Financing a College Education

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The Savvy Student's Guide to College Education—Chapter Six

The Big Picture

There's certainly no question that college costs a lot of money—much more than when your parents were growing up—and most students aren't going to be able to afford college without a plan, and without some help. While most pre-paid tuition plans are designed for younger students, some can still be of benefit to older students, and a 529 savings plan can help out any student, regardless of age. The process of applying for financial aid is a joint effort among the federal and state governments and the college you'll attend. This partnership often requires a lot of paperwork from students and their families, but it does leave them with some strong payment choices, including some that don't have to include loans. The role of loans is always one to think about carefully, and so is the idea of using some creative approaches to paying for college, including new home mortgages, starting at a community college, and earning college credits while going to high school. All of these options should lead each student to carefully consider if college is the best choice for them, and if so, what kind. At the same time, the advantages of college go beyond the price tag and the financial benefits, a point that is as important now as it ever was.

It used to be that the most challenging part of getting into college was filling out the application on time. All colleges admitted most of their applicants, and with a strong summer job and a little of Mom and Dad's savings, college could be paid for, books and all.

Things have certainly changed. A number of colleges now admit less than 20 percent of the students who apply, and more students who are admitted to any college are looking for some kind of financial help as never before.

Looking at the many ways to pay for college may be daunting at first, but with a little patience and a few strong websites, you'll soon discover you don't need a college degree in Business to figure out how to pay for your college degree in anything.

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Savings Plans

If you're a student reading this, you might be thinking “OK, something I can skip. Mom and Dad didn't buy one of those pre-paid plans when I was young, so this isn't for me.”

A number of states do offer savings plans that get you the biggest return if they're purchased early, but there are also some that can realize big savings now. Just in case you have a much younger brother or sister, the list of states that offer a pre-paid tuition program. Since these are all state-based plans, they each have their own rules and limitations, so you'll want to read the rules carefully for the one in your state—but in general, here's how they work:

The rate of return also varies by state, and by program, so there are a few that can be purchased when the student is older that might still be a good investment. This is something to check with each individual plan.

No matter how old the student is, and even if the parents have bought a pre-paid contract, many states also offer a 529 savings plan. These plans work a little differently than pre-paid tuition plans:

Some families choose to start both a pre-paid tuition plan and a 529 plan, so they can begin to save for both tuition (pre-paid tuition) and other college expenses (529 plan). Either way, the question comes up—are these plans better investments than if the parents simply took the money and invested it in the stock market, or with a financial planner?

A quick look at the summaries of the effect of these plans suggests the answer is—it depends. Many states have different kinds of investment plans with different levels of possible return and possible risk, leaving it up to the investor to decide what plan best suits their comfort level. In addition, some families feel they need the structure of an official college plan to make sure they set something aside for college. Many of these families don't have other investments, or they feel that, if they did, it would be too tempting to use a general investment fund for something else, like a trip to Disney World.

On the other hand, general investments aren't a sure thing either, and any investment with a financial planner involves fees to pay them. Then again, some students feel limited by their college choice if their parents invest in a pre-paid tuition program. Sure, they will still get their money back, plus a little more (usually), but that kind of seems to defeat the purpose of having the tuition paid up front.

Families considering these plans should look carefully at the specific rate of return and limitations of the benefits—but either way, they need to start saving for college. When the cost of college was soaring about twenty years ago, there was a feeling the government would intervene in some way, and offer free college for everyone. That plan is still being talked about, but it doesn't seem to be coming any time soon—and families qualifying for current federal aid generally need something more to pay the full college bill. So look at your options, and start saving—if you end up going to college for free, you could always use the money for something else, like a trip to Disney World.

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Applying for Assistance in Paying for College

Whether you've put money away for college or not, it's likely you're going to apply for help to pay for college. The process is easy to describe, and requires help from your parents. Ready?

Complete the FAFSA

The Free Application for Federal Student Aid (FAFSA) is the first step in applying for financial assistance with college. Created and maintained by the federal government, the answers you give on FAFSA are first sent to the US Government, where they determine if you qualify for any of the federal assistance programs. These programs fall into three categories: Grants, or need-based money you receive that you don't have to pay back, as long as you keep your grades up; Work study, where you work about 10 hours a week at your college, and most (or all) of your paycheck goes back to the college to pay for tuition; and Loans, or money you use to pay for college that you must pay back.

Generally speaking, until the student turns 24, they have to complete the FAFSA using both their income information, and their parent's income information. It doesn't matter to the government if you're not living with your parents, or if they have refused to pay for college, even if they have the money. In most cases, their incomes will be taken into consideration when you apply for aid. (To see the exceptions, which are important, take a look at the Federal Student Aid website, which has everything you need to know about federal financial aid.)

