119 billion in debt. Borrowers from the class of 2018 left college with on average of about $29,200 in student loan debt.

“The costs of attaining a higher education are increasing so rapidly that it seems the only option for many students seeking this personal growth of going to college is to take out loans,” says Tobin Van Ostern, co-founder of Savi, a public benefit corporation focused on helping to solve the student debt crisis. “Gone are the days of affording tuition on a part time job.”

10 tips for paying for college

There isn’t one best way to pay for college; the right option for you depends on your financial circumstances. When considering how best to fund your education, consider the following options:

  1. Apply for scholarships and loans early.
  2. Save in the right name.
  3. Consider your repayment options.
  4. Prioritize payments.
  5. Enlist help from relatives.
  6. File the FAFSA.
  7. Find the right schools.
  8. Save early.
  9. Search for select scholarships and loans.
  10. Compare 529 plans.

Tip 1: Apply for scholarships and loans early

It can be advantageous to apply for scholarships early, particularly because there are some scholarship programs that place limits on the number of applications they will consider. If you delay applying, it’s possible that your application may not be accepted.

“The sooner you begin the scholarship application process, the more options you’ll have for handling college costs when other financial resources are not enough, and the less likely you are to rely on loans,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling (NFCC).

What’s more, it can take as long as one month for your loan applications to be processed, he adds, so the sooner you start the application process, the more likely the funds will be ready when you need them.

Early birds also have an advantage when applying for federal student aid. While private scholarships have their own application deadlines, students can apply for federal financial aid starting October 1. Since some federal awards are given out on a first-come, first-served basis, applying early can pay off.

Tip 2: Save in the right name

Where you save can count just as much as how much you save. To make sure that your college savings aren’t detracting from your family’s financial aid package, it’s a good idea to put all assets in the adult parents’ name, says Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com. Money held in the student’s name can impact a family’s expected contribution and thus lower the financial aid package.

Student assets, which is any cash stored in a checking or savings account, a business venture, real estate or an investment in the child’s name, are assessed at a rate of 20 percent. This means that for every dollar the student saves, the federal government will subtract 20 cents of every dollar in the student’s financial aid package.

“Thus, $10,000 in the student’s name can reduce eligibility for need-based financial aid by $2,000,” said Kantrowitz.

The assessment rate for parental assets is much less stringent. A maximum of 5.64 percent of a parent’s assets are assessed on the Free Application for Federal Student Aid.

The two exceptions are 529 college savings plans and Coverdell education savings accounts. Funds in these types of accounts are assessed at the parental rate, regardless of whether they’re held in the student’s or parent’s name.

Tip 3: Consider your repayment options

One major drawback of working in public service is that the salaries that come with jobs in fields such as social work, public defense and education are sometimes substantially lower than salaries in other fields.

If student debt is holding you back from pursuing a public service job, the government is here to help. Under the federal Public Service Loan Forgiveness Program, students who have Direct Loans (which are only federal loans, not private) and who work full time in public service fields are eligible to have any leftover federal debt forgiven after they make consecutive monthly payments for 10 years.

However, Kantrowitz points out that because of the complexity of the program, less than 3 percent of borrowers who apply for public service loan forgiveness have actually been approved.

Borrowers might also consider applying for federal income-driven repayment plans, which generally set student loan payments at 10 percent to 20 percent of your discretionary income, depending on the plan.

Tip 4: Prioritize payments

The federal financial aid formula considers assets such as stocks, mutual funds, certificates of deposit and rental properties that your family owns, but some other investment vehicles, such as retirement plans, life insurance plans and equity in your family’s primary residence, aren’t included in the federal financial aid formula.

Parents may, but don’t always, qualify for more financial aid if they store assets in places that aren’t considered on the FAFSA. That includes paying off unsecured debt like personal loans. Money owed to credit card companies or on auto loans aren’t considered in the federal needs formula.

Tip 5: Enlist help from relatives

Parents and students don’t have to shoulder the burden of college costs alone. Grandparents and other family members can contribute to a student’s 529 plan, and there are perks built in for those who give big.

