How to Pay for College
Every year high school juniors and seniors plan to attend college, sometimes not knowing how they will pay the tuition. Thousands of others may not apply despite having excellent credentials because they don’t think their families can afford the expenses associated with attending college. While costs have skyrocketed over the past decade, with proper planning and an active search for college funding, many students can find the money to help pay their way. There are several ways families can save for or find money to pay college tuition.
- Section 529 Savings Plan - Named after the section of the Internal Revenue Code under which it is authorized, a 529 savings plan allows you to invest in a qualified savings plan and pay no income tax on earnings as long as the money is used for qualified college expenses.
- Guaranteed Student Loans - This refers to a loan for which the federal government, and sometimes a state government, has accepted all risk of repayment. Typically, these loans are need-based and the guarantee is required in order to waive credit inquiries and assure the private institutions making the loans that the loans will be repaid.
- Grants - Grants are basically “free” money. They are often made or offered by government entities, private businesses and nonprofits. They do not have to be repaid. Many students will receive a small grant as part of their financial aid package fulfilled by the federal government. The greater the need, the more likely the federal financial aid package will have a higher percentage of grants to loans.
- Scholarships - Scholarships are also a form of “free” money. They are offered by universities and colleges, businesses, organizations, nonprofits and individuals. They range from small one-time bequests to recurring awards worth hundreds of thousands of dollars.
- Private student loans - This loan type is similar to most other consumer loans. They are made in the name of the student and will require a credit check. The majority of students will need a cosigner, guarantor or adequate collateral with which to secure the loan.
Many students will use a combination of these resources to fund their undergraduate education. Understanding their requirements and limitations will help guide you through the process of building a college fund.
Section 529 Savings Plans
The 529 Savings plan gets its name from the section of the Internal Revenue Code under which it is authorized. Under this plan money that is saved may be distributed without incurring taxes on the capital gain, if the money that is disbursed is used for a qualified education expense. Legally known as “qualified tuition plans,” these savings programs are typically sponsored by states or educational institutions. There are two types of qualified tuition plans.
- Prepaid tuition plans allow you to save by purchasing credits that can be applied toward future tuition costs at a specific university or college.
- College savings plans allow you to save for any qualified higher education expense.
There are distinct differences between the two. With a prepaid tuition plan you can lock in college tuition costs at qualifying institutions, many plans are guaranteed by the state, and most plans set a contribution amount based on the beneficiary’s age. On the other hand, the college savings plan does not allow you to lock in tuition costs, performance is not guaranteed by the state and contribution limits are not set. For more information on the differences between the two types of plans see the SEC Introduction to 529 Plans page. Like many investment decisions, starting a 529 savings plan takes careful research and planning. There are several trusted resources available that can guide you through the process.
- U.S. Securities and Exchange Commission - An Introduction to 529 Plans - This is an excellent, easy-to-read explanation of 529 savings / college tuition plans. The page also includes a list of seven questions to ask prior to investing in a plan.
- Savings Plans Network - Created by the National Association of State Treasurers, the site provides links to most of the 529 plan websites. The site also lists other resources and provides a tool with which you can compare the different plans.
- SEC’s EDGAR Database - For additional information about the underlying mutual funds that may be a part of the 529 savings plan check the EDGAR database. Information will also be found in the prospectus, annual report or from the plan manager.
There are a wide variety of merit-based scholarships available through organizations, businesses, community groups, and universities. These scholarships are typically awarded for special accomplishments, talents or skills. There are also scholarships based on race, ethnicity, heritage and physical disabilities. Most are open to all applicants, however, some are considered legacy scholarships and are given to the children of a business’s employees or an organization’s members. The sheer number of these scholarships is overwhelming and no one website includes them all in their database. This can make searching for a scholarship difficult and requires the use various sources. The first stop for many college bound students is their school’s guidance counselor. The next stop is the Internet. When starting an online search, two good places to begin looking are College Board and the organization in your state that manages the 529 savings plan. Some, like College Foundation of North Carolina (CFNC) have links to some national and state scholarships. Look for scholarships in these categories:
Contests often have multiple deadlines and may require a short essay, performance, or the completion of a project. Contests are a valid way to win $1000 - $5000 toward college tuition costs, and some contests offer substantially more to the winner. To find contests, you can check websites like Scholarships.com or run a Google search for “scholarship contests.” Notable contests include:
- Dr. Pepper’s Million Dollar Tuition Giveaway - Eligible entrants are students between the ages of 18 and 24. Prizes range from $2500 to $100,000. Multiple entries are chosen and entrants simply upload a 60 second video telling how they will make a difference.
