How to Pay for College: For Parents and Students
- A baby is born and immediately the parents think 18 years ahead to saving for college. It sounds crazy, but it's the best thing to do. Statistics show that saving for college starting from when a child is born as opposed to starting 5 years later can mean the difference of thousands of dollars in savings. The good news is there are plenty of ways to pay for college, for both the early starter and the late beginner, as described below.
College Savings Plans:
The 411 on 529's529 plans are hands-down the best choice for your college savings. These state sponsored investment plans are designed to help families save for future college costs. Parents are encouraged to set up a 529 account as early as possible, or anyone for that matter - grandparents, uncles, cousins - for as little as $25 or $50, and anyone can contribute to it throughout the years. Plus, the account holder stays in control of the funds throughout the life of the account, not the student.
The biggest benefit to a 529 plan is that its earnings are tax-free. The earnings are reinvested over and over as long as the money stays in the plan. And if you decide at some point to change the beneficiary (i.e. your older child gets a full scholarship to college but your younger child may not get that option), you can change the beneficiary without having to pull your money out. It just keeps reinvesting. In addition, you can invest in more than one state's 529 plan for one beneficiary.
Another perk is that the distribution of funds from your 529 plan are also tax-free, as long as they are used for "qualified" expenses (college-related), which are usually tuition, room, board, fees, books, supplies and transportation.
With 529 plans, the state controls the investment options, though you do have a say as to how conservative or aggressive those assets are allocated. Check with your state for more information and further details.
Coverdell Education Savings AccountsFormally known as the Education IRA, Coverdell accounts are offered by banks, mutual funds and brokerage companies, and give the account holder complete control over how the money is invested.
Coverdell Education Savings plans have become a great option for parents, as the limits on contributions to the account are $2000 per year. Again, anyone can donate to the account, up to $2000 each year. You don't get a tax deduction when money goes into the account, though you can use tax-free withdrawals to pay for private elementary and high school expenses. Plus, you can invest in both a Coverdell account and a 529 plan at the same time.
Custodial AccountsCustodial Accounts, like the UTMA or UGMA, have taken a beating in the world of college savings. Originally their big draw was to reduce a family's tax bill, and though there are some tax advantages, they can't compete with the zero tax benefits of 529 plans and Coverdell.
Plus at the age of 18 or 21 (depending on your state's stipulations), your child gains full control of the funds, which leaves some parents uneasy. Not only don't they have control over how the money is used, but financial aid may also be affected negatively since the funds are considered the student's assets, not the parent's.
Prepaid Tuition PlansPrepaid Tuition Plans are a way to let parents pay for future college bills by locking in today's prices. Offered to parents of students who are within three or more years away from attending college, they can either pay a lump sum or set up a monthly payment program. Money in the plan can be used at any public college or university within the state it is set up, though many states do not offer this plan.
18 Years Later:
Financial AidNow your student is ready to go off to college and the costs are at your doorstep. For any student hoping to get Federal Aid, State Aid, private loans or scholarships, they must first file the Free Application for Federal Student Aid (FAFSA). This can be obtained from any high school guidance office, college financial aid office, library, online, or by calling the Federal Aid Information Center, among others. The key is getting in your application as early as possible, usually between January and March 1st of a high school student's senior year for maximum consideration, since funds are allocated based on availability.
Financial Aid applications are considered after the student has been accepted for admission to a college and that college has received their information. First the college will consider your Estimated Family Contribution, which is how much you'll be expected to pay for your education based on the information provided in your FAFSA. Then they will determine the Financial Aid Package the student will receive, usually in the form of loans, grants or campus-based programs.
Types of Federal loans and grants include Federal Pell Grants, Perkins Loans, Subsidized Stafford Loans/Direct, Grad PLUS and Federal Parent PLUS loans (which is a parent loan). These are all determined on a need basis and vary in their features, from the government paying the interest to delayed repayment options.
Other loans include Unsubsidized Direct and Stafford Loans, private loans and college sponsored loans, among others. These are usually awarded to help a family pay for their share of the costs of college, though they are not need-based.
Doing research on all of the pros and cons of all types of loans is the only way to determine which is best for you. Just remember that you should always ask yourself how much of a loan you actually need, and to never borrow more than that amount. Even if your award letter shows more aid than you determined you'll need, you don't have to borrow that entire amount.
ScholarshipsThere are many free scholarships out there waiting to be allocated to students meeting certain criteria, and many ways of finding out about them through the Internet, high school guidance offices, libraries and many other sources. Make sure to also look locally at community based scholarships that aren't as well known.
Plenty of websites specialize in searching scholarships for you (like Fastweb.com), giving you a great starting point. Just be sure to avoid ones that charge for this service.
How can you increase your chances of landing a great scholarship? Get great grades! A high GPA will stand out among other applicants and classify you as a serious, dedicated, motivated student.
Choose the Right CollegeBe sure to apply to many different colleges in different price ranges as well as reach and back up schools. You may think a high priced college is out of your range; however you may receive a larger scholarship due to the higher cost and end up paying the same as an average or lower tuition college.
Also you may consider going to a Community College for the first couple of years. Not only will the cost be significantly less, it may also help springboard to getting you into a college that initially may be out of reach.
Work-Study ProgramsThere are many opportunities to work on your campus and earn money to pay for school. Check with your college for specific details, and don't delay. There are only so many jobs to go around.
Resident AdvisorsThough perks vary from college to college, many offer free room and board and sometimes a tuition break. Plus it's a great way to meet others in your res hall.
Regardless of how you choose to pay for college, the most important step will be researching all of the options out there and taking advantage of them as early as possible. Consider interest rates and repayment schedules, speak to advisors, and be honest with yourself as to what is realistic over the course of a college career. Once this is out of the way, you will be free to focus on your bright future - good luck!
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