Once the federal government receives your FAFSA, they generate a number called the Expected Family Contribution, or EFC. The EFC is then shared with your state, and with the colleges you've applied to. Some states, and each college, have their own financial aid resources they can use to help students pay for college, so once they get your EFC, they try to figure out how much help they can give you.

An example should help here. Let's say your family completes the FAFSA, and the federal government says your family can spend $10,000 a year on college. That's your Expected Family Contribution, or EFC.

You want to go to a college where the cost of attendance (that's tuition, room and board, books, and personal fees) is $15,000. Since you can only pay $10,000, you need $5000 more to go to college.

After you complete the FAFSA, the federal government decides you qualify for $1000 in grant, $1600 in work study, and $1000 in loan. That's $3500 in aid of the $5000 you need, meaning you need another $1400.

At this point, all that information is shared with the college. They may want more information about your finances, so they might ask you to complete another financial aid form—usually the CSS Profile or a form they've created. The college will then look at the money they have to offer students, and try to find the $1400 you need. That could be more grant, more work study, more loan, or a merit-based scholarship (we talk about those in another chapter).

Complications in Paying for College

If this all sounds pretty easy, it's supposed to be—but it can get complicated in a hurry, especially if one of the following happens:

You don't fill out the FAFSA

Many parents refuse to fill out the FAFSA, either because they think it's too confusing, or they are sure they won't qualify for federal financial aid. It's certainly true that not many families qualify for help from the US Government—but if you don't try, very few colleges will give you any money, until they know Uncle Sam isn't going to pay for college. In terms of the FAFSA being pretty complicated, it is, at least for right now. But if you have your income tax information from last year, the form takes about an hour to complete—and a number of colleges and tax preparers participate in a program called College Goal, where they will help you fill out the FAFSA for free.

You don't complete the other financial aid forms your college needs

Some parents are OK with sharing their financial information with the US Government, but won't fill out the more detailed CSS Profile to give to the colleges. Many schools need that information to see if the student qualifies for money that has special restrictions, so without the extra information, you won't get the extra cash.

You can't really pay what the EFC says you can pay

One of the biggest complaints of the current FAFSA is that most families can't pay the Expected Family Contribution—the amount is simply too high. The college's financial aid office is usually willing to hear about the circumstances that make it impossible for families to pay the EFC, but it is a problem that is happening more and more.

You don't get all the aid you need

In our example, the student needed $1400 in aid from the college in order to go to school. But what if the college only gave the student $500—or nothing at all? The student would have to make up the difference, or the “gap”, between what they need, and the aid they've received. This is happening more and more, and the gap usually isn't in the hundreds of dollars—it's in the thousands.

You don't want to take out any loans for college

With all of the stories going around about students who graduated with a Bachelor's degree and $100,000 in debt, it's easy to understand why students don't want to start their lives with debt from college. Given the high cost of everything, paying off a loan in an uncertain job market is something you just don't want to think about.

So what do you do if you don't want any loans? Well, don't accept them. When you get a financial aid offer from the government or from a college, it's just that—an offer. You can turn down the loan and keep the other two parts; you can turn down the loan and the work study, and just take the grant; if you'd like, you can turn down the whole thing. It's important to remember that, if you turn down part of an offer, you aren't going to get a different offer where they increase the grant. You're just saying that you don't want that part, and you're going to figure out some other way to cover that expense.

Other Factors to Consider

It's always wise to think twice before taking out a loan for anything. But as you consider the role of loans in paying for college, consider these factors:

Your income once you finish college

Dan (not his real name) graduated with a degree in Chemical Engineering and $29,000 in debt (that's about the average for a four-year degree). That's a lot of money—but since the average starting salary of chemical engineers is $66,400, there's a good chance Dan can afford the monthly payment of a loan that he's going to repay over 30 years. In fact, unless Dan has a ridiculous life style, he should be able to pay that loan off in 5 years—and remember, the only way he could earn such a great starting salary is by taking the loans out in the first place.

The job you have once you finish

Cindy (not her real name) graduated with $15,000 in debt, but she's a teacher, and her starting salary is $34,000 (about the national average). Cindy can't afford to pay her debt off in five years, but she can afford the monthly payment for five years—and since she's a teacher, that means the rest of her federal student loan will be forgiven, as long as she's still teaching in the school where she's working now.

Other options

Bill (you get the idea) didn't want to take out a $6,000 loan for his first year in college, but because he kept his grades up and was active in his residence hall, he was selected to be a residence hall advisor the following year. At his college, that job comes with free room and board, which more than replaced the need for Bill to take out any more loans for college.

It's easy to look at situations like Bill's and Cindy's and think, well, those were special situations. But when it comes to paying for college, everyone has special circumstances. It's too easy to think that you're destined to become one of those unemployed students with insane college debt who ends up living on your parent's couch. If you look closely at your college options, and look closely at the tips on getting scholarships in the next chapter, you're likely to find that you may have a special situation of your own—and that might include where it's OK to take out a college loan.

