Parents and students all across the country continue to wonder how they are going to pay for college. Over the last thirty years, the cost of college has risen astronomically. Since 1987 we have had over a 500% increase in the cost of college tuition. In that same time frame, college tuition has risen at a rate 2.5x that of home prices, over 3x that of medium income, and 4x that of general inflation. Because of this, we often have parents who come to us wondering how they are going to afford the rising cost of college tuition. Luckily, there are numerous tools and loans available to help pay for college. Here is our suggested order of operations for how to pay for college.
Paying For College – Financial Aid & Scholarships
It’s important to see if you can qualify for any “free money” towards your college tuition. We start the college planning process here because any money we can skim off the top of your tuition bill is good.
Financial Aid
In order to start the process of applying for financial aid, you will need to fill out a FAFSA form. A FAFSA form is the first step in this process. After filling out a FAFSA, you will receive an expected family contribution to see if you qualify for any federal aid. This will come in the form of Pell Grants which could equal up to about $6,000 towards college tuition.
After you fill out the FAFSA, it’s also a good idea to look at state financial aid. This will differ from state to state in the form and scope of financial aid offered. Here in California, this exists in the form of Cal Grants. Cal Grants are another great way to get a few thousand dollars in financial aid to pay for college. Typically, Cal Grants are offered to state schools.
University Aid
Once you’ve looked at federal financial aid, it’s a good idea to take a look at the university itself to see what aid they give. We all know about academic and athletic scholarships but sometimes, the school might also offer need-based aid or other aid as they see fit. It’s worth exploring these options with the school’s financial counselor.
Use Scholarships to Pay For College
There are billions of dollars given away each year in the form of scholarships. Scholarships are basically an easy way to pay for college and chip away at some of those costs. There are numerous organizations and groups that list thousands of scholarships that students can apply for today. Some of these scholarships are given away for very random reasons. Here’s a brief list of some of our favorite sites:
Leveraging Loans to Pay for College
After we take a look at scholarships and take all of the “free” money off the table, we still want to look at how to cash-flow the cost of college. Federal loans are a great place to start. Here’s the order which we suggest you look to first.
Subsidized and Unsubsidized Loans
These are loans that the government pays the interest on while you are in college. They are typically the best type of loan that you can receive. However, since they are subsidized, they are a needs-based loan. This means that only certain financial situations will qualify.
The next step would be to take a look at unsubsidized loans. Unlike subsidized loans, the government will not pay the interest rate on unsubsidized loans. However, you still get the same interest rate than you would with a subsidized loan, which is typically at a lower rate. Currently, the aggregate limit for unsubsidized loans starts at around $5,500 for dependent students.
PLUS Loans
There are two types of PLUS loans – Parent PLUS and Grad PLUS.
In a Parent PLUS Loan, parents are cosigning with their student to help pay for college. A Parent PLUS Loan is calculated by taking the total college expenses minus the aid you receive which gives you the maximum loan amount. The calculation is similar to Grad PLUS Loans. The main difference of a Grad PLUS Loan is that they start at a couple of interest rate points higher and have underwriting requirements that not everyone may qualify for.
Private Sector
This is typically the last place we suggest looking. The reason we look here last is that each private student loan has different variables and conditions that must be met. It takes an individual analysis of each private sector loan t find the right one that fits you. Protection and repayment options are often less flexible as well. Interest rates will usually be higher – in some cases, as much as 50% higher.
Final Words
There’s no denying that college is expensive. Paying for college can seem like a daunting task but it doesn’t have to be. In this Bench Talk, we briefly cover some of the many ways in which you can help pay for college tuition costs. It’s important to always have a plan or goal to aim for when starting this process and starting early definitely has its’ benefits. If you ever need help planning for college, or just want a second opinion, we’re always here to help.
