Tuition rates have been steadily rising over the years, and the cost of college has never been so high. According to College Board, the cost of tuition and fees at public four-year colleges is more than three times what it was 30 years ago. At private four-year colleges, the cost has more than doubled since 1988.
But even though higher education is expensive, a college degree remains valuable. In fact, those who hold a bachelor’s degree make an average of $1 million more over the course of their lives than those who don’t, according to the Department of Education. So a degree can still worth investing in — but first you need to know how to pay for it.
To that end, we’ll explore the costs of college and how you can piece together scholarships, grants, savings and student loans to fund your education.
Part I: How Much Does College Cost?
When you first look at the cost of tuition and fees, room and board and meal plans, most colleges appear oppressively expensive. But appearances can be deceiving. The first number you see is the “sticker price,” and it’s usually much more than you end up shelling out for your education.
The number you actually pay — the net price — is lower for most students. Net price is how much the school charges minus the amount of financial aid you’re awarded.
Net price vs. sticker price
If you already know how much financial aid you’ll be receiving, you can subtract that number from your school’s nominal cost of attendance. The difference will be your net price.
Colleges are required to have a net price calculator on their websites to help you estimate costs. Before using one of these calculators, however, keep these points in mind:
- The numbers they produce will be estimates only and aren’t guaranteed.
- Some calculators base their calculations on in-state tuition. If you’re an out-of-state student, your costs could be higher.
- Some calculators also factor in financial aid opportunities available to first-year students. There’s usually more funding for freshmen, so you can expect your subsequent three years to be more expensive than your first one.
Nonprofit vs. for-profit schools
For-profit schools tend to cost a good deal more than non-profit schools, even private non-profit schools. This is partly because for-profit schools offer less institutional aid (financial aid given through the college itself). Instead, they rely heavily on federal financial aid for the funding of their students’ education.
As a result, students who attend for-profit schools generally wind up with more student loan debt after graduation. At for-profit schools, 88% of graduates had loans, and the average debt burden was $39,950. At private nonprofit schools, those numbers were lower, with 75% of graduates having loans, and at an average total debt of $32,300.
Before going into debt for a for-profit school, be careful to weigh net prices at nonprofit institutions. Remember, the sticker price won’t necessarily be what you end up paying. Also note that nonprofit institutions will usually offer more scholarships and grants, reducing the number of loans — and therefore debt — you have to take on.
Public vs. private school tuition
Undoubtedly, the sticker prices for public colleges tend to be lower than that of private institutions. However, some private schools also have large endowments providing substantial student aid at the institutional level.
For example, Cornell University offers significant grants to students from low-income families. In an example generated by the university, a traditional student from a household with under $40,000 in annual income could receive a Cornell grant of $41,911.
In this example, the student’s net price is only $2,700 for one year at this Ivy League university.
Also note that private college institutional aid can also be extended to students from middle-income families as well, even if they don’t qualify for a large amount of aid through federal programs.
Part II: How to Pay for College
There are several different ways to find money for college expenses. If you stay on top of financial aid application deadlines and have a high GPA and strong test scores, you may be able to shave many thousands of dollars off your cost of attendance.
In this section, we’ll cover the most common sources of college funding.
The Free Application for Federal Student Aid (FAFSA) is likely the single most important document you’ll fill out as a college student.
Why? Because you need to submit the FAFSA to access the majority of financial aid options we’re going to cover in this guide. These include:
- Work-study opportunities
- Federal student loans
- Direct PLUS Loans for parents
Not only will the FAFSA tell you how much aid you’re eligible for through the federal government, but it’s also usually a required step to getting institutional financial aid from your college or university.
How to fill out the FAFSA
It’s important to remember that you don’t have to pay to file the FAFSA — it’s entirely free. Go to https://fafsa.gov/ to create a Federal Student Aid account and start your application.
Important: You must fill out a FAFSA every year you attend college in order to receive aid.
