Financing College

According to the National Center for Education Statistics, the average tuition and fees for full-time undergraduate students in a public four-year institution increased by 13% from 2010 to 2020. What’s more, The Education Data Initiative estimates the average public university student borrows $30K to receive a bachelor’s degree. Regardless of whether your children are newborn or in high school, it’s worth your time to explore what financing options are available to help you cover the costs of a post-secondary education.

529 Plans

College savings plans and prepaid tuition plans offer tax benefits when funds are used to pay for qualified education benefits on behalf of a designated beneficiary.  Distributions from a 529 plan are not taxable when paying for qualified higher education expenses. However, withdrawals must happen in the same year as the qualified expense. Qualified expenses include tuition and fees, room and board (including off-campus housing), as well as books and special needs equipment.  While there are no annual contribution limits on 529 plans, contributions count as gifts for gift-tax purposes. 529 plans can be left open after graduation and used to repay student loan debt.

Scholarships

Scholarships—both merit-based and those based on financial need-can be used to reduce the cost of post-secondary education and do not have to be paid back.  Some scholarships may cover the full cost of tuition while others come in the form of a one-time award.  Because student aid cannot exceed your total costs, any scholarships that are awarded will affect other student aid that may be available to you. Ideally, students should start applying for scholarships the summer between their junior and senior years of high school.  Potential sources to learn about scholarship opportunities include high school counselors, college financial aid offices, the US Department of Labor’s online scholarship search tool, religious or community organizations, local businesses, professional associations related to the field of interest, ethnicity-based organizations, and employers (of both the student and the parents).    

FAFSA

Every year on October 1, the Free Application for Federal Student Aid (FAFSA) becomes available for the next school year.  Federal student aid includes federal grants, work-study, and loans.  The FAFSA information is also used by states, colleges, and even private financial aid providers to determine whether or not a student qualifies for aid. Student eligibility for federal student aid is dependent on the family’s expected financial contribution, enrollment status, the student’s year in school, and the cost to attend the student’s chosen school. Financial need is calculated by subtracting the expected family contribution from the cost of attendance. Need-based federal student aid includes federal Pell Grants, Direct Subsidized Loans, and Federal Work-Study. Unfortunately, not all students complete the FAFSA.  Some students and their parents feel they can afford college costs without financial aid while others feel they will not qualify for financial assistance. 

Federal Student Loans

Non-need-based financial aid—including Direct Unsubsidized Loans and federal PLUS Loans—are available to fill the gap between the cost to attend college and the amount of need-based funds awarded. Direct Unsubsidized Loans are available to both undergraduate and graduate students and there is no requirement to show financial need. Unlike Direct Subsidized Loans, the student is responsible for paying interest on the loans while enrolled in college. Direct PLUS Loans are available to eligible parents of dependent undergraduate students as well as graduate and professional students.  In order to receive Direct PLUS Loans, the applicant must be the biological or adoptive parent and not have an adverse credit history.  Grandparents and legal guardians are generally not eligible to receive parent PLUS loans.

Private Loans

After college savings plans, scholarships, and Federal student aid have all been exhausted, parents may need to look at private loans to cover the remaining cost of college. These non-federal loans are backed by banks, state agencies, or schools. Private loans have terms and conditions set by the lender, as opposed to federal student loans, which are made by the government with terms set by law. Depending on a borrower’s credit history and prevailing interest rates, private student loan rates may be more desirable than federal parent PLUS loan rates.