There are plenty of ways to finance a college education. Options range from financial aid to savings accounts to tax breaks. Given this array of choices, how do most families pay for college?
Financial Aid Can Help Almost Everyone
Many lower- and middle-income students do not apply for financial aid because their families mistakenly think that their income is too high or they can't afford college. For many families, however, financial aid is the major source of money for college. Financial aid can come from the federal government, from the state government, or from the college itself.
Colleges base financial aid eligibility on a calculation of what a family should be able to pay toward college costs, called the Expected Family Contribution (EFC). The difference between the EFC and actual college costs (as determined by the college) is the family's financial need. Colleges try to cover this need with financial aid, either through government aid or their own institutional aid.
Paying for What Financial Aid Doesn't Cover
If the family does not get enough financial aid to match its financial need, the difference is called "unmet need." For many families, even their Expected Family Contribution may be difficult to afford. Here are some ways that families typically pay for their "unmet need" and their EFC:
- Parents' income
- Student's income
- Personal loans (such as home equity loans)
- Private loans (nonfederal loans)
- Tax credits and deductions
- Tuition payment plans
- Reducing expenses (such as having the student live at home)
- Starting out at a community college
- Getting college credits while in high school
Loans Can Bridge the Gap
Federal educational loans are available to both students and parents. These can help fill in gaps in your financing plan and are typically the cheapest loan options. Other common borrowing options for college include state and private (nonfederal) educational loans, equity loans, and loans against other assets, such as life insurance or retirement.
What About Scholarships?
You can't count on getting scholarships, but students who win them are able to fund some or all of their college education this way. Compared to other sources, however, scholarships typically play a small role in college financing. You may be the exception, so be sure to research scholarships at colleges to which you are applying and build a private scholarship search into your planning.
A Word About Tuition Payment Plans
Most colleges offer the option of a tuition payment plan. The student or the family pays a fixed amount every month (or quarter/semester). While these plans help you avoid large lump sum payments, they can backfire. If you pay by credit card, there may be a fee, sometimes as much as three percent of the payment. If the plan covers all four years, payments in the first two years of college may be larger than they would be otherwise to cover expected increases in future tuition. So a student who drops out or transfers may have spent more than if tuition had been paid normally. Check with the college's bursar's office to determine its policy.
To get more specific help, consult the many other articles in CollegeData's Pay Your Way.
Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.