We all want the best for our kids. We want them to be successful and live financially rewarding lives so that they can raise their own families without the struggles we may have had. We want them to go to college. We expect them to go to college. Unfortunately, not all of us have the financial means to get them there, at least not without some help.
Options for Paying for College
According to The College Board's study on Variation in Published Tuition and Fees for the 2012-2013 academic year, the tuitions vary greatly when choosing between private and public institutions. For instance, if you or your child is interested in a public 4-year college, the median tuition is $8,672 per year. Your wallet will feel a little lighter, however, with a private 4-year college at a significantly higher median price tag of $30,200 per year.
If your children are a bit younger and you still have time to plan ahead, there are options available, such as Section 529 Plans, which allow you to save money as your child grows in an account that can be used to pay for "qualified educational expenses." The beauty of these plans is that funds that you invest in these accounts are free from federal income tax (unless, of course, your child decides not to go to college). Since these plans are state-administered investment plans, some states will also offer tax benefits, such as tax deductions and/or credits. As of April 2013, there are 86 of these 529 plans, each with its own fee structure and other unique features, so it's best to do your research or talk to your financial planner when considering one.
What if these plans aren't an option for your particular situation? What if your kids will enter college in a year or two? What now? Do you tap into your retirement fund to pay for your child's education? Most experts say NO! You should never use your retirement money to pay for your child's education. As it is, most of us will struggle to save enough for retirement, so accessing a retirement fund to pay for a child's tuition isn't generally advisable. Of course, some people are 100% funded for retirement and can afford to tap into their IRAs or 401(k) accounts. Again, it's always best to make these decisions with the guidance of a financial planner or accountant whom you trust.
Fortunately, for those of us who don't have a significant amount of savings stuffed under a mattress somewhere, there are a variety of tuition assistance programs to help ensure that our children get a proper college education. There are many sources of financial assistance, and more of us every year are looking to these programs for help. In fact, federal grant aid almost tripled between 2001 and 2012, increasing from 20% to 26% of the total $185.1 billion in undergraduate aid.
What to Look for When Choosing a College
One very important point to look at when considering colleges and universities is their financial aid policy. According to Kiplinger, Several private college with a hefty annual tuition have "no-loan financial aid policies" which allow a student attending a school with an expensive tuition to graduate with very little debt to deal with. For example, students attending Princeton University (annual tuition of $50,269) typically graduate with debt as low as $5,225. Surprisingly enough, the percentages of students who borrow loans for these schools is just as low. At Princeton, again, the percentage of borrowers is 23%. So, when considering a college, it never hurts to do some research into every college that you're interested in. Not just the ones with low costs. You could be surprised by what you find!
Along the same lines as researching which colleges or universities offer the best financial aid package, you must also be sure that you'll be able to pay off whatever debt you end up having within a reasonable amount of time. When thinking about majors, we automatically think "What is my dream job?". That dream, however, isn't quite realistic in this day and age. A drama major going to a school with a tuition of $30,000 would probably leave college with more debt than they would be able comfortably start paying off with any theatre job they would get. Of course there are always the special cases where that same theatre major could become quite famous in their field and have no problem paying off debts. That situation is, unfortunately, the exception and not the rule. The best thing you can do is to research your major of choice. Find out what types of positions are available with that type of degree, the chances of landing a job quickly after graduation, and the average salary of those jobs. This could be a huge factor in deciding where you go and what you study. With the state of the job market where it is right now, the less debt you can rack up, the better off you are. According to New America Media, many college graduates are finding themselves taking any job they can possibly get just to start paying off their debts!
How to Tackle the Daunting Application Process
The best advice is to start the financial aid process early, because the red tape can be overwhelming at times. The first step to getting financial aid for college is filling out a Free Application for Federal Student Aid (FAFSA). You can file online at www.ed.gov, or call 1-800-433-3243 for a copy of this application. You can also get a copy of the FAFSA from your high school guidance office or at any area college. The FAFSA application must be filed in order to become eligible for federal and state aid, and should be completed sooner rather than later, preferably in January. Why so early? A lot of federal aid is distributed on a first-come, first-served basis, so the sooner you file the better. If you wait to the last minute before filing, loans may be the only aid left.
