So your student has been accepted to college – Congrats! Celebrate their accomplishments and then take some time to map out how to pay for all four years before your student gets the bill for freshman year. That is, unless you enjoy being suddenly faced with a college bill you aren’t sure how you’re going to pay! Bonus points for those that start this process using estimates during Junior year.
Add Up Total Funds Needed For the College Bill
Once you get your Financial Award Letter, you should have a pretty good idea of how much the first year is going to cost. You can use that to estimate cost for years 2-4 as well. When doing so, keep in mind that:
- The cost will likely increase by about 3-5% each year.
- This assumes that your financial need will be consistent throughout all four years of college. If that is not the case, work with an expert from myCAP to help you come up with a closer estimate.
- Keep in mind that most need-based aid must be recalculated annually while most merit aid applies to all 4 years of college. If you aren’t sure which awards are for 1 year and which are for 4 years, talk to your admissions counselor.
Identify Money Sources
You’re going to start by making a list of all of the college funding sources you have available so you don’t miss out on opportunities. This will allow you to take into account tax implications, federal student loan caps, and scholarship considerations. Most families will be paying for college in layers – a little bit from here and a little bit from there. Whether you have a lot or a little ready to use for college, you’ll benefit from being prepared. Some sources to consider include:
1. Scholarships, Grants, and Qualified Tuition Reduction
Use – all money available annually
Free money is the best money – I think we all can agree with that. Your student may be awarded a Pell Grant from the Department of Education, a need-based grant from the institution or a merit scholarship from the Admissions Department. State based scholarships would fall into this category as well, and don’t forget to check for tuition reciprocity agreements if you are going out of state.
Hopefully, you’re applying for private scholarships as well, so include those if you’ve been lucky enough to be awarded money for school that way to reduce your college bill amount.
2. 529 Savings
Use – annually until gone
To get the benefit from your 529 savings, you’ll need to make sure you use it on eligible expenses for college which you haven’t used to qualify for a tax credit such as the American Opportunity Tax Credit (AOTC), Lifetime Learning Credit (LLC), or other tax advantaged source. Otherwise, you have a few limited options for taking the money out penalty free and you would have to change the beneficiary to a close family member and then use it on eligible expenses to take the funds out tax and penalty free.
For the freshman year, this means taking funds out of a 529 in the parent’s or student’s name with the student listed as the designated beneficiary. As the law is currently written, a 529 in a grandparent’s name should be used in years 3 and 4 if you need to avoid the negative effect that untaxed income has on your family’s EFC or Expected Family Contribution as calculated by the FAFSA.
If your family EFC is already too high for you to qualify for any aid, then there is no need to distinguish between a 529 held in a grandparent’s or parent’s name. Starting in 2023 for the 2024-2025 school year, this treatment of grandparent 529 contributions to pay for college will no longer be a cause for concern when it comes to the FAFSA and EFC calculation.
If you are going to a school that requires the CSS Profile to be completed, you may still need to wait until Junior and Senior year of college to use this money depending on whether or not the CSS schools choose to mirror the FAFSA when it comes to this issue.
3. Student Savings
Use – ASAP
If your student has been saving for college, add those funds in. Also, add in any money the student will contribute from working while attending school.
From an Expected Family Contribution (EFC) perspective, this is a great place from which to take funds for college because it has a positive effect when it comes to lowering your family’s EFC. If your EFC is too high already to qualify for need-based aid, then it may not make a difference.
4. Parent Savings
Use – Annually as needed after 529 depleted
In addition to any 529 savings you may have, if you have funds in other savings accounts that you can safely use to pay for college without causing yourself financial hardship, then add that into the mix as well. Using your savings to pay for college will lower your EFC but not by as much as using your student’s savings.
5. Grandparent Savings
Use – Annually as available starting with the FAFSA filing for the 2024 – 2025 school year
As with the Grandparent 529, assuming that you care about keeping your EFC as low as possible, this should be used for the 3rd and 4th year of school under today’s laws. This will be changing in 2023 for the 2024-2025 school year, and at that time it won’t matter any more.
That means, you’ll be able to use money from friends and family to pay your college bill without special timing considerations if your school only requires the FAFSA for financial aid considerations.
