The question of “How are we going to pay for college?” is something that many parents and students continue to weigh every year. Going to college has become more expensive than ever and typically requires money from multiple avenues to pay for an education. In addition, paying for college is a complicated topic with an alphabet soup of acronyms like FAFSA and SAI. Parents worry about missing something important that will affect their child’s future. Here is everything you need to know about saving and paying for college.
The Three Ways Families Pay for College
Most families rely on multiple sources to cover college costs—savings, financial aid, income, and loans. The net price of college is the total cost minus grants, scholarships, and other aid that doesn’t need to be repaid.
A college is affordable if your savings, income, and aid can cover the net price without excessive borrowing. Otherwise, you may need to take on significant student loans. Like any major expense, college costs are typically covered over time:
- Past: Savings from past income (e.g., 529 plans).
- Present: Current income and financial aid.
- Future: Student loans, repaid with future earnings.
Since college is more expensive than ever, limiting how much you borrow is key to long-term financial security.
6 Best Ways to Pay for College
While there are many ways to cut down the total cost of college, you’ll likely want to consider more than one throughout the typical four years it takes to graduate. Here are the six best ways to pay for college that might be relevant to you and your family.
1. Save with a 529 college savings plan
Families can save for future college costs using a 529 plan. A 529 plan is a savings account that provides several tax and financial aid advantages and allows you to pay for college tuition or all of the expenses related to getting that education. Here are the two largest advantages to this over other savings accounts:
- Tax Advantages: More than two-thirds of the states provide a state income tax deduction or tax credit based on contributions to the state’s 529 plan. Earnings accumulate in the 529 plan on a tax-deferred basis and are entirely tax-free if used to pay for qualified higher education expenses.
- Financial Aid Advantages: If a 529 plan is owned by the student or the student’s parent, the 529 plan is reported as a parent asset on the FAFSA, and distributions are ignored. This has a minimal impact on the student’s eligibility for need-based financial aid.
In addition, your extended family may be able to contribute to your children’s educational costs. With a 529 plan, other family members – such as grandparents – can make contributions to your 529 account or even open their own.
The best 529 plans offer several other key benefits, such as reducing the need for student loans and increased flexibility in college choice. Every dollar saved is a dollar less borrowed, but where you save matters. A 529 plan has a minimal impact on financial aid compared to savings in a checking account.
If your state of residence offers a state tax deduction or credit for 529 contributions, it will help reduce your taxes each year, providing you with a little extra to put back into your 529 college savings account.
2. Apply for federal financial aid
Most students who are U.S. citizens and permanent residents may qualify for unsubsidized federal student loans and federal parent loans by filing the FAFSA if they are enrolled at least half-time.
Students with financial need may also qualify for subsidized federal student loans. The federal government pays the interest while the student is in school and during the 6-month grace period after the student graduates or drops below half-time enrollment.
Students should always borrow federal first, as federal student loans are less expensive and have better repayment terms than private student loans and parent loans.
If a student needs to borrow from the Federal Parent PLUS loan program or private student loans, it may be a sign that the student is borrowing more money than they can afford to repay. As a general rule of thumb, if the student loan debt at graduation is less than the student’s annual starting salary, the borrower should be able to repay their student loans in 10 years or less.
3. Get free money from grants and scholarships
Use a free scholarship search site, such as Fastweb or the College Board’s Big Future, to find scholarships. Never invest more than a postage stamp to find out information about scholarships or to apply for a scholarship. If you have to pay money to get money, it’s probably a scam. Grants are similar—you can apply for need-based grants or earn money through merit-based awards for specific skills.
4. Use cash from savings and work
You may choose to keep savings in a non-529 account for various reasons. While there won’t be any tax benefits to doing it this way, there aren’t any restrictions to how you spend your money, so you could use these funds to pay for expenses considered non-qualified for 529 plans.
In addition, many parents pay for college expenses out of current income and savings. If you have a 529 plan and are in a state that offers a tax benefit for 529 contributions, you may wish to deposit this money in the 529 account first to take advantage of that benefit.