Expected Family Contribution
The Expected Family Contribution (EFC) is how much the federal government determines you or your parents should be able to contribute to your education costs. This number is then used to figure out how much aid the government is willing to extend to you.
For example, to qualify for a full Pell Grant in the 2019-20 school year, your family’s Expected Family Contribution can’t be higher than $5,576.
Filing for aid for the 2019-2020 school year began in Oct. 1, 2018 but remains open until June 30, 2020. For the 2020-2021 year, you can file anytime after Oct. 1, 2019.
Ideally, you should apply as soon as possible, as the aid is doled out on a first-come, first-served basis, and some awards can in fact run out of funds.
You should also note that some states have stricter deadlines than the federal government; be sure to check your state’s deadline to be sure you get your application in on time.
Another form of aid distributed by the federal government is student loans. You will know which federal student loans you qualify for after you fill out your FAFSA.
Because student loans have to be repaid with interest, they should only be pursued after you’ve exhausted all grant, scholarship and work-study options.
Types of federal student loans
As an undergraduate student, there are a variety of federal student loans you may be offered.
Try to max out your federal student loan eligibility before turning to private loans. Federal student debt typically has better rates than private loans, as well as those flexible repayment options.
Private student loans
If federal student loans aren’t enough, you can turn to private student loans for college financing. These loans from banks, credit unions and online marketplace lenders might not have the same generous repayment programs, though some do have deferment options in certain situations, such as unemployment.
Private loans come with variable or fixed interest rates. If you take out a variable interest rate loan, the rate could go up over the course of your loan. Fixed interest rates, meanwhile, remain stable throughout the course of repayment.
Should I get a cosigner?
If you haven’t established credit yet, you’ll likely need a cosigner to qualify for private student loans. If you’re a non-traditional student and have a less-than-stellar credit history, you’ll also probably benefit from having a cosigner.
Borrowers with very good credit scores can skip the cosigner, but if you do decide you need some help, look for loan options with a cosigner release. This lets the cosigner off the hook after a certain period of time — generally once your payment history has allowed you to establish a better credit history yourself.
You don’t want to borrow more than you can reasonably afford to pay back. Certain professions that require extensive education, like law and medicine, will have considerably more student loan debt than other professions. But while these kinds of professions are likely to garner higher incomes, there is no guarantee — recent reports show stagnation in doctors’ salaries and a difficulty in finding employment amongst lawyers.
Others, such as teaching, might require a master’s degree but won’t necessarily lead to an entry-level salary that makes up for all your educational expenses.
Before taking on a lot of debt, talk to professionals in your target field to get a sense of the entry-level pay and rate of salary growth over the course of a career. While using online sources to find this information is great, it’s not going to replace the knowledge of a professional working in the field.
You can then plug that number into CollegeBoard’s Student Loan Calculator, along with how much money you intend to borrow. It will analyze the figures and tell you if your monthly payments will exceed 10% to 15% of your income — which is generally considered to be the maximum you should allot to student loan payments.
If you take out federal student loans, you may be able to borrow more, as most loan options allow you to pay based on your income level. Just be careful not to bury yourself in debt — you don’t want to be paying student loans into your 70s.
Scholarships are among the most valuable forms of financial aid, since they give you free money for school that you never have to pay back. They’re a little different from grants (see below) and come in various forms. Here are features to look for:
Merit-based vs. need-based scholarships
While the majority of grants are need-based, most scholarships are merit-based. There may be maximum income levels or priority given to those in dire financial straits, but for most scholarships, you’ll be judged based on your achievements.
Many of these awards require you to maintain a certain GPA, and almost all will involve some type of essay, portfolio or video submission.
If your family’s income doesn’t help you establish a strong financial need, don’t lose hope. There are plenty of scholarships out there that have no financial requirements and are completely based on your essay — on rare occasion, they won’t even ask about grades.
Recurring vs. one-time scholarships
Most scholarships only last one semester or one school year. However, there are some you can apply for that will cover your entire tenure as an undergrad. Keep in mind, though, that these options are likely to require you to maintain a certain GPA throughout your studies.