If they require the CSS Profile as well, then you may want to consider continuing to use a work-around to make sure payments from outside sources like a grandparent owned 529 don’t have a negative impact on your ability to receive financial aid.
6. On-Going Cash Flow
Use – Annually as needed
If your family has been making monthly contributions to a 529 plan or other savings vehicle for college and plan to continue that habit during the college years, add in a conservative estimate for that amount.
If you live in a state that gives a state tax deduction for 529 contributions, check to see if you can continue making contributions while your child attends school and pull out the funds before they graduate so that you can continue to enjoy those tax benefits.
You also may be able to use some on-going cash flow towards the college bill that you would have otherwise used to pay for the student’s food or extracurricular activities during high school.
7. American Opportunity Tax Credit (AOTC)
Use – Annually, when applicable
If your family income is below certain limits, you may qualify for the AOTC, which is good for a credit of up to $10,000 over four years. If you can get this credit and plan to build it into your payment plan, you need to be super deliberate about actually putting the money aside at tax time to save it until you get a school bill to pay.
If this money is likely to be absorbed into your regular family cash flow, you shouldn’t count on it to help pay for college. You know yourself best, so act accordingly.
There are special tax considerations you need to have in place to be able to claim the credit. Namely, you must be able to identify expenses against which you are claiming the credit. You need $4,000 in eligible expenses in order to claim the full $2,500 per tax year. You can not use expenses paid for with a 529 withdrawal, the tax free portion of a scholarship or grant, or just about any other tax free source of money. You can, however, use expenses paid for with a loan.
The tricky thing about using a tax credit to help pay the freshman year college bill is that you normally won’t see the benefit of it until the school year is almost over. The easiest way to manage this setback is to include this source of funds in your plan for years 2-4 of college.
8. The Lifetime Learning Credit (LLC)
Use – Annually, when applicable
If you cannot claim the AOTC, you may be able to qualify for the LLC. You cannot claim both in the same year for the same student. The LLC is worth up to $2,000 per year, but it is worth 20% of eligible expenses, so it takes $10,000 of qualified expenses to support a $2,000 credit.
As with the AOTC, if you are using the LLC as part of your college funding strategy, be deliberate about setting the money aside someplace safe until you’re ready to send it to the school in payment of a college bill.
9. Student Loans
Use – Annually, starting with freshman year until no longer needed. Prioritize Federal Student Loans first and then fill in gaps with private student loans or parent loans discussed below.
There is a limit to the amount of student loans your student can take from the Department of Education each year while working toward their undergraduate degree. For that reason, if they’re going to need loans, they should start taking them in year one. Nobody wants to end up $20,000 short for senior year and find out that they can only borrow a maximum of $7,500 that year from the government. Here are the yearly maximums:
Year 1 – $5,500
Year 2 – $6,500
Year 3 – $7,500
Year 4 – $7,500
In typical government fashion, there are special cases for which you can borrow more, so take a look at the official webpage for all the details.
Many students will find they need to borrow more than they can get through the federal student loan program. That is where you’ll want to help them think through their options and decide as a family what makes sense for all of you. More on that below.
In the event that you determine additional student loans will be needed, help them decide up front how much they should reasonably borrow. Even for kids having no need for loans, taking a small amount can help them build credit as long as they are careful to pay it back on time.
Here is a structure that you may want to discuss with your student to help them determine how much to take in student loans.
Ideal – I don’t want to take any loans. I’m not comfortable with debt.
Great – I will borrow up to the amount I can borrow from the Government, about $27,000 for 4 years, because I want to stick to the most flexible debt I can access. It will be a significant monthly payment, but I should be able to afford it if I have a good job and I’m willing to make a few financial sacrifices.
Good – I’m willing to borrow up to the amount I expect to earn my first year out of college, because I’m ok with a pretty large student loan payment for 10 years or more after school ends, and I’m ok with making financial sacrifices to pay it off.
Caution – I will borrow more than I expect to make my first year out of college. I recognize that I will need to make substantial financial sacrifices for many years to pay for my college experience.