5. Work during school
One good way to pay for school, especially for students with full or partial scholarships, is to work part-time while in school. This can help pay for room and board, books, or tuition.
Working full-time during the summers can help pay for next year’s expenses. However, this is becoming increasingly more difficult for students who need to pay for their whole education because it has become so expensive.
6. Apply for private student loans
As a last resort, you may want to consider private loans. It’s important to know how much these loans will cost to pay back and consider whether a student’s chosen major and profession will provide enough income to make these payments. And keep in mind private loans typically start accruing interest immediately, though some lenders offer in-school deferment options.
Other Ways to Reduce College Expenses
About half the cost of a college education involves living expenses, such as room and board, books, supplies and equipment, transportation to and from college, and miscellaneous/personal expenses. Each of these presents an opportunity to save on college costs.
- Live with someone: If your parents are nearby, you can cut the cost of room and board by living at home with them. You can also live off-campus and split the rent with a roommate.
- Get good grades: Improve your academic performance. Getting good grades and admissions test scores can affect eligibility for academic scholarships at some colleges. Some private scholarships also depend on your grades and test scores. Maintaining good grades is often required to renew your scholarships in subsequent years.
- Buy cheap textbooks: Buy used textbooks and/or sell your textbooks back to the bookstore at the end of the semester. Ask the professor for their evaluation copy of the textbook. Or borrow the textbook from the college library. Rent the textbooks. Share textbooks with your roommate and other friends. Buy only the required textbooks. These tips can save about half of textbook costs.
- Don’t visit home as frequently: You can minimize the number of trips home from college. Don’t bring a car to campus, as parking costs can be expensive. Use public transportation and ride-sharing instead. If you bring a car to campus, driving for Uber and Lyft can earn you extra money when you have free time.
Your goal should be to live like a student while you’re at college, so you don’t have to live like a student after you graduate. Here are some other ways that you can reduce your overall college expenses related directly to your tuition costs:
Choosing a more affordable school
One of the best ways to cut college costs is to enroll at a less expensive college. Students should apply to several colleges based on academic and financial fit. Use the college’s net price calculator to get a personalized estimate of the net price to evaluate the college’s affordability.
The least expensive options generally include in-state public colleges, colleges that offer “no loans” financial aid policies, and free tuition colleges. A private college is generally the most expensive option.
Earning college credit in high school through AP, IB, or dual enrollment can reduce the number of semesters needed, lowering total tuition costs.
Studying Abroad
Studying abroad for the student’s entire educational program may be less expensive than U.S. private colleges, even with added travel costs, but just as prestigious. The Federal Pell Grant and some other federal grants may be available for study abroad if the program is administered by a U.S. institution. If this isn’t the case, the programs may not be available when studying abroad.
Community College
Although taking a detour through a community college on your way to a Bachelor’s degree may save some money, you may ultimately miss your destination. Only about 20% of community college students who intend to earn a Bachelor’s degree complete one within six years. However, structured transfer programs with clear articulation agreements improve success rates.
Take a Gap Year
A gap year may give you time to earn money to pay for college. However, the money will count against your eligibility for need-based financial aid. Also, students who take a gap year get out of the habit of studying and are less likely to enroll in and graduate from college.
High School Programs
You can earn college credits in high school through dual enrollment programs and AP, IB, CLEP, and PEP tests. Look on the college’s website to learn about their test requirements for awarding college credits. Even if you earn college credit, it may serve as general credits only and not substitute for specific prerequisites.
Tips for Applying for Financial Aid
Only a tiny percentage of the college population never has to borrow any money to go to school. Even families that saved for college often borrow at least part of their educational expenses. This is why knowing how to navigate the financial aid process is important. Here are some of the best tips to lower your total borrowing costs.
