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College Planning

How to pay for college

Worried about how to pay for college? Here are some basic tips to help you plan for college costs now so that you can be prepared for the future.

How to pay for college is something that's on the mind of many parents and students today. With rising tuition costs, it takes a little bit more effort to develop a good strategy to save for higher education.

Whether you're a new parent and want to start saving for college now or a college student who is trying to set a budget with your parents for how to pay for college, you'll want to be financially prepared.

Saving for college

Saving for college is a multi-year, multi-step process, and it's never too early to start. Try not to be daunted by the whole price tag; break down the cost and plan early. The good news is that there are options to consider such as a 529 plan.

What is a 529 plan?

A 529 plan is one way to save for college. It's a tax-advantaged plan that's designed to encourage saving for future higher education expenses of the beneficiary (typically a child or grandchild). Plans are administered by state agencies and organizations as a way for people to save for qualified educational expenses, such as tuition, room and board and textbooks.

When you're ready to withdraw the money to pay for college expenses, your withdrawal will be tax-free. Additionally, 529 plans may have a smaller negative impact on a student's financial aid award compared to funds kept in other types of checking or savings accounts.

Types of 529 plans1

Savings plan

The first type of 529 is an investment account. You add money to your account and invest it in a variety of different mutual funds. All 50 states offer these 529 plans, and they are often more flexible because you can use the money for most qualified college expenses including tuition, room and board and textbooks.

  • No lock on college costs.
  • Covers all "qualified higher education expenses," including tuition, room and board, mandatory fees and books and computers (if required)
  • Many plans have contribution limits in excess of $200,000.
  • No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.
  • No age limits. Open to adults and children.
  • No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisors or brokers.
  • Enrollment open all year.

Prepaid tuition plan

The second option is a prepaid tuition 529 plan. With these plans, you prepay for semesters of college tuition at today's rates. This locks in the price so you don't have to worry about college tuition going up in the future. These plans are more restrictive and not all states offer them. You need to be aware that these types of 529 plans only lock in the tuition at schools listed on the plan. If your child attends a school that isn't on the list, you'll be able to transfer over the value of your account, but there's no guarantee that it will be enough to cover the full cost of tuition. Also, the prepaid plan in your area may not be able to be used for expenses beyond tuition, such as textbooks or room and board. Be sure to investigate plans in your area thoroughly if this is an option you're considering.

  • Locks in tuition prices at eligible public and private colleges and universities.
  • All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.
  • Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.
  • Many state plans are guaranteed or backed by state.
  • Most plans have age/grade limit for beneficiary.
  • Most state plans require either owner or beneficiary of plan to be a state resident.
  • Most plans have limited enrollment.

Other options for saving for college

Coverdell Education Savings Accounts are another way to save tax-free for college and/or kindergarten through 12th grade, allowing you to save up to $2,000 a year per account per child. Learn more about Coverdell Education Savings Accounts from IRS.gov

Paying for college

Saving for college is only one part of the equation. Once a child heads off to school, it's time to focus on paying for college. This is when you can combine your savings with scholarships and other options to help cover costs.

Financial aid

The first step when planning how to pay for college should be to fill out and submit the Free Application for Federal Student Aid (FAFSA) to determine eligibility for financial aid, including federal grants, work-study and loans.

The FAFSA is essentially the gateway to federal student aid. Upon completion of the form, the student's financial information (including parents' information if the student is a dependent) will determine how much federal student aid they may qualify for. This information also determines eligibility for low-cost federal education loans. 

Many parents and students look to financial aid in the form of student loans. While student loans may be necessary at some point, doing your homework can help you borrow as little as possible.

Private student loans are also an option. Financial institutions offer student loans, which can be taken out by both parents and students.

Grants and scholarships

The best options when paying for school are the ones that come at no cost to you. Below are a few places to look for money that you don't have to repay:

  • Scholarships.com: Provides a huge database of available scholarships based on everything from grades to hobbies and religious affiliations.
  • FinAid: Has a searchable database of scholarships, grants and work-study opportunities.
  • Fastweb: This is another site that has a portal featuring a large database for scholarship searches.
  • Pell Grants: Pell Grants are need-based awards offered to qualifying students who are pursuing their first bachelor's degree at an accredited college or university. Students apply for Pell Grants by filling out the FAFSA.

Budgeting during college

During college, money can feel tight. However, this is a great time for students to start learning how to make a budget and stick to it.

Here are some ways college students can stick to a budget:

  • Set smart spending expectations: Realize that there are a lot of college expenses beyond room, board and tuition. Make a budget to get a handle on that extra spending and put a little bit aside for savings when possible.
  • Consider a part-time job: Many students find part-time work to help pay for school. On-and-off campus jobs are popular, and a lot of schools offer work-study programs through their financial aid offices.
  • Take advantage of campus resources: Most colleges and universities will have all sorts of activities and resources for students to use free of charge. This includes library services, gyms, mental health and health care services.
  • Buy used books: A huge expense can come in the form of textbooks. When possible, stick to used books or look for discounts online.
  • Monitor credit cards: Students who use credit cards responsibly and pay off the balance each month can start building good credit.

Paying student loans

Payments on federal student loans are usually delayed until graduation, and interest may be subsidized. Students may want to consider consolidating a variety of loan debts into one comfortable and easy payment for budgeting purposes.

Once payments are established, it's important to include them in a budget and pay them on time to avoid penalties and negative effects on credit scores.

If someone finds themselves under financial strain, they may be eligible to temporarily postpone or reduce payments during periods of financial hardship by requesting a deferment, extended repayment or income-based repayment plan. While not always ideal, it's better than defaulting on payments.

Also note that many people who work full time in a public service job may be eligible for loan forgiveness under the Public Service Loan Forgiveness Program to help pay for student loans.

More college money saving tips

When it comes to saving for college or finding ways to make college more affordable, here are a few other strategies to consider:

  • Online classes: A number of accredited colleges and universities offer online courses. Usually, these can be more affordable and the credit can transfer to other institutions.
  • In-state tuition: In many states, the price of public colleges and universities are more affordable for those who live in-state.
  • Regional reciprocity: Certain multi-state regions, such as New England, offer subsidized rates for students who live in that regional area. 

Even if college is far off on the horizon, it never hurts to start saving for college and planning for how to pay for college. Developing a plan and sticking to a budget can go a long way toward reducing the financial burden of paying for college and can make the dream of higher education a reality.

 

1. Source: Smart Saving for College, FINRA®


NOTE: As of 2018, the IRS has amended the term “qualified higher education expense” to include a limited amount of annual expenses from a 529 Plan for tuition at an elementary or secondary public, private, or religious school. Source: www.irs.gov/newsroom/529-plans-questions-and-answers

 

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