If you have a child who’s heading off to college soon, you might be wondering how you’re going to pay for the costs.
Even if your family qualifies for financial aid, it might not cover all of your college expenses.
If you have a high family income of over $100,000 per year, you could easily end up paying over 90 percent of college costs or even full price.
At lower income levels, you can still end up paying 50% to 75% of a school’s sticker price, which can be over $10,000 per year in net costs.
This is why it’s critically important to sit down, create a college financial plan, and figure out how you’ll pay.
There are only six ways to pay, and most families will use a combination of some or all of them. Here’s a breakdown of the six ways to pay and some important things to keep in mind for each one.
1. Current Income
If you don’t qualify for financial aid or only qualify for partial assistance, your family might pay a large amount of college expenses from your current income. Usually this is income you’re making, but it can also include income your child makes from working over the summer or at a part-time job.
Paying from current income is more realistic for some families than others. If your family has a high income, you might be able to pay more college expenses from your current budget. But cost of living differences could mean you’re unable to contribute as much.
For example, if you live in New York City and make $80,000 a year, you’ll only be able to contribute a smaller portion of your current income than someone living in rural Wisconsin and making the same amount.
Your child may also be able to pay from current income. Some students are able to land good-paying, part-time work and summer internships while they’re in college, so they can contribute more toward college costs.
One thing that makes it easier to pay from your current income is a payment plan. This may be offered by your college or a private company. These let your family contribute a set amount every month rather than paying tuition in lump sums.
You may also be able to pay for a significant portion of college costs from your existing savings and investments. Maybe you started saving for college as soon as you got a positive pregnancy test. Alternatively, if you’re like many families, you might have savings or investments that weren’t earmarked for college, but you could end up using them for college.
It’s important to consider how using savings will impact your other financial plans. These include your retirement and family vacations as well as how your savings and investments might be assessed in the financial aid application process.
Colleges expect parents to use up to 5.64 percent of their unprotected assets toward college. Unprotected assets include savings and checking accounts, cash, investment accounts, tax credits, tax-exempt interest income, investment property, college savings plan, and even the net worth of a business with over 100 employees.
3. Financial Aid
Depending on your family’s financial situation and the college you choose, financial aid could pay for a large percentage of your costs, or you might not qualify at all.
Financial aid can come from the federal government, state governments, or your child’s college. These funds typically come in the form of grants, scholarships or loans. Some will be need-based, while others are merit-based.
When you receive your financial aid award letter from the schools that accept your child, you’ll find out how much aid they’re offering. These letters generally arrive in early April of your child’s senior year in high school.
To get an estimate of how much financial aid your family might receive, you can use my expected family contribution calculator at www.tamingthehighhostofcollege.com/EFC. It will help you determine how much need-based aid you may qualify for, and you can also watch the videos in the Quick Links section to learn more about federal financial aid programs.
For a lot of families, student loans are a reality. You may not like them and you may not believe in them, but you might need them. If you don’t get enough financial aid to cover your costs, and you aren’t able to find enough funds from your savings, income or investments, you’ll probably have to rely on loans.
Some students will pay a percentage of their college costs through student loans. These could include federal Direct Loans or private student loans.
There are a few types of federal student loans. Some require the student to repay them, while others are taken out by the parents, who are obligated to pay them off.
The amount of money your student can borrow through federal student loans is based on your student’s year in college.
Once you’ve maxed out your federal student loan allowance, you’ll have to turn to private student loans or other alternatives if you need more money.
Private student loans usually require a co-signer. That means parents or another close friend or family member will be required to take some responsibility for the loan. However, most private student loans offer a co-signer release, which allows the co-signer to be released of responsibility after a set number of on-time payments by the borrower.
You might also decide to take out a Home Equity Line of Credit to help pay for college, or you might take a loan from one of your retirement accounts. These types of loans can potentially give you lower interest rates than a student loan, but borrowing from retirement should always be a last resort.
For a complete introduction to all of these student loan options and great advice to help you decide which might be best for you, make sure you read my article, The Quick Guide to the Best Student Loans.
Scholarships are a great way to pay for college costs. Who doesn’t like free money?
Unfortunately, not every student is a good candidate for scholarships, and applying for them can take a significant amount of time and effort.
It’s important to evaluate your chances of winning scholarships and decide how hard your child is willing to work to apply for them.
If you think your child is potentially a good candidate for scholarships because he or she excels in academics, sports, leadership, or the arts, then you should start researching scholarships during your child’s sophomore or junior year.
Your student might also qualify for institutional scholarships, which are given out by your child’s college, or external scholarships awarded by individuals, organizations, and companies.
While there are only a few students who pay for all of their college costs through scholarships, there are many students who receive scholarships to pay for at least some of the costs.
6. Reduction in Expenses
Another strategy to pay for college is reducing your expenses and using the savings to pay for college.
The first place you can look for cost savings is in your taxes. Tax incentives are given to families with children in college, and the savings can be redirected toward college costs.
Another strategy is to get out of debt before your child goes away to school. The money you would otherwise spend on interest or credit card payments can be redirected toward college costs.
Cutting back on discretionary spending and unnecessary expenses is another option. This might include cutting back on eating out, grocery shopping, or even your cable bill. If you’re able to cut enough small things from your family’s budget, these can add up to a big contribution toward college.
Finally, you might cut back on saving for retirement or put off buying a new car, going on family vacations, or giving expensive holiday gifts. By cutting back on luxuries and temporarily reducing your retirement savings, you can redirect significant savings toward college expenses.
How Your Family Will Pay
Your family will probably end up paying for college by using some combination of these six methods.
For example, if college will cost $20,000 per year and your family has a lower income and a higher need for aid, your child might qualify for $15,000 in financial aid. You might pay for the rest with Pell Grants and student loans.
If you have a high income and significant savings, you might only qualify for $2,000 in financial aid. Let’s say your student also receives $5,000 in merit aid. You could pay for the remaining costs with $10,000 out of savings and $3,000 out of your current income.
If your family income is somewhere in the middle, you might end up using a variety of payment methods. Perhaps your child qualifies for $7,000 in financial aid and receives $3,000 in scholarships. You might end up paying an additional $5,000 out of savings, $2,000 from current income, and $3,000 from student loans.
If you don’t believe you can pay for college out of your current income, you might want to start putting funds aside now, or you might explore how to increase your child’s odds of getting scholarships.
No matter how you end up paying, it’s important to plan ahead and think about the right combination and options for your family.
The sooner you start planning, the easier it will be to cover the costs once the time comes.
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