How do I find scholarships?
The first place you can look is your financial aid office. Many schools have endowments, not just for grants, but for scholarships as well.
After you’ve exhausted scholarship options at your school, look in other places, such as:
- Professional organizations in the field you want to enter
- Professional organizations or unions your parents may belong to
- National student organizations related to your major
- Potential future employers — especially if they’re a larger company
- Groups within the community you grew up in
- Organizations based on your ethnicity or heritage
- Religious organizations
- Organizations related to any extracurricular activities or hobbies
You can look for scholarships on specialty search engines, like Fastweb, CollegeBoard and Scholarships.com, but you’ll find a ton of competition. On the other hand, if you search for scholarships focused on what makes you unique, you might find a dramatically smaller applicant pool, boosting your chances of winning an award.
How soon should I start applying?
Start applying for scholarships as soon as possible. It is even possible to fund your entire education this way, though you would have to fill out a lot of applications and write a lot of essays. The sooner you get started, the better.
Each scholarship has a window, which is typically opened annually or once a semester, during which you can file an application. While high school sophomores will be able to apply for some scholarships, opportunities really start opening up in your junior year.
Beware of scholarship displacement
Although scholarships can be a great tool for paying for college, you also need to be careful about scholarship displacement. Some colleges will take away some need-based aid if you have a lot of outside scholarship help. Before applying far and wide to scholarships, it could be worth checking with your financial aid office to see if it engages in this practice.
A grant, like a scholarship, is money you never have to pay back, unless you drop out of school or violate the terms of the agreement some other way. For undergraduates, grants are typically need-based.
In order to qualify for federal grant programs, you must fill out the FAFSA and meet eligibility requirements. Here are some types of federal grants, along with other opportunities from your state or school:
Federal Pell Grants are distributed based on income-eligibility only. They can be awarded regardless of whether you’re in school full-time, half-time or less than half-time.
For the 2019-20 school year, the maximum Pell Grant award is $6,195 for full-time students. Pell Grant awards are distributed in two parts over two semesters.
Students taking summer courses might also receive a summer Pell Grant, which is an additional 50% of your full award to spend on summer studies. This extra grant money can be particularly helpful for community college students whose course of study typically runs through the summer.
Federal Supplemental Educational Opportunity Grants (FSEOGs) are available to students with financial needs in excess of what the Pell Grant can address. These funds are distributed to schools upfront and then awarded on a first-come, first-served basis. Notably, not all schools participate, so you would need to consult your school’s financial aid office.
The maximum award is between $100 and $4,000, depending on your personal financial situation.
If you lost a parent or guardian while they were serving in the military in Iraq or Afghanistan after 9/11, you may qualify for the Iraq and Afghanistan Service Grant — which offers funds almost equal to that of a full Pell Grant — regardless of your family income.
To qualify, you must:
- Meet all Pell Grant requirements, except for the EFC requirements.
- Have been 24 years old or younger and enrolled in college at least part-time at the time of your parent or guardian’s death.
If you’re planning on becoming a teacher, you may be interested in a Teacher Education Assistance for College and Higher Education (TEACH) Grant.
In order to qualify, you must be enrolled in a TEACH-eligible program. Not all schools participate, and the ones that do determine which of their programs qualify for TEACH Grants, so be sure to sit down with your financial aid counselor to determine your eligibility.
When you accept a TEACH Grant, you’re agreeing to serve four out of your first eight years in the workforce in a high-need specialization in a low-income area. You can also meet this obligation by teaching at a Bureau of Indian Education school.
High-need specializations include:
- Bilingual education
- English language acquisition
- Foreign languages
- Special education
- Reading specialists
- Regional needs, which are updated annually
If you do not keep your promise to serve in this capacity, your grant will turn into a Direct Unsubsidized Loan, which will have to be repaid.
