Financial aid and other ways to pay for college
College is an expensive undertaking in any given year. For parents with children in high school, or even younger, the prospect of planning for college during a time of rising inflation and market instability can be downright alarming. Here are five ways to help you plan for your child’s college expenses.
- Financial aid: The Free Application for Student Aid (FAFSA) is a free government resource that can help you pay for college tuition costs. The application can be completed in approximately 30 minutes. You’ll need access to your recent tax forms and savings and investment statements. Sallie Mae estimates that only 70% of families completed the FAFSA for the 2021/2022 school year. It’s important to apply early as early applicants tend to receive a more generous financial aid package. The application process typically starts on October 1. For the 2023/2024 year, the deadline to apply is June 30, 2024. You’ll have to apply for financial aid each year that your kid is in college and the amount received can vary year to year.
- Scholarships: According to the National Scholarship Providers Association, an estimated $95 billion in grants and scholarship money is awarded by the U.S. Department of Education ($35 billion) and the nation's colleges and universities ($60 billion), and an additional $7.4 billion is awarded through private scholarships and fellowships annually. Due diligence is required with scholarships as knowing which scholarships to apply for is key. A prevalent misconception about college scholarships is that the awardee needs to be exceptional or that the family needs to be in a low-income bracket. Understanding the scholarship requirements and putting in the work to apply to several different scholarships can go a long way toward paying for college. There is no limit to how many your child can apply for. Tailoring application materials, especially the cover letter, to address each scholarship specifically can help increase your child’s chances of receiving one.
- Loans: There are three types of federal loans: direct subsidized loans that are financial need-based, direct unsubsidized loans that are determined by the college based on tuition costs and financial aid, and direct plus loans that are unsubsidized loans offered to parents of dependent students enrolled in college or a higher education program at least half time. Additionally, there are private student and parent loans to consider. Federal loans typically have lower interest rates than private loans.
- 529 accounts: Nearly 30% of American parents use a 529 education savings account to plan for their kids’ college costs. It’s a misconception that having a 529 account might affect the financial aid package you receive. The FAFSA counts 529 savings as parents’ assets and the percentage of those assets that’ll be counted to pay for college expenses is capped at under 6%. Additionally, starting in the 2024/2025 school year, qualified distributions from a grandparent-owned 529 account will not be reported as untaxed income to the beneficiary. Since the FAFSA uses income from two years prior to determine aid eligibility, grandparent-owned 529 accounts will no longer affect financial aid.
- Out-of-pocket money: Paying for a part of the expenses out of pocket can help your child by reducing the amount of debt they could face after graduation. This can be supplemented with your kid working part time in college or within a federal work-study plan, which can help your child pay for their college expenses. This can also be a good way to help your child understand the value of money and the importance of a good education.
A financial professional can help you put together a plan for sending your child to school, including setting up a specific savings account, such as a 529 education savings account.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
Consult your financial, tax, or other professional to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. Some states do not consider 529 withdrawals for student loan repayments to be qualified withdrawals and, therefore, the investor may be subject to penalties. The $10,000 qualified education loan limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
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