How to pay for college: 9 tips to consider

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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. Between the 1990-91 and 2020-21 school years, the average cost of college tuition and fees more than doubled at public four-year, public two-year and private nonprofit four-year institutions, according to College Board — and that’s accounting for inflation.

The good news is that 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 those costs.

9 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 to pay for college, consider the following options:

  1. File the FAFSA.
  2. Apply for scholarships.
  3. Start saving early.
  4. Prioritize payments.
  5. Get help from family.
  6. Compare 529 plans.
  7. Choose an affordable school.
  8. Take out federal student loans.
  9. Apply for private student loans.

1. File the FAFSA

The Free Application for Federal Student Aid (FAFSA) looks intimidating, but that shouldn’t scare students away. The FAFSA qualifies students for federal aid and some state and institutional aid. Low-income students, for instance, can qualify for the Federal Pell Grant, which provides up to $6,495 for the 2021-22 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 Mark Kantrowitz, a financial aid expert. “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 accept the aid that’s available. 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.

2. Apply for scholarships

Scholarships are one of the best ways to get help paying for college because you generally don’t have to repay them.

Start with the scholarships that your school offers, then use scholarship search engines like Scholarships.com and Fastweb to find opportunities that you qualify for.

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).

3. Start saving early

The golden rule of college finance still rings true: Start saving early to maximize the compound interest. A college savings calculator shows that 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.”

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 and credit cards or an auto loan.

5. Get help from family

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 needing to disclose the gift to the tax agency. 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.

If a family member is considering this, encourage them to speak with a tax professional to make sure that it’s executed correctly.

6. Compare 529 plans

A 529 college savings plan allows you to set aside money for qualified educational expenses. Money that you contribute will grow tax-free and can be withdrawn tax-free as long as it’s for an eligible expense.

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 few 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.

If your state doesn’t offer tax benefits and you can get more investment options and lower fees through another state’s plan, consider using that one instead of what your state offers.

7. Choose an affordable school

The cost of college and the amount of aid available varies immensely by institution. Certain schools offer full-tuition scholarships, while some “work colleges” offer free or reduced tuition in exchange for student work.

Still, many pricey institutions offer significant 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.

Also compare the total cost of attendance for each school you’re considering. You can usually find this information on the school’s admissions page online.

8. Take out federal student loans

If you’ve exhausted all of your other options for getting money to pay for college, consider borrowing federal student loans.

Federal loans are relatively inexpensive, especially for undergraduate students. If you’re an undergrad with financial need, you may qualify for subsidized loans, where the government pays the loan’s interest while you’re in school and during future deferment periods.

To apply for federal loans, all you need to do is fill out the FAFSA. For most loans, there’s no credit check, and you’ll get the same interest rate as everyone else who qualifies for the program. When you receive your financial aid award letter, you can decide how much you want to borrow based on what you’ve been offered.

Federal student loans are typically the first choice for students who need to borrow money for college, since they come with benefits that private student loans can’t offer. For instance, they have extensive deferment and forbearance options, plus opportunities to have some of your balance forgiven through income-driven repayment plans or Public Service Loan Forgiveness.

9. Apply for private student loans

Private student loans are another way to cover the cost of college. However, they’re generally considered to be the last resort option, even compared to federal student loans. Private loans typically require a credit check to get approved, which means that it can be tough to qualify as a college student with little or no credit history.

Even if you get approved, your interest rate is based on your creditworthiness, so your loans could be expensive.

With that said, most lenders allow co-signers, which can help you qualify and get a low interest rate. However, this also means the loans show up on the co-signer’s credit report, which could make it difficult for them to get approved for credit in the future.

Even so, if you’ve exhausted your allotment of federal student loans, which are capped on an annual and aggregate basis, private student loans can be a much better option than higher-interest options like credit cards and personal loans.

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 loan balance 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.

The key is that you create a plan for your student loans based on your goals and budget. With the right strategy, you could end up paying off your debt early, saving money on interest and even getting some or all of it forgiven.

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