As you consider your borrowing options, you want to make especially sure to keep a close eye on using private loans or PLUS loans as part of your payment strategies. Unlike federal loans that often don't have to be paid back until you're done with college, most private loans require you start making payments right away, just like a car loan or a house loan. While PLUS loans have favorable repayment plans, they also have a very high ceiling—your parents can borrow up to the full cost of college if they qualify. That may sound good in the short term, but any family should think twice about borrowing the full cost of college. There are likely better ways to achieve that goal.

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Other Approaches to Affording College

The high cost of college, and the recent Great Recession, led many families to look at creative ways to pay for college. These may not work for you, but they're certainly worth considering:

Home equity or remortgaging

Parents who are used to making monthly house payments sometimes decide to use the equity they have in their house to pay for college, or to get a new mortgage on their home. Since the payment is already built into their monthly budget, they see this as a way to afford college without having to change their lifestyle. This way of paying for college could have an effect on when your parents will retire, so it's important for them to consider their entire financial picture before using this approach.

Starting at a community college and transferring

This strategy was extremely popular in the economic downturn of 2008, and with good reason. Since community college tuition is usually much lower than that of most four-year colleges, students begin their college careers locally and live at home, saving the money of room and board as well. With a year or two of transferrable credits, the student completes their four-year degree at a four year institution—and if they did well at community college, they may qualify for a Phi Theta Kappa scholarship as a distinguished community college student.

This approach has worked for thousands of students, but it's important to do your homework. Not every community college class will transfer to a four-year college, and some will only transfer as elective credits, something you don't need much of when earning a Bachelor's degree. The best way to make sure the classes you take locally will help you at the four year college is to talk with the transfer advisor at the four-year school. The advice you get from the school accepting the credits is all that matters.

Earning college credit in high school

Many colleges will give credit to students who have earned high scores on Advanced Placement (AP), International Baccalaureate (IB), and College-Level Examination Program (CLEP) exams. Students generally prepare for these tests while taking accelerated courses in high school, and while the exams aren't free, a good score can more than pay for itself with the college credit the student will earn. Not every college accepts these tests, so again, you'll want to talk with the transfer coordinator at the four-year college you plan on attending.

Other high-school based programs that offer college credit include dual enrollment or early college programs. Dual enrollment occurs when a student takes some high school classes and some college classes while still in high school—but in this case, the college classes are paid for by the local school district or the state. Most early college programs operate the same way, but the students takes a specific set of college classes (some of them offered at the high school) in order to earn an Associate Degree either at the same time they graduate from high school, or one year later. Credits from these programs don't always transfer to four-year colleges, so it's best to ask in advance.

Attend a free college

Plans may be underway to offer free college to everyone, but there are some colleges that are free to all students right now, while others are free to many. A strong list of these colleges can be found here; note that many require students to complete required work study as a condition of enrollment. This list doesn't include the US military academies, which are also free, but do require all graduates to complete a number of years in military service after graduation.

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Is College Worth It?

It costs more to go to college now than ever before, so much so that many are wondering if the value of a college education is as strong as it once was. Where a Bachelor's Degree of any kind was once a guarantee to a better paying job, that just isn't the case anymore. In fact, some argue, there are higher paying jobs in the technical trades where you can earn more than someone working as a barista with a Bachelor's Degree.

Deciding if college is worth it is really an individual decision, for two reasons. First, the Bureau of Labor Statistics continues to tell us what has long been true. On average, the more education you have, the more money you will make—and, just as important, the more education you have, the less likely you are to be out of a job at any time in your life. These are averages, of course, and there are exceptions, but even after nearly a decade of high college costs, the investment in a college degree of any kind is still worth it economically.

The second reason college is worth it has to do with a different kind of value. With more kinds of classes to offer and experiences like study abroad available to nearly every student, college plays an important role in making sure students understand just how big, and different, the world is around them. That alone may not be worth taking on thousands of dollars of debt, but combined with the career opportunities still only available through college, the ability to understand more about the world, and more about the people we live with in the world, are valuable skills to have in the work we do, the families we raise, and the neighbors we live with. There's more to everyone's life than the job they have and the taxes they pay. One or more years of college is an important reminder of that, giving students the skills not only to contribute to our world, but to improve it.

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More Resources

Pre-paid tuition programs

529 Savings Plans

Completing the FAFSA

Being considered an independent student on the FAFSA

CSS Profile

4 College Savings Tips for Community College Students

Should You Use Home Equity to Pay for College?

Tuition-free colleges

Is College Worth It? (Yes)

Is College Worth It? (No)

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