Any student loans needed over what the government will provide will need to be borrowed from the private student loan market or from the college if they offer that option. Students will typically need a cosigner for private loans, which is usually a parent. Remember that cosigning on any type of debt puts the cosigner at risk of default if payments are not made on time.
As with any financial obligation, remember to read all agreements carefully and make sure everyone involved understands the details and implications of the loans taken.
10. Parent Loans
Use – Annually, as needed, after other sources depleted
Whether to take loans in the name of the student or parent is a personal/family decision that should be made after considering several factors. For example, if you, as parents, have very strong feelings about providing a college education for your child, you may lean toward taking out debt in your own name only.
Before deciding, research all of the options available between private loans taken in your child’s name and loans taken in your own name as described below. What interest rates and payment terms are available for each? How will the payments affect your/your student’s ability to meet other financial obligations and goals?
Remember to calculate the future payment amount including ALL loans that will be taken over the four years of college, not just freshman year. Then, compare total expected expenses including the loan payment to expected income at that time to decide if the extra loan payment is going to be feasible.
Parents who are willing and able to take out debt in their own name may want to consider the following types of loans:
- Parent PLUS Loans issued by the Department of Education, though the interest rates are usually not favorable on these loans.
- Private Loans – May also come with a high interest rate or be difficult to obtain.
- Home Equity Loans or Home Equity Lines of Credit – May have lower interest rates but must be underwritten by the bank which can take time. Also, any loan taken out against your home could put you at risk of losing your home if you can’t keep up with payments, so keep that in mind when considering this as an option.
11. Employer Provided Education Assistance
Use – Annually when applicable
If your student is lucky enough to work for an employer that provides education assistance, count that toward your college fund balance. An employer can pay up to $5,250 per year in education expenses, tax free.
12. Education Savings Bonds
Use – Annually when applicable
If you cash in Series EE or Series I Government Bonds, you may be able to avoid paying tax on the interest if your income falls within the applicable limits and you have enough qualified expenses. In this case, qualifying expenses do not include room and board but do include contributions to a 529.
13. Penalty-Free Early IRA Distributions
Use – Annually when applicable
In the event that you have more than enough retirement savings and wish to use some IRA funds to help pay for college, there are some penalty exceptions that make it less costly for you to do so.
Distributions from an IRA typically incur a 10% penalty if taken before age 59 ½. One exception to this rule is when the money is used to pay for Qualified Education Expenses, in which case, you may be able to take advantage of penalty free withdrawals.
Keep in mind that you can withdraw your contributions from a Roth IRA anytime both tax and penalty free. Contributions are the amount you contributed and, thus, do not include any earnings. Therefore, if you are taking from a Roth IRA in an amount equal to or less than the amount you have contributed, you don’t have to worry about the double dipping rules and qualified education expenses.
A Note On Tax Preferential Sources Of College Funding
While the government does provide tax benefits to pay for college, they won’t be allowing you to double dip, and you must have eligible expenses to back up all tax advantaged sources including:
- The American Opportunity Tax Credit
- The Lifetime Learning Credit
- Tax free 529 withdrawals
- Tax free Coverdell withdrawals
- The tax-free portion of scholarships
- Early IRA distributions
- Qualified Tuition Reduction
- Employer provided educational assistance
- Education Savings Bonds
What that means is, if you are going to benefit from any of the sources above, you must have separate qualified expenses to back up each form of benefit. For example, you can’t use the same expenses to qualify for a tax free 529 withdrawal that you use to qualify for the American Opportunity Tax Credit.
Let’s Put It All Together
So, let’s look at a fictitious example.
Jayden has been accepted to Higher Ed University with a cost of $50,000 for his freshman year. During a conversation with the Financial Aid Department, he learned that the cost usually goes up by about 5% per year, so he has increased the cost by that amount for years 2-4.
Jayden was offered $15,000 per year in merit aid by the Department of Admissions and received need-based financial aid of $4,000, which he expects to qualify for in years 2-4 as well. He was also fortunate enough to win a renewable private scholarship that was advertised on his high school’s guidance page.
He knows that he will not be able to cover all four years of school without student loans, so he has included a plan to use the maximum amount of federal student loans available each year.