Fill Out the FAFSA as Early as Possible
To apply for need-based aid, file the Free Application for Federal Student Aid (FAFSA). The FAFSA is your gateway to grants from the federal and state governments, as well as most colleges and universities. Less than 200 mostly private colleges use a supplemental form called the CSS Profile for their own financial aid funds, but these colleges must still use the FAFSA for federal aid and state aid.
Families should file the FAFSA every year, as close as possible to the date the form becomes available, even if they received only student loans last year. Subtle changes in the family’s circumstances can greatly impact the amount and types of financial assistance you receive. For example, increasing the number of children in college from one to two can be like dividing the parent income in half.
Other factors that can affect aid eligibility include changes in income and assets, dependency status, and marital status. Families also tend to overestimate eligibility for merit-based aid and underestimate eligibility for need-based aid.
Free help completing the FAFSA is available from the U.S. Department of Education’s Federal Student Aid Information Center (FSAIC) at 1-800-4-FED-AID (1-800-433-3243). The FSAIC also runs Twitter chats via @FAFSA and #AskFAFSA. The National College Access Network (NCAN) sponsors free College Goal Sunday programs in many states that provide one-on-one help completing the FAFSA.
Be sure to appeal for more financial aid if the family is affected by special circumstances. Special circumstances include anything that changed since the base year and anything that distinguishes the family’s ability to pay from that of the typical family. This can include job loss, salary reductions, high unreimbursed medical and dental expenses, high dependent care costs for a special needs child or elderly parent, casualty losses, private K-12 tuition, parents enrolled at least half-time in college, homelessness, and disability-related expenses.
Take Advantage of Educational Tax Benefits
There are several education tax benefits that can be claimed when you file your federal income tax returns. These include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit (LLTC), which are based on amounts paid for college expenses. The Student Loan Interest Deduction also provides an above-the-line exclusion from income for up to $2,500 in interest paid on federal and private student loans.
File for Employment-Based Aid
You can find several types of financial aid that are based on employment. When you file the FAFSA, you may qualify for Federal Work-Study (FWS) and other forms of student employment. Even if you don’t qualify, there are plenty of part-time jobs, summer jobs, and paid internships on or near college campuses.
Some employers provide employer-paid tuition assistance. As much as $5,250 a year in employer-paid tuition assistance is excluded from income. Most employers require you to get at least a B for your tuition to be eligible for reimbursement.
Some employers offer tuition reimbursement, and some professions provide Loan Repayment Assistance Programs (LRAPs) after graduation, particularly in fields like law, medicine, and public service. LRAPs typically provide $100 or $200 a month in student loan payments. These payments are counted as taxable income to the employee under current law. Military student aid can provide money for college in exchange for enlisting in the U.S. Armed Forces. You can receive ROTC scholarships for one year before committing to military service.
The Bottom Line
College is more expensive today than it has ever been, so it’s important to understand how you plan on paying for school before deciding to move forward. If you don’t have a financial plan beforehand, you’re more likely to borrow more money than you need and cost yourself quite a bit of money down the road. While college is expensive, preparing financially can be the key to getting the career you want without sacrificing your financial future.
Frequently Asked Questions (FAQs)
How do most parents pay for college?
The best way for parents to pay for college is to open a 529 savings plan for their child and start contributing monthly. They can also get others, such as the child’s grandparents, to contribute to these accounts. While parents are still contributing less than half of their kids’ educational expenses, they are still contributing as much as possible on average.
How do average parents pay for college?
On average, most parents pay for less than half of their kid’s college education. Students use their income, scholarships, and loans to help pay for the rest of their schooling. Parents should consider not taking out loans for their kids to attend school because they can hurt their retirement chances. The best thing parents can do is to open a 529 plan and save as early and often as possible.
How do I pay for college if I have no money?
Not having enough money to go to college can seem pretty overwhelming, but there are steps you can take to lower the total cost and help you afford school. You can get grants, scholarships, and work during school to cut down the costs. You can also go to an affordable school and find ways to reduce living expenses. There are things anyone can do to go to college if they’re willing to put in the time and effort.