- Duck brand Duct Tape’s Stuck at Prom Competition - Entrants design and make their prom attire from rolls of decorative duct tape. Prizes range from $5000 to $500 and are awarded to each of the winners and their schools.
Many universities and colleges have a number of merit scholarships that are often funded by bequests made by an alumnus or group of alumnae. These scholarships often have “priority” application deadlines that are earlier than the standard application deadline. Applicants who are interested in merit scholarships awarded by the university or college they plan to attend should search the institution’s website or ask an admissions counselor. Some universities consider all applicants for their merit scholarships and there are no special deadlines. Notable merit scholarships offered by universities include:
- The Morehead-Cain Scholarship - The University of North Carolina at Chapel Hill - This program is the oldest merit scholarship program in the United States and is considered among the most respected. Applicants are typically nominated by their high school, however, self nomination is allowed. The award covers all four years at Carolina as well as four fully-funded summer enrichment experiences.
- Mork Family Scholarship - The University of Southern California - The USC faculty and staff select approximately 20 recipients from among a very competitive international pool of students.
Clubs and Organizations
Many civic clubs and organizations offer scholarships to college bound students. These scholarships are often used to promote the organization and are awarded based on how well the applicant’s background, essay, and other specific application requirements mirror the organization’s or club’s ideals. Notable scholarships offered by clubs and organizations include:
- Optimist International Scholarships - These competitions start on a local level. Interested students should contact their local Optimist Club to locate a sponsor.
- Kiwanis / Key Club District Scholarships - Students should contact their local or district organization to find out the availability of awards.
Many businesses offer scholarships that are open to the public. Most are typically merit based with some having both need and merit qualifications. A surprising number of scholarships are available through local businesses. These awards are typically filed with school guidance counselors. Students can get application information from their counselors. Notable merit scholarships offered by businesses:
- GlaxoSmithKline Opportunity Scholarship - This scholarship is available to students who have overcome adversity and who live in one of three counties in North Carolina.
- MediaCom World Class Scholars Program - The MediaCom scholarship is based on a student’s academic, community, leadership and service activities and accomplishments.
Legacy scholarships are those offered to the children and sometimes grandchildren of a business’s employees or an organization’s members. Notable merit scholarships offered by businesses:
- Siemens Foundation - Students with parents who work for Siemens are eligible for merit scholarships and should begin the application process in their junior year of high school. This program is part of the National Merit Scholarship program.
- Lockheed Martin Foundation - Students with parents who work for Lockheed Martin are eligible for their scholarship program for employees’ children. This program is part of the National Merit Scholarship program.
Where to Search for Scholarships
The first stop for any high school student searching for college scholarships should be in their high school’s guidance office. This is where most schools house information about technical training programs, colleges and universities, as well as scholarship opportunities for their graduating students. Students without access to college and scholarship information from their school can turn to the Internet. There are quite a few websites and organizations that provide listings of scholarships. Some offer easier access, while others require the user to click through ads. Almost all require registration on the site to search for scholarships. Where to look:
- College Board - College Board does more than offer standardized testing for college entry. Students can find colleges, explore careers, and search for ways to pay for college.
- Fastweb - Fastweb has been in the scholarship search industry for the past 15 years and has gained the respect of guidance counselors and other college and scholarship search organizations. A limited search is available without registering on the site, however, registration is required to access all of the site’s features.
- CollegeScholarships.com - This site requires registration to access any scholarship information. Registration is free and gives access to an extensive scholarship database.
- Scholarships.com - Offers a free scholarship database search as well as information and advice on other ways to pay for college. Registration is required to access the scholarship database.
Federal Student Aid
The federal government offers several types of financial aid to students for the purpose of attending college or career school. The types of aid fall into three categories. Grants are free money that under normal circumstances do not have to be repaid. Student loans offered under Federal Student Aid are guaranteed by the Federal government, do not require a cosigner and you are not required to begin paying the loan if you remain enrolled full time. Work-study jobs are available to students as part of a need-based financial aid package and are awarded on a first come, first served basis. The first step to receiving any federal financial aid is to fill out the Free Application for Federal Student Aid(FAFSA). Deadlines vary by state and school, but you are advised to gather necessary tax and financial information as early as possible and file the application as close to the beginning of the year as you can since some programs are time sensitive. To find out more about FAFSA, you can go to studentaid.ed.gov.
