Families spent an average of over $26,000 on college costs in 2020-2021, and the number is expected to climb in the years ahead. Some parents of teens have been planning for higher education costs for decades while others are just now getting started. Luckily, there are plenty of options available for students and their parents, and knowing some key terms and first steps can help families make sense of what can be a stressful process.
Income & College Savings Plans
According to Sallie Mae (see the graphic below), about half of college costs in 2020-2021 were funded by parental income and savings. Increasing household income is one of the cornerstones of building any strong financial foundation, and affording higher education is no different. Federal and State governments also provide tax advantaged choices specifically related to saving for college and it’s important to start early with these to maximize the benefits of compounded interest.
Source: Sallie Mae
In fact, 37% of parents used a college savings account to help pay for college in 2019-2020. 529 plans are the most popular way of saving for a college or trade school education. They are flexible and low maintenance potential tax-deferred savings plans for which anyone can qualify. You can use your 529 plan account balances to fund any U.S. post-secondary education institution or certain schools abroad for expenses that are qualified. Other parents tap custodial UTMA or Coverdell Education Savings accounts, and each can provide unique benefits. Talk to a qualified financial professional to help determine the savings option that best suits you.
Student Scholarships
Scholarships are funds for college that don’t have to be repaid to the provider. While full athletic scholarships get many of the headlines, there are many smaller scholarships available for students based on academic ability, interest, intended major, ethnicity, geography, and more. Scholarships.com is a great database that provides not only a directory and search functionality but also matches students with potential funds
One of the benefits of scholarships is that they are usually not based on financial need, so almost anyone can apply. They also come in a variety of amounts, so it might help to target a number of $500-$2,500 scholarships instead of aiming for the big awards that garner the most attention (and competition). It’s best to start the search process early (think, junior year) as many include multiple steps in the application process.
Educational Grants
A subset of financial aid, educational grants are another funding source that does not need to be repaid. The difference from scholarships is that most are “need” based, meaning there are income or asset qualifications. The first step in applying for grants is to fill out the free application for financial aid (FAFSA) which is released on October 1 for the upcoming academic year. Check out our useful, updated guide to the 2022-2023 FAFSA to understand recent changes and how to go about starting (and completing) the process.
Each year, thousands of families miss out on potential funding simply by not filling out this free form. The FAFSA now features an import tool that will automatically pull your tax filings directly from the IRS, reducing the time required to collect and validate financial information. It’s also recommended that you complete the process as soon as possible: while aid is need-based, many states disburse funds on a first-come, first-served basis.
Work Study & Student Employment
Another benefit of filling out the FAFSA is potential eligibility for work-study, which is a way for students to earn money for tuition via part-time employment. Although pay and hours vary, the average student can earn $2000-$3000 each year in funding that is not counted against other financial aid awards. Most work 10-20 hours per week throughout the semester. As with many things related to financial aid, it is best to apply early for work-study via the FAFSA and engage with your college’s employment or financial aid office about possible job openings as soon as your student reports to campus freshman (and each subsequent) year.
Regular (non-work study) employment is also available on most college campuses to students who do not demonstrate financial need based on the FAFSA form. Student earnings for non-work-study roles will usually come directly from departmental budgets. Many colleges even allocate separate funds to departments for non-work study employment opportunities. This can be a great way not only to earn extra money toward tuition, but to gain valuable work experience that can be leveraged for summer internships or jump-starting post-graduation careers.
Financial Aid Appeals
A financial aid appeal can be requested due to a major life change such as a death in the family, one-time income bump, or job loss. Financial aid offices have reported a deluge of appeals since 2020 due to the economic fallout from the Coronavirus pandemic. To add further complexity to the issue, many schools received special pandemic funds from Federal and State governments and have more flexibility than usual with financial aid awards.
If you experienced even a financial set-back since completing the FAFSA, it might be well worth your time to contact your student’s financial aid office for a reevaluation. SavingForCollege.com provides a convenient, step-by-step guide for parents to communicate their situation to schools. It’s critical to include as many facts (i.e hard numbers and dates) and documentation as possible to expedite your appeal review.
Borrowing
Unfortunately, the rising cost of higher education has outpaced the ability of many families to pay for college through savings and cash flow. To bridge the funding gap, there are a number of private and public loan options for both students and parents. The U.S. Department of Education’s federal student loan program is the William D. Ford Federal Direct Loan (Direct Loan) Program. Undergraduate, dependent students can borrow up to $5,500 their first year. Those with financial need can have their interest payments subsidized while they are still engaged in half-time (or greater) study.
Federal Direct Plus loans are also available to parents with acceptable credit to fund their students’ educations. Parents can borrow up to the full cost of attendance, so it’s important to consider a realistic return on the investment. Loose eligibility requirements, a lack of borrowing limits, and few forgiveness options can make these loans risky for some. Be sure to talk to a financial advisor about your holistic financial picture – especially your retirement goals – prior to taking out tens of thousands of dollars of additional debt.
Wrapping Up
No matter where you fall in the process of funding your student’s college education, making a plan and exploring multiple options is critical to making it more affordable and less stressful for your entire family. Taking advantage of tax advantaged savings vehicles, filling out the FAFSA to maximize financial aid, and exploring all possible scholarship, grant, and work opportunities provides a great start.
In addition to these college funding options, you can also learn more about the 7 Biggest Mistakes Parents Make When Saving For College. And be sure to check out our Family and Finances blog series where we provide financial insights for families.
Have additional questions regarding FAFSA or College Savings Plans? Contact our team of Financial Advisors today!
Sources:
- https://ww2.salliemae.com/about/leading-research/how-america-pays-for-college/
- https://www.usnews.com/education/best-colleges/paying-for-college/articles/how-to-pay-for-college-using-these-overlooked-strategies
- https://www.ed.gov/content/8-things-you-should-know-about-federal-work-study
- https://www.savingforcollege.com/article/how-to-write-a-fafsa-appeal-letter-for-covid-19
- https://studentaid.gov/understand-aid/types/loans
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