How to Pay for College - Your Complete Survival Guide
A Guide to Saving, Borrowing & Repaying
A college education has become necessary for a majority of careers in the modern economy, and remains an important investment in your child's future. Rising college tuition costs have become a concern given that the national average yearly cost of tuition, fees, room, and board for all 4-year institutions comes to $25,409 ($18,632 for public universities and $37,990 for private institutions) based on recent data. Student loans have become inevitable for most families: the average college graduate leaves school with $33,000 in student debt.
You may be experiencing some trepidation in figuring out how to pay for college as a result. A good piece of advice when selecting potential schools is to be realistic about your budget and financial resources. The cost of college and the debt you may incur should be considered as part of your college selection process. This is not to suggest eliminating any school based upon cost – because the financial aid package they offer can make any school affordable. But when the time comes to choose the best school for you – always be mindful of the debt that you will carry after graduation, and your ability to repay that debt.
Scholarships and financial aid offered by colleges and universities can help soften the impact of the cost of college, in addition to federal programs like Pell grants that are income-based. But with proper planning, you can minimize the impact of college tuition bills even with little or no financial aid or scholarships.
If you're unsure where to start with paying for college, here's what you need to know before you, or your child, start filling out those applications.
1. How to Get a Student Loan
The first thing to do is determine how much you need to borrow. What will your college expenses look like? They include:
- Activity fees
- Books and required supplies
- Computers and study aids
- Food (if there is no meal plan)
- Medical insurance
Including in your calculation, how much is in your college savings plan and how much can be covered through other means like work-study, you can estimate how much borrowing will be necessary for college. Monitor your spending throughout the school year and keep a strict budget so that you don't borrow an unnecessarily high amount but also aren't left with a shortfall.
The first step in applying for federal government student loans is the completion of a Free Application For Student Aid (FAFSA). This type of loan doesn't have the stringent income and credit requirements that private loans do, and subsequently may not require you to co-sign if your child takes one out. Federal loans also tend to have lower interest rates than private loans, which are locked in when the loan is taken out, and the federal government will pay for (subsidize) some of the interest while the student is in school. You will be asked to provide a complete financial profile on the FAFSA form.
If you qualify for a government loan and/or financial aid from the institution, it may still be insufficient for your needs. Tuition by itself is often the highest expense, followed by living expenses like room and board.
As a result, borrowers must turn to private loans when college savings plans and other sources of funds aren't enough to pay for all of these expenses. The application process for a private student loan is similar to FAFSA in that you must provide your personal financial information as well as how much you need to borrow. However, you will also need to prove that you have the credit rating and income necessary for repaying the loan. Since young students often lack credit and sufficient income, you will likely need to co-sign their private loan.
An alternative for many people is to utilize a Home Equity Line of Credit (HELOC) for college expenses. This line of credit allows you to borrow against the equity in your home – you can write checks against the line of credit without having to reapply for loans each year. HELOC’s are variable rate loans which typically are indexed to the Prime Rate. They typically allow people to draw on them for 10 years during which time only interest payments are required. Then there is a 15 year repayment period during which principal and interest are due.
2. College Savings Plans
It's a good idea to start a formal college savings plan as soon as possible. Some people do this right after their child is born so that the funds have a long time to generate returns and other family members like grandparents are also able to contribute.
Many states offer what is called a 529 plan, which works similarly to retirement accounts in that your contributions to the plan will be invested in different assets of your choice (such as mutual funds). The 529 plan's value then fluctuates with the financial markets over time. Contributions aren't deductible on your federal taxes, but states often offer generous tax benefits.
Prepaid 529 plans are different, because they are not invested but rather treated as pre-payments toward all or part of the tuition and other costs at a public college within your home state. The funds can be converted to private and out-of-state colleges in most cases.
We recommend talking with a financial planning professional to help determine the best college savings plan for your needs.
3. The Best Student Loan Repayment Options
Different repayment options are available to each student depending on the type of loan that they have. Most student loans do not begin the repayment process until after graduation.
For federal student loans, additional deferments are available if you enter active military duty after graduation or other circumstances they deem allowable. You will not need to make payments on your federal student loans if you're eligible for a deferment, and the federal government will continue making interest payments on subsidized loans but not on private, unsubsidized, or parents' PLUS (Parental Loans Undergraduate Students) loans. Federal loans have a standard repayment period of 10 years.
For private loans, deferment can be detrimental since the interest will keep accruing on the loans while the principal is not being paid down. Deferment may be necessary if the borrower or co-signer gets into an accident, becomes ill, loses their job or can't find work after graduation.
Federal loans also offer income-based repayment plans, which may make the most financial sense if you do not qualify for further deferment upon graduation. However, an income-based repayment plan can result in significantly higher payments. You will need to determine whether an income-based repayment plan is going to hurt you financially depending on what happens with your personal and professional life in the foreseeable future.
Student debt can become easily manageable with some good planning, which begins even before you select the college you will attend. When you do your research, know your options and plan appropriately, you will feel more prepared and paying for college will be a much less frightening process.
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