Grants are free money and do not need to be repaid. Grants from the federal government are need-based. There are four types of grants offered:
- Federal Pell Grants - Federal Pell Grants are typically offered to undergraduate students who have not yet earned a bachelor’s degree.
- Federal Supplemental Educational Opportunity Grants (FSEOG) - This type of grant is also called campus-based aid because it is handled directly by the school’s financial aid office. Not all school’s participate.
- Teacher Education Assistance for College and Higher Education (TEACH) Grants - TEACH grants provide up to $4000 to those students pursuing an education that will result in a teaching career. There are other stipulations for receiving the grant which are outlined at the link above.
- Iraq and Afghanistan Service Grants - If you are the child of a member of the U.S. Armed Forces who died during service in Iraq or Afghanistan after the events of 9/11 and are not eligible for a Pell Grant, you may be eligible for an Iraq and Afghanistan Service Grant. More information is available at the above link.
Federal student loans typically offer a lower interest rate than private consumer loans, do not require a credit inquiry and offer more flexible repayment schedules. There are two federal student loan programs offered through the U.S. Department of Education. The largest student loan program is the William D. Ford Federal Direct Loan Program with four loan programs available.
- Direct Subsidized Loans - Undergraduate students must demonstrate financial need in order to qualify for a loan under this program. There are several benefits to the direct subsidized loan. While you are in school at least half time, your interest will be paid by the federal government. It will also be paid for you during the first six months after you leave school. If you are experiencing financial stress you can apply for a deferment, which is a period during which you will not be required to make payments.
- Direct Unsubsidized Loans - Both undergraduate and graduate students may qualify for direct unsubsidized loans. You do not have to demonstrate financial need to qualify, however you are responsible for paying interest from the time the loan is taken out. If you opt to not pay interest while you are in school, it will be added to the principal of your loan.
- Direct PLUS Loans - PLUS loans are available to graduate students and those seeking a professional degree, as well as parents of dependent undergraduate students. The loan can be used to pay education expenses that aren’t covered by other forms of financial aid. The borrower is subject to a credit check and the interest rate is currently fixed at 7.9%.
- Direct Consolidation Loans - After a few years, the number of loans and different payment requirements may get overwhelming. You may find it helpful to consolidate all of your student loans into one loan. This option may give you a longer time in which to repay your debt. This may result in lower monthly payments, but it can also result in greater interest payments over the life of the loan.
Federal work-study provides part time jobs for graduate and undergraduate students who qualify based on financial need. Most jobs are on-campus jobs and many pay minimum wage. It is available to full or part-time students. Your school or university will administer the program if there is one available. Jobs are limited and are filled on a first come, first served basis. The earlier you submit the FAFSA application the better if you want a work-study job. After filling out the FAFSA forms and submitting all necessary financial information required by your college or university, you will be notified about the amount and types of financial aid you will receive. Make sure you reply promptly to any requests for financial information so you don’t limit your access to monies available to you.
Private Student Loans
Private student loans are like most consumer loans - they require a credit check (Go here to learn more about credit scoring) and as in most cases with a young borrower, they require a cosigner. Terms for repayment range from 5 to 15 years and the amount you can borrow is based more on creditworthiness and your ability to repay the loan, rather than on financial need. Prior to applying for a private student loan be sure to exhaust all funding options through Federal Student Aid to help keep interest charges as low as possible and repayment terms as flexible as possible. FinAid offers an excellent resource for comparing private student loans. The website offers a thorough comparison chart of the top PSL’s on the market. If you don’t want to base your research on information from one site, FinAid also includes a list of other websites that offer comparisons charts for private student loans. When you are ready to begin your search ask a few questions about each loan.
Are there flexible repayment options? Repayment options fall under three basic categories deferred repayment, fixed repayment or interest repayment.
- Deferred repayment plans allow you to defer all payments of principal and interest until after you graduate from school.
- Fixed repayment plans allow you to pay a very small fixed payment during your college years to help save on overall interest charges during the life of the loan.
- Interest repayment plans require that you pay full monthly interest charges on the loan principal. This option saves the most in interest charges over the life of the loan.
- Are there loan origination fees or application fees? If there is a fee, is it balanced out by a reduced interest rate?
- Is there an early repayment penalty?
- How much of your school costs are you able to borrow?
Receiving an acceptance letter to the college or university of choice is a very exciting event in most students’ lives. Developing a strategy for paying college expenses early in the process can alleviate a tremendous amount of stress for you and your family.