The IRS allows individuals to give financial gifts of up to $15,000 per year per beneficiary to a 529 plan without paying a gift tax. All 529 plans come with an additional caveat that allows donors to give a financial gift of up to five years of funds at a time, for a total of $75,000, without incurring gift taxes, as long as the total amount of the gift averages out to $15,000 per year.

Tip 6: File the FAFSA

The Free Application for Federal Student Aid (FAFSA) — the document that makes students eligible for federal grants and loans — looks intimidating, but that shouldn’t scare students away.

The FAFSA not only qualifies students for federal aid, it also may qualify students for awards given out through their colleges or through private scholarship programs.

Low-income students, for instance, can qualify for the Federal Pell Grant, which provided up to $6,345 for the 2020-21 school year.

“Some families mistakenly believe that filing the FAFSA will require them to borrow, or that they earn too much money to qualify for financial aid, or that it will take hours to complete the FAFSA,” says Kantrowitz. “It takes most people just half an hour to file the FAFSA. There’s even an app version of the FAFSA, which is very easy to submit.”

It’s also important to note that even though filing the FAFSA is a prerequisite for getting low-cost federal student loans, those who complete the application will not be required to borrow money. Financial need is also based on the difference between college costs and the expected family contribution (EFC), so even wealthy families may qualify for financial aid at high-cost colleges.

Tip 7: Find the right schools

Colleges and universities vary dramatically in how much financial aid they have available to give. Certain schools offer full-tuition scholarships, while some “work colleges” offer free or reduced tuition in exchange for student work.

Tuition-free colleges are rare. Even historically free schools have started charging some tuition in recent years. Still, many pricey institutions offer deep discounts to low- and moderate-income students. Head to the National Center for Education Statistics’ College Navigator to research average financial aid packages by income bracket.

Tip 8: Save early

The golden rule of college finance still rings true: Start saving early to maximize the compound interest. According to Bankrate’s college savings calculator, parents who start investing $200 per month when their child is born will have about $76,500 in that account by the time their child turns 18, assuming a 6 percent rate of return. In contrast, parents who begin investing when their child is 10 years old will accumulate only $24,500 with the same rate of return.

“Time is your greatest asset. If you start saving from birth, about a third of your college savings goal will come from earnings,” says Kantrowitz. “If you wait until your child enters high school, less than 10 percent will come from earnings, and you’ll have to save six times as much per month to reach the same college savings goal.”

Tip 9: Search for select scholarships and loans

The best way to maximize your chances for winning a scholarship is to first apply for those you’re most likely to win or those given on a first-come, first-served basis.

That may mean applying for federal aid first or asking your college of choice for funds and rooting out awards offered through local organizations, clubs and professional groups.

There are also many companies that offer student loans for different needs, with loans designed for students entering high-income fields, loans for students without co-signers and loans for people with bad credit. If you’ve maxed out your federal student loans, these private companies could be a good supplement.

Tip 10: Compare 529 plans

Some 529 college savings plans vary dramatically on fees, investment options, tax incentives and rates of return. While some offer generous state tax deductions, others offer little or no state tax incentives.

When comparing plans, research 529 plan ratings through organizations such as Morningstar, look into your home state’s 529 plans first to figure out what state tax incentives you may be eligible for and remember that you can invest in any state’s 529 plan, not just where you reside.

How to deal with student loan debt after college

If you have a federal student loan, you may be eligible for programs like Public Service Loan Forgiveness, which forgives your remaining student after 120 consecutive payments, or income-driven repayment plans, which could lessen the amount you have to pay each month.

Borrowers who have private loans might consider refinancing their loans after finishing college in order to receive a lower interest rate or better repayment terms that fit their needs. You can also refinance your federal loans into a private loan if you spot a particularly good interest rate, though keep in mind that you’ll lose the benefits of the federal program.

There are many companies that will refinance private student loans, including SoFi, College Ave and Splash. The key is to shop around and make sure that you’re getting the best rate possible and that you understand the terms of loan.

Featured image by Tyler Olson of Shutterstock.

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