Jayden has saved up $2,000 to help him pay for college costs, but that has a bigger impact on his EFC than 529 savings his parents have for him, so he is going to go ahead and use that $2,000 in year 1. He is also planning to work as much as possible and expects to be able to contribute about $2,000/year from his income toward the cost of college.
Jayden’s parents have been paying a lot for groceries to feed him as well as sports clubs he is a part of. When those expenses go away, they think they can use those funds to contribute an additional $4,500 per year to help pay the college bill. They plan to proactively put the money in the 529 each month so they can continue getting a state tax deduction for the money they contribute to that account.
The money they currently have saved in the 529 increases their EFC each year, so they want to use that money to fully fund each school year until it is gone. Jayden’s grandparents haven’t saved anything for him, but if they had, he would use his parent’s 529 first and then start using the grandparents’ 529 since that is better for his EFC.
Following this strategy, Jayden is showing a gap in year 4 of about $20,500. He is trying to decide how to fill that gap.
One idea is to apply for as many private scholarships as he can find. Whatever he can not cover will have to be borrowed. Even if he has to borrow the full $20,500 in private student loans, he will still only have a student loan balance of about $48,000, which is a little less than he expects to earn in his first year after college as a nurse.
Though it will hamper his ability to start saving to buy a new car after college, he feels like the trade off is worth it to complete his education.
|Year 1||Year 2||Year 3||Year 4|
|Room and Board||$15,000||$15,750||$16,538||$17,364|
|How To Pay|
|Merit Aid (tax free)||$15,000||$15,000||$15,000||$15,000|
|Private Scholarship (Renewable)||$1,000||$1,000||$1,000||$1,000|
|Parent On-Going Contribution||$4,500||$4,500||$4,500||$4,500|
Your situation is probably very different from Jayden’s, so go ahead and reach out to an expert through your myCAP account for help putting together your family’s plan to pay for all four years of your college bill. Then you can rest easy, or more likely, start stocking up on dorm room necessities!
What are the 3 primary ways to pay for college? ›
- Apply for a Scholarship. Scholarships are typically merit-based. ...
- Apply for a College Grant. College grants are need-based, and like scholarships, grants don't have to be repaid. ...
- College Work Study. ...
- Federal Student Loans. ...
- Private Student Loans.
Federal student aid from ED covers such expenses as tuition and fees, housing and food, books and supplies, and transportation. Aid can also help pay for other related expenses, such as a computer and dependent care.What are 3 ways you pay for college if you do not have any money? ›
- Apply for scholarships.
- Apply for financial aid and grants.
- Consider going to community college or trade school first.
- Negotiate with the college for more financial aid.
- Get a work-study job.
- Trim your expenses.
- Take out federal student loans.
Student loans have become an increasingly popular way to pay for college over the past few decades. There are different types of student loans: federal loans borrowed by students, loans borrowed by parents, and private loans.How do middle class families pay for college? ›
Students and families who do not qualify for Federal Pell Grants and Institutional need-based aid have several different options including scholarships, Federal Work Study, Federal loans for students, Federal loans for parents, private educational loans, and family savings and out-of-pocket payments, including payment ...What are 6 ways to pay for college? ›
- Scholarships. Scholarships offer money for college that does not need to be paid back. ...
- Grants. Grants, like scholarships, do not need to be repaid. ...
- Work-Study. A work-study program provides part-time employment opportunities while you're in school. ...
- Your Own Income and Savings. ...
- Federal Student Loans. ...
- Private Student Loans.
- Fill out the FAFSA. ...
- Search for scholarships. ...
- Choose an affordable school. ...
- Use grants if you qualify. ...
- Get a work-study job. ...
- Tap your savings. ...
- Take out federal loans if you have to.
There are several different types of financial aid for college. Some of these are free, while others need to be paid back with interest. Scholarships, grants, and work study are the three main financial aid types that don't need to be paid back. Loans are the main type of financial aid that needs to be paid back.What are the two best financial aid options? ›
Grants and scholarships are the most desirable forms of financial aid because they come in the form of free money, often with no strings attached.How do parents pay for college? ›
Most families pay for college using some combination of savings, income and financial aid. Financial aid is money you receive to help cover college costs. Some financial aid, like grants and scholarships, doesn't need to be repaid. Financial aid can also come in the form of loans — money you have to repay.