The application is quite an involved process and isn't exactly simple to complete. The form asks parents for everything from federal tax forms to current bank and mortgage statements. Students will need a copy of their own W-2 forms and federal tax forms, as well as a list of the colleges that they'd like to attend. Mistakes mean delays. If the information provided is wrong, they'll send it back for you to fix, but that costs you time and, potentially, money.
Many private and public universities have additional aid forms that must be completed. Again, turn in these forms as soon as possible. About four to six weeks after submitting a FAFSA, you'll receive a Student Aid Report (SAR). This report contains the information submitted on the FAFSA application and lists your expected family contribution, which is the amount of money the government expects your family to pay in college education costs. Be prepared. Federal financial aid calculations may expect parents to contribute as much as 6% of their savings and anywhere from 22% to 47% of their available income toward their childs education costs. By taking the parents' available income from the previous year's taxed and untaxed income and subtracting a number of allowances, including federal taxes, a percentage of state and local taxes, the number of parents working and number of kids in college, the government assesses how much available income you'll have this year.
So, You Need to Apply for a Loan
There are many different types of loans that parents and students can apply for, including federal Stafford loans, which are offered in the following manner, according to Staffordloan.com:
- Interest rate: 6.8%
- Interest Paid: By the federal government while the student is in school.
- Loan Amount: Up to $8,500 per year (dependent on student's eligibility).
- Interest Rate: 6.8%
- Interest Paid: The interest is accrued while the student is in school. Payments are not required while student is in school.
- Loan Amount: Up to $12,000 per year (dependent on student's eligibility).
Another option is a Perkins Loan. This is a campus-based loan program, with the school acting as the lender. According to studentaid.ed.gov, you may qualify for a Perkins Loan if you meet all of the following:
- You are an undergraduate, graduate, or professional student with significant financial need. (Financial need is determined by looking at the difference in the cost of your school and the earnings your family would be able to contribute.)
- You are enrolled in school either full-time or part-time.
- You are attending a school that participates in the Federal Perkins Loan Program.
Parents of dependent students can take out loans to supplement their children's aid packages. The federal Parent Loan for Undergraduate Students (PLUS) allows parents to borrow money to cover any costs not already covered by the student's financial aid package. Information on this type of loan can be found on StudentAid.Ed.Gov
- Interest Rate: Fixed Interest at 7.9%
- Lender: US Department of Education
- Requirements: Cannot have adverse credit history.
- Loan Amount: The remaining amount after subtracting the financial aid received from the cost of attendance.
Scholarships: The Silver Lining
Scholarships are a form of aid to help students pay for their education. Unlike loans, they do not have to be repaid. Hundreds of thousands of scholarships from several thousand sponsors are awarded each year. Generally, scholarships are reserved for students with special qualifications, such as academic, athletic or artistic talent. Many scholarships can be identified and applied for on-line through various searches. There are several ways to find out if there is a scholarship out there for you. Some key areas to research scholarships are:
- Financial Aid Office at the colleges or universities you are considering
- High School guidance counselor
- U.S. Department of Labor's website
- Local libraries
- Local Churches (or other religious establishments)
- Local Businesses
There are even services that will locate scholarships for you, but be careful if you opt for this type of company. Each year, the U.S. Department of Education receives thousands of complaints from students and parents regarding such services, most alleging that the information promised was never delivered.
What Should You Do Now?
Now that you're well equipped with the information necessary to do further research on your own, the best thing to do is to understand that there are more people applying for school at the same exact time as you or your child than you could possibly imagine. Breathe. You're not alone. There are people out there that know how stressful this time can be and they are more than willing to help you out. More information on the application process, from the initial search all the way to the move-in day, is available online at your fingertips. Check out StudentAid.Ed.Gov or any college or universities website to direct your search.