A college education does not come cheaply. The average student who attends a four-year collegiate institution leaves school owing about $30,000 in student loan debt. The total amount of student loan debt in the United States comes in at a whopping $1.6 trillion dollars. That’s a lot of debt. In order to keep your borrowing costs down and money from pouring out of your pockets, let’s take a look at some of the best ways to pay for college.
How To Pay For College
Less than 30% of Americans actually know that a 529 plan is the best tool to pay for college. High income earners and wealthy individuals are the greatest adopters of 529 plans despite the fact that they are open to anyone. A 529 plan is named after section 529 of the Internal Revenue Service. A 529 plan is a tax advantaged savings plan designed to pay for educational expenses. A 529 plan can cover expenses from kindergarten through 12th grade including college education. The benefits of a 529 plan are that you receive tax-free growth and tax-free withdrawals.
Contributions to a 529 plan are not tax deductible at the federal level but more than half of the states in the U.S. allow a state tax credit or tax deduction for contributions to a 529 plan. Contributions are considered gifts for tax purposes as long as you stay under the $15,000 gift tax threshold. Tax free distributions for elementary, secondary schools, public, private, and religious are limited to $10,000 per year.
There are two basic types of 529 plans:
529 Prepaid Tuition Plans
Prepaid plans allow you to prepay future college expenses. You purchase tuition credits that will cover future tuition costs. These plans fully cover the cost of attending college at an in-state public institution. Prepaid plans are only offered in a handful of states and they strictly cover tuition and fees. Prepaid plans lock you into a lower tuition rate but they also lock your child into attending a state school. If your child selects an out of state school, then you may be on the hook for additional tuition payments and fees.
529 College Savings Plans
The best 529 plan to get is the 529 college savings plan. College savings plans have greater flexibility and can be used at any academic institutions both public and private schools. They can pay for undergraduate, graduate, professional, technical, and trade schools in any state. College savings plans are invested in mutual fund securities, which have the opportunity to grow your contributions to a greater rate over time. College savings plans have greater risk than prepaid plans, which also means greater return potential. You can enroll in a 529 college savings plan whenever but prepaid plans owners are subject to open enrollment periods. 529 college savings plans allows you to use funds for computers, books, supplies, equipment, and more educational expenses other than just tuition and fees.
The earlier that you start your child’s 529 plan, the better off you are.
You can name anyone as the beneficiary of a 529 plan including:
- A child
- A grandchild
- Any family member
- A friend
- A neighbor
You can buy a 529 College Savings Plan for any of the 50 best states. You don’t have to enroll in your state’s plan. You can pick the plan whose returns, investment style, and administrator that you like the most.
You can start saving for your child in a 529 plan even before the child’s birth. You can list yourself as the beneficiary of the plan and then switch the beneficiary’s name to your child after his/her birth. This allows you to make compound interest work for you.
You can open a 529 plan at any major bank or broker.
Coverdell Education Savings Account
Coverdell ESA’s are similar to 529 plans in offering tax-free growth and tax free withdrawals. This plan can be used for K-12thgrade and college just like a 529 plan. Coverdell ESA’s can cover tuition, room and board, books, technology, uniforms, and any other education related expenses. Coverdell ESA’s have an annual contribution limit of $2,000 per year.
Education savings accounts cannot be contributed to once a child reaches the age of 18 whereas a 529 plan can be contributed to for anyone of any age. Funds in the account must be withdrawn by the time the beneficiary turns 30 or else the account is subject to taxes and fees. You do not have the same degree of control to switch beneficiaries as with a 529 plan. Your child controls the funds and can use them for non-educational purposes after the age of 18. Coverdell ESA’s and 529 plans are both subject to tax if not used for educational purposes.
You can have both a 529 and a Coverdell Education Savings plan to save for college. Coverdell ESA’s do have income limits however. High earners may not be able to contribute. Single taxpayers whose modified adjusted gross income falls between $95,000 and $110,000 are subject to gradual phase outs of contributions. Married taxpayers whose MAGI falls between $190,000 and $220,000 are subject to contribution phased out as well.