What are 3 different types of financial aid and a description of each one? ›
Grants: Financial aid that generally doesn't have to be repaid. Loans: Borrowed money for college or career school; your loans must be repaid with interest. Work-Study: A federal work program through which undergraduates and graduate students at participating schools earn money to help pay for school.What are the three types of money you should use when paying for college and what type of money are scholarships and grants? ›
In general, grants are given based on financial-need, while scholarships are merit-based and awarded to students based on their academic achievements, extracurricular activities, field of study, and more. Loans are the more commonly-used type of financial assistance.Which are ways to pay for a college education quizlet? ›
- Loans. money borrowed that must be repaid with interest.
- Grants. money received for college that does not have to be paid back. ...
- Scholarships. money received for college that does not have to be paid back. ...
- Work-Study. ...
- FAFSA. ...
- Pell Grant. ...
- Subsidized loans. ...
- unsubsidized loans.
- Apply for Grants. ...
- Scholarships. ...
- Ask for More Money. ...
- Get a Work-Study Job. ...
- Take Required Core Classes at the Local Community College. ...
- Live Off Campus. ...
- Take Advantage of Employer Reimbursement Programs. ...
- Ask Friends, Family, and Even Strangers.
A college education is widely perceived as unaffordable for most Americans, with 77% of U.S. adults saying a college degree would be difficult for someone like them to afford. 82% of women said a college degree would be difficult to afford, compared with 73% of men.What is the most expense college? ›
The report put Franklin & Marshall College, in Lancaster, Pennsylvania, in the No. 1 spot on its list of colleges with the highest sticker price. In the 2022-2023 academic year, the school charged $65,652 per year for tuition, according to The College Investor.What to do if your parents are rich but won t pay for college? ›
- Fill out the FAFSA.
- Apply for scholarships.
- Get a job.
- Look into tax credits for qualifying college expenses.
- Minimize your college costs.
- Research tuition assistance programs.
- Consider taking out federal student loans.
The Free Application for Federal Student Aid, better known as the FAFSA, helps potential and current college students get scholarships, grants, work-study programs and federal student loans. There are no income limits to apply.What amount is too much for FAFSA? ›
There is no set income limit for eligibility to qualify for financial aid through. You'll need to fill out the FAFSA every year to see what you qualify for at your college. It's important to make sure you fill out the FAFSA as quickly as possible once it opens on October 1st for the following school year.How can I make easy money to pay for college? ›
- Look for on-campus work. Check with your college or university for work-study or other oncampus positions offered to students. ...
- Seek off-campus opportunities. ...
- Tutor. ...
- Write, edit and proofread. ...
- Transcribe. ...
- Walk dogs. ...
- Babysit. ...
- House sit.
Do most parents pay for college? ›
How much do parents pay for college? During the 2021/2022 school year, the average parent covered about 43% of their student's college costs using income and savings. Parents covered an additional 8% of that cost by taking out loans, according to the Sallie Mae study.How do you pay for life in college? ›
Take out a student loan
Student loans can be the easiest way to cover college living expenses because they are widely available and borrowing money doesn't require you to take time away from your studies. Both federal student loans and private student loans can help you cover some of your routine costs.
- Pick up part-time work. ...
- Set up a budget. ...
- Carry your student ID. ...
- Minimize your textbook costs. ...
- Make full use of your school's amenities. ...
- Plan your meals. ...
- Save money on housing. ...
- Fill out the FAFSA each year.
- Consider dual enrollment. ...
- Start off at a community college. ...
- Compare your housing options. ...
- Choose the right meal plan. ...
- Don't buy new textbooks. ...
- Earn money while in school. ...
- Explore all of your aid options. ...
- Be responsible with your student loans.
Pay cash for your degree.
Using your own money that you've budgeted for specific purposes is always the best and wisest approach to paying for anything. And that includes college. If you're the parent of younger kids, now might be a great time to begin saving for their education.
