Getting into college takes more than just good grades, it takes a financial plan. Every year the cost of higher education rises as students scramble to pay for supplies, tuition and living expenses. An education is a great investment but it’s important to understand your options so that you can leave school in the best financial situation possible.

Hands down the best way to pay for college is out of pocket, either with available scholarships and grants or with a funded education account such as a 529 savings plan. Each state runs their own college savings program, but you don’t have to go with your current state’s plan. With these plans you can save money on your taxes both when you put money in and on any interest that accrues on the account. Study the terms of the program and administration fees as you find one that works best for you. Here is a list of savings options for education.

Setting up a financial account for college expenses takes a bit of planning and forethought for your child, but can literally save you and your student thousands of dollars in the long run on capitalized interest and fees. Students who can leave college with little to no accrued debt are much more successful than students who could be paying back tens of thousands of dollars in loans for a decade or more after graduation.

Scholarships and Grants

If you haven’t been lucky enough to get a college fund together by graduation, then your next step is to start applying for scholarships and grants. There are thousands available that offer a few hundred dollars to a full-ride for programs all over the country. However, you have to do some research to find them. The financial aid office at your school can help. Here is a good list to get you started,  or also here

Pell Grant

Before you even consider taking out an education loan be sure that you have filled out the government FAFSA® (Free Application for Federal Student Aid) form to determine how much aid you are eligible for and to see if you can apply for a Pell grant.

Pell Grants are awarded to undergraduate students who have exceptional financial need. The grand doesn’t have to be repaid except under certain circumstances. It has to be re-applied for every year you are in school to maintain the grant.

Federal Student Loans

If you decide to take advantage of financial aid be sure to understand how the loan is structured, how it will be repaid, what the terms and fees are, if it is coming from the federal government which often offers more protection for borrowers, or private sources including private student loans from a bank.

It’s best to start with a Federal loan. By law they have controlled terms, lower set interest rates for the life of the loan, and more repayment plan options than private loans. Undergraduate student loans are typically managed through the school’s financial aid department, but you will be liable to the financial institution or bank that holds the loan when it comes time to repay it. For the most accurate information on student loan interest rates visit this site.

There are four types of federal student loans also known as Stafford Loans:

Direct Subsidized Loans. These loans are specifically for undergraduates (students that haven’t yet received a college degree) who qualify as low income. With a subsidized loan the government pays the interest on the loan while the student is actively enrolled in school and for a set grace period after graduation. Subsidized loans save money because the interest accrued during the student’s education isn’t capitalized or added to the total amount owed. They also have the lowest interest rate.

Direct Unsubsidized Loans. These loans can be for either undergraduate or graduates depending on the university or college and there is not requirement for low income or financial need. The borrower must pay the interest accrued or it will be capitalized on the principal amount of the loan.

Direct Graduate PLUS Loans for graduate and professional students. These loans are designed specifically for masters or doctorate students and often have higher interest rates and stricter repayment plans. 

Direct Parent PLUS loans which can be applied for by a student’s parents or guardians. In this case the parent is the only applicant and are responsible for repayment. It offers the same tax benefits as other student loans.

In addition to the set interest rates on these loans there is also a disbursement fee charged for each distribution payment on your loans. That fee can run between 1.0-4.25% of the total loan amount and will be taken out of each payment you receive. You can get more information on the types of Federal loans and how to apply here.

Private student loans

While it’s a good idea to keep your college expenses as low as possible, sometimes federal loans won’t cover all of your education costs. In addition, some private and trade schools aren’t accredited to offer federal student loan packages. If this is the case you will need to look into applying for a private loan. Be aware however, that the private loan industry is fully for profit and a financial minefield. Even with regulations in place financial institutions can be predatory in their lending strategies. Your loans may start with a reasonable 5% interest rate, but could go as high as 14% (standard private loan interest runs around 13%) over the life of the loan.

Fees vary widely as well. In addition, private institutions may not have flexible repayment or forbearance plans, and thanks to a 2005 ruling private student loans just like their federal counterparts are also protected from bankruptcy. It’s a win-win for the bank. It’s best to stay away from private student loans unless they are absolutely necessary.

Other ways to pay for education

1. Follow the money. Some low-cost loans, grants, and repayment programs are designed to encourage people to go into high-need areas of expertise. Others help increase minority presence in some industries. After graduation if you are employed by some government or non-profit organizations, serve in a high-risk or low-income area, join the military, or work for some types of business which offer loan repayment as a perk you can have your education expenses covered, or your student loans forgiven over time. After your period of service to fulfill the terms of the contract you can take a job in another area without penalty and build from there.
2. Consider spreading out your education. Taking 6 years to go through a 4-year program for instance while maintaining a full-time job, sharing rental expenses with other students to cut housing costs, or doing a work-study program where you are employed by the university for a discount on your tuition.
3. Research school costs vs. value. Private universities are often multiple times more expensive than state run universities and those are more expensive than community colleges. It may be that a career training program is even the way to go. Do the research to find out which program is going to give you the most bang for your buck. Your first choice may not always be the best one.
4. Other pathways into college also exist. Rather than jump right into a degree program from high school, you can get some basic job training which will get you better paying work to help you pay for your higher degree. For instance, become an electrician’s apprentice and get your journeyman’s license before entering a university engineering program; or take an EMT or nurse assistance course and double your wages from just flipping burgers while you prepare for nursing school.

The important thing to remember is to have a solid plan early in your school preparations, and budget every dime while you are working for a degree. The current student loan debt in this country as of 2020 is over $1.5 Trillion dollars, that is a lot of debt hobbling graduates as they try to start out in life. Not getting an early start on savings, investing and a home purchase because of a large debt payment makes a big difference in how much someone can earn over their lifetime – but it doesn’t have to be that way.  One of the best skills you can learn is how to save, manage and budget your money with an eye to your future.

Our counselors at Family Financial Education Foundation are trained to help people manage their debt and learn how to have a stronger financial future. Give one of our specialists a call at 877-789-4172. We offer a free initial consultation and can help you figure out a good direction and bring you peace of mind. www.ffef.org