You can open a Coverdell ESA at any major bank or broker.
Who doesn’t love free money? A scholarship is a grant to support a student’s education which never needs to be repaid. Scholarships can completely pay for college or reduce the amount of student loans that a student needs. Scholarships can be based on academic excellence, merit, need, or outstanding athletic ability.
Merit Based Scholarships
Academic scholarships are one way of paying for college for students for have a high Grade Point Average (GPA). A GPA of 3.0 or higher can qualify a student for an academic scholarship at some institutions whereas highly competitive schools will require a minimum GPA of 3.5 or higher. Colleges offer partial and full scholarships based on the students academic performance in high school. Higher GPA’s qualify for greater assistance. Academic scholarships look at consistent academic excellent, community service, volunteer activities, leadership abilities, and clubs/organizations joined.
SAT and ACT Scholarships
High SAT and ACT scores can serve as another way of earning a college scholarship. SAT scores of 1200 and up and ACT scores of 26 and up allow a lot of students to earn scholarships to colleges. Some students have earned SAT scholarships for scores above 1000 and ACT scores above 24. The SAT/ACT requirement depends on the academic requirement and scholastic competitiveness of the academic institution. A 1400 score may qualify a student for a full ride at a public institution while the same score would not qualify you for merit based assistance at a school like Harvard. Public schools typically offer more scholarship opportunities based on GPA and SAT scores than private schools.
You can find merit based scholarships by visiting college websites or typing into google the university’s name followed by “merit based scholarships”.
Athletic scholarships are based on a student’s athletic ability and contributions that will be made to the university in sports. The best chance of getting a full ride athletic scholarship for men is by playing football or basketball at a NCAA Division I institution. Women can earn full scholarships in basketball, gymnastics, tennis, and volleyball. Students in other Division I sports can earn full athletic scholarships but it’s less likely due to the division of revenues. Students can still earn partial athletic scholarships which will still cover a large portion of tuition.
The top 10 athletic scholarship sports for men in the NCAA and NAIA are:
- Ice hockey
NCAA Division I, Division II, junior colleges and NAIA schools offer athletic scholarships. You can obtain athletic scholarships by communicating with college coaches and recruiters. Send a coach an email with your information and links to highlights uploaded to Youtube or school’s athletic website. You can also send a DVD to a coach of your game footage and a copy of your schedule so a scout can come see you.
Need Based Scholarships
Colleges offer scholarships for students who come from low-income homes and are able to demonstrate significant financial need. Need based financial aid often comes in the form of grants. Pell Grants are federal grants for undergraduate students based on financial need with students receiving a maximum grant of $6,195 for 2019-2020. States offer grants for students attending in state colleges. Universities also offer additional grants to students with demonstrated financial need. Need based assistance often has an academic component attached where students must meet certain academic standards and demonstrate financial need to qualify.
Government Financial Aid
You can qualify for low interest loans from both federal and state governments to pay for college. Students can obtain subsidized and unsubsidized loans by completing a FAFSA application. (Learn about all of the government financial aid options available in what is FAFSA). Undergraduate dependent students can qualify for up to $57,500 in financing for undergraduate education. Graduate and professional students can qualify for up to $138,500 in financial aid. Independent students can receive up to $31,000 in the form of grants, loans, and work-study programs are available.
Private loans are often the last resort of those seeking to pay for college because of the higher interest rates charged and difficulty of obtaining financing. Private loans from banks and other institutions require a higher credit score and often have higher interest rates than student loans offered by the government. Also, borrowers who are not credit worthy will require a cosigner.
Sallie Mae is the largest private student loan company lending money to over 30 million students at the undergraduate, graduate and professional school level. Sallie Mae is the most well known lender because it used to be a government entity servicing federal loans. There are other lenders who offer private loans for borrowers seeking education financing including:
- Citizens Bank
- Laurel Road
- Wells Fargo
The advantage of private loans is that they can cover the total cost of education whereas financial aid may not cover the whole amount depending on the institution.
Now you are equipped with all of the information that you need concerning how to pay for college. Start early, research all financing options, and stash as much cash as possible in investment assets so you can come out of college debt free!