Scholarships are the best form of financial aid you can receive to reduce the cost of college as the money is interest-free. Better still, there's no limit to the number of scholarships you can apply for and no limit to the amount of money you can win.What is SAP in college? ›
Satisfactory Academic Progress (SAP) is defined as the successful completion of coursework toward an eligible certificate or degree. Federal regulations require the Office of Student Financial Aid to monitor the academic progress of students receiving financial aid.What are the 4 basic types of financial aid assistance include? ›
There are four basic types—grants, scholarships, loans, and work study—and four basic sources—federal, state, institutional, and private—of financial aid.Which type of aid is the least desirable? ›
"The rule is: free money first (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans)," the US Department of Education writes on its website, adding that private loans should be the last resort.What are the three most common sources of financial aid? ›
Financial aid helps students afford their higher education expenses. The most common types of financial aid are grants, scholarships, work-study programs, and loans. Federal student loans provide significant advantages over many private student loans.
Which types of aid are the most desirable? ›
Scholarships and grants are the most desirable type of financial aid. In most instances, students must have demonstrated need to qualify for scholarships and grants. Loans: Loans are a type of aid that the student or his parent must repay.How much does the average American family spend on college? ›
The average cost of college* in the United States is $35,551 per student per year, including books, supplies, and daily living expenses. The average cost of college has more than doubled in the 21st century, with an annual growth rate of 7.1%.How much does the average family pay for college? ›
The average total cost during the 2021–22 school year for a public four-year university for in-state students staying on campus was $27,330 a year and $44,150 for out-of-state students, according to the College Board. A year at a four-year private college cost an average of $55,800 for all expenses.How much of my child's college should I pay for? ›
Ultimately, there's no one right answer to how much of your child's college tuition you should pay. When your child fills out the free application for federal student aid, you'll be provided with an expected family contribution amount and any financial aid will be reduced based on the amount you're expected to pay.What is one example of a private source that help pay for college? ›
Private sources include private foundations, non-profit organizations, philanthropists, corporations and other businesses, education lenders and employers.What type of federal funding is free money? ›
The government does not offer “free money”
The government does not offer free money or grants to individuals for personal needs. But you may be eligible for government benefits or loans to help with your expenses.
Share this Article. EFC stands for expected family contribution. Your EFC is the amount of money the government assumes your family can contribute to your education. Your family's income and allowances determine this number. Financial aid packages and Pell Grant eligibility are determined based on your EFC.What are smart ways to pay for college? ›
- College Savings Plans. Families can save for future college costs using a 529 plan. ...
- Federal Financial Aid. ...
- Grants and Scholarships. ...
- Cash From Savings. ...
- Work During School. ...
- Private Loans. ...
- Choosing a Cheaper College. ...
- Studying Abroad.
- ROOM & BOARD. The cost of a place to live and the meals you eat for the school year. ...
- BOOKS & SUPPLIES. The cost of such items as books, course materials, office and art supplies. ...
- PERSONAL EXPENSES. ...
- TRANSPORTATION. ...
- TUITION & FEES.
Fill out a FAFSA
Filling out the Free Application for Federal Student Aid should be every student's first step in paying for college. Also called the FAFSA, this is how the government assesses your finances — and your family's — and determines how much your family should expect to put toward the cost of college.
Which method of paying for college needs to be paid back? ›
Student loans are a form of financial aid that must be paid back. Loans for college come in many forms, including different types of federal and private loans, and repayment options vary.What are 4 types of money? ›
The 4 different types of money as classified by the economists are commercial money, fiduciary money, fiat money, commodity money. Money whose value comes from a commodity of which it is made is known as commodity money.What parents pay for college? ›
Most families pay for college using some combination of savings, income and financial aid. Financial aid is money you receive to help cover college costs. Some financial aid, like grants and scholarships, doesn't need to be repaid. Financial aid can also come in the form of loans — money you have to repay.What are the two sources of money for college that do not have to be paid back? ›
Scholarships, grants, and work study are the three main financial aid types that don't need to be paid back. Loans are the main type of financial aid that needs to be paid back.What is the money you pay for school called? ›
Tuition payments, usually known as tuition in American English and as tuition fees in Commonwealth English, are fees charged by education institutions for instruction or other services.Which is a way to pay for future college costs at today's rates? ›
Prepaid tuition plans let you pay in advance for future college tuition and fees at the current rate, by purchasing units or credits.