For many families, the panic button goes off when the cost of college sinks in. How do families cover the college bill?
Most families use a variety of sources to finance a college education—from financial aid to tax breaks. Here's a rundown of the basics.
Pay for college with your own resources
Families can save for college using tax-advantaged plans, such as 529 College Saving Plans and Coverdell Education Savings Accounts. Other funding includes parent and student income, contributions from grandparents and other relatives, sales of assets, etc.
Tip: Use retirement savings as a last resort. Parents will eventually depend on those funds for their own support.
Pay for college with borrowed money
Loans are part of many families' college financial strategy. Loans offered by the college as part of the aid package usually have the lowest interest rates. Families can also take out federal PLUS Loans or loans from private loan providers.
Tip: Some families use credit cards or borrow against assets, such as home equity and life insurance. Be sure to evaluate the expense and risk of these options before making a commitment.
Pay for college with tax reductions
The government offers higher education tax breaks. These allow some taxpayers to subtract certain college-related expenses from the tax they owe.
Tip: Get to know the government's rules for these programs. You can take only one credit or deduction per year, in addition to the student loan interest deduction.
Pay for college with need-based financial aid
Families who prove they cannot afford to fully cover college expenses are eligible for financial aid. For many families this is the major source of college financing.
Tip: Only two types of aid actually cut college cost: grants and scholarships. The other forms of aid, loans and work-study (paid employment), must be repaid or earned.
Pay for college with merit-based aid
Colleges may offer merit aid as an incentive to enroll. This aid is based on academic performance or other talents, and not on financial need. Other sources of merit-based aid include outside scholarship providers, employers, and service organizations.
Tip: Ask colleges about their "outside scholarship" policies. Some colleges reduce the aid they award by the amount of scholarship aid received from outside sources.
Pay for college by choosing a "financially friendly" college
Look for financially friendly colleges with track records of generous merit aid, high four-year graduation rates, and low rates of graduate debt.
Tip: The cheapest college is not always the best choice. Take college fit into consideration. The most expensive college can be the one the student drops out of or transfers from.
Pay for college by reducing college costs
Get inexpensive college credit through AP testing and community college courses. Enroll in public service programs, such as the ROTC, which cover some college costs.
Tip: Manage college expenses. Buy used textbooks, limit eating out, and stick with a budget.
- Find out how to apply and qualify for financial aid.
- Use the Net Price Calculator to estimate your cost at any four-year college.
- Visit Pay Your Way for articles and tools that will help you better understand college costs and how to pay for them.
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.