You or your child are getting ready to go to college or perhaps is even in college. Depending on the institution, you might be on the hook for one of the biggest bills of your lifetime. According to the College Board, the average price for a private college for the 2013-2014 school year was $31,231; the cost for state residents are public colleges $9,139; the cost for out-of-state students at public colleges $22,958. Multiply that by four years to get a real ouch!
How to Calculate Your Price Tab
The first step in paying for college is understanding the price tab. While colleges have a list price, this isn't the price that many students pay. The net price, the actual price you pay is the list price minus any gift aid (grants, awards, scholarships). Net price does not include loans or money earned through work-study. Most colleges have a net aid calculator which can give you a general idea of what this cost will be. A student who digs out scholarships or grant opportunities though can get a net price below what these calculators estimate. Annually, colleges and different organizations provide billions in scholarships and grants.
Once you have a net price, there are several different ways to pay the bill. A family might have saved enough cash to cover the cost, or might have a rich grandparent who can gift the tuition, or might need to take out loans.
If you think you need to take out loans, then you will need to wait until you have been accepted to a college to get the full picture. Along with the acceptance, colleges send a financial aid offer that explains the different types of loans you qualify for. There are three distinct loan types:
Direct Subsidized Loans - Available to four year undergraduate students in need, these government-backed loans offer slightly better terms than their unsubsidized variety.
Direct Unsubsidized Loans - Available to four year undergraduate and graduate students, these loans are not based on need. Each college determines how much of this loan type the student should receive.
Private Loans - These types of loans make up the difference. They are not government backed and as long as the student or parent qualified, there is no limit on borrowing.
Just because you qualify for a certain type of loan doesn't mean it's the best option.
The chart below explains the different methods of paying for college and the strengths and weaknesses of each one.
Common Ways to Pay College Tuition
The chart below shows seven different ways that a student or parent can help pay tuition.
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|
Description |
Advantage |
Disadvantage |
Who Should Use This? |
|---|---|---|---|---|
|
Parents save up for child's education in savings accounts, CDs, 529 plans or other investment or bank vehicle. |
The cash is there and ready to be used. No need to apply for loans or pay them back. Child graduates debt-free. |
The actual price of tuition (listed tuition rate minus grants) penalizes those who have saved for tuition via these types of vehicles. Those who have saved and planned ahead actually pay more. |
Those with high incomes who can afford to put money away to pay for their child's education.
For a guide on the most popular ways to save for college, click here. |
|
|
Gifts |
Grandparent or rich Uncle pays some or part of tuition. |
This is great way to transfer wealth because the direct payment of tuition to the educational institution does not trigger gifts taxes or count against the unified credit. |
Not everyone has grandparents or a rich uncle in the position to help pay tuition or living expenses. |
Those with wealthy relatives. Good generational wealth transfer mechanism. |
|
Grants |
Money towards tuition based on financial need. They do not need to be repaid. The Free Application for Federal Student Aid (FAFSA) is the main way that students apply for both Federal and private grants. |
Grants do not need to be repaid and are not loans. |
Grants are difficult to get, especially for students who do not need financial aid. But students and parents can haggle with schools to increase the amount of grant aid provided.
Note that this is the area where having saved for college is unhelpful. Colleges will look a prospective student's savings and lower grant money if they have put money away for college. |
Those who are struggling to pay education and are willing to spend the time to find appropriate grant opportunities. |
|
Scholarships |
Money towards tuition based on merit. They do not need to be repaid. |
Scholarships do not need to be repaid and are not loans. |
Getting a scholarship can be difficult. Scholarships are usually merit based. |
Those who are high achieving high school students who have the time to apply for scholarships. |
|
Federal College Loans |
Loans backed by the government. Colleges let students know how much Federal student loan they qualify for.
There are three principal types:
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Federal Loans have the following advantages:
|
The interest rate on Federal College loans for those with good credit can often be higher than private loans, especially Direct PLUS loans.
Subsidized loans are available on a need-basis. Not everyone will qualify.
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Those who do not have the money to pay for college after grants and scholarships. |
|
Private College Loans |
Loans from private banks or institutions made with the intent of helping pay for college. |
For those with good credit or with good income after school, private loans may offer lower interest rates. |
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Those who need money for tuition after grants and scholarships and savings and who have a steady income. Private loans may have a lower interest rate than publicly backed loans. |
|
Home Equity Loans |
Loans from a bank against the value of a house or real estate property. |
Home Equity Loans offer the lowest rates available for credit-worthy borrowers.
The interest on home equity loans can be tax deductible. |
|
Those whose parents have significant equity in their home and are willing to borrow against it. |
Borrowing Options
If you need to borrow money, determining the best mechanism for doing so depends on your personal situation. If your family has a lot of equity in their home, then this might be the best option. If you are planning on teaching in a low income neighborhood after graduation, then Federal Loans might be best, as they offer loan forgiveness for various types of public services.
Because of the large sums of money involved in paying for college, it makes sense to spend the time to understand the intricacies of paying for college.
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