The maximum grant amount is $3,752 if disbursed after Oct. 1, 2018 and before Oct. 1, 2019. For grants paid out after Oct. 1, 2019 and before Oct. 1, 2020, the maximum award is $3,764.
Your state government may also issue need-based grants. Generally, you will be redirected to your state’s application page at the end of your FAFSA application, but if you want to check out your options beforehand, you can find information from your state’s department of higher education here.
Your college or university may also issue need-based grants. While your EFC is not likely to be measured in the same way, a FAFSA application is still required.
Some colleges, though typically not Ivy League schools, will also offer merit-based grants. Your grades will likely be a factor here.
Work-study programs are another form of aid that will not be accessible unless you complete your FAFSA.
Many schools participate in federally backed work-study programs for students with financial need. With work-study, you’re assigned a set amount of hours working for the school, in a community service role, or in a field relevant to your course of study.
You should get a paycheck at least once per month, and you can often choose whether to receive the funds directly or to have it applied against any money you owe the school.
529 accounts are tax-advantaged accounts to help you save for future college expenses. Contributions go in after you’ve paid taxes on your income. That money is invested and grows tax-free — as long as you spend the money on qualified educational expenses.
Types of 529 accounts
Not all 529 accounts are created equal. They are issued under state law, and each state has its own specific rules on how 529 accounts can be used. However, some states will let you purchase their 529 accounts even if you aren’t a state resident.
There are two basic kinds of 529 accounts:
College Savings Plans
The College Savings Plan structure allows your money to grow in traditional investments, as made available by your state. You can use this money to pay for school at almost any U.S. institution — and even at some schools abroad.
With a College Savings Plan, whatever you have saved can be applied toward any allowable educational expenses, though you’ll have to cover the remaining costs after exhausting the money from your 529.
A good example of a College Savings Plan is Utah’s 529 plan, which even offers a few investment options insured by the Federal Deposit Insurance Corporation.
Prepaid Tuition Plans
Prepaid Tuition Plans allow you to save for tomorrow’s college at today’s rates. There may be different tiers of saving for different types of schools.
For example, Pennsylvania’s Guaranteed Savings Plan 529 option currently allows you to buy credits at today’s rates. These credits will be valid when your child goes to school in the future — even if tuition rates have skyrocketed.
One thing to be careful of with Prepaid Tuition Plans is that if you save at the state school level, and your child ends up not wanting to attend a state school when they graduate from high school, you could run into some funding problems. Pennsylvania allows you to change your investment tier at any time, but this is a potential point of friction you should consider if you decide to go with this type of 529.
You’ll also notice that price per credit is quite high at Ivy League schools. As discussed earlier with the example of Cornell, Ivy League schools tend to have extensive grants. If you’re making a median income, saving in this manner may reduce your child’s future institutional aid, costing you more money than you would have had to pay without the dramatic savings.
What can I use my 529 account for?
You can only use the money in your 529 account for qualified educational expenses. If you use the money for anything else, you will have to pay taxes on the withdrawal.
Qualified educational expenses include:
- Tuition and fees*
- Room and board — though you must be enrolled at least half-time to claim this expense
- Technology required for school — including internet access
- Other required equipment and materials, as assigned by your instructor
*Some Prepaid Tuition Plans cover tuition and fees only.
How to make a 529 withdrawal
Most programs allow you to make a withdrawal online or via postal mail. Your 529 account issuer will not keep records of how that money was spent. Producing documentation to show that the money was spent on educational expenses falls squarely on your shoulders.
Pros of 529 accounts:
- Studies show that regardless of how much you save, the fact that you are saving for college makes your child more likely to attend college.
- If you have a high enough income level, your child might not qualify for need-based financial aid. Saving in a 529 plan is a generous investment in their future, given that they won’t have as many funding opportunities available to them.
- Because you are investing, your money is likely to grow — and it will grow federally tax-free. This means you won’t have to save as much in a College Savings Plan in order to meet your goals.
Cons of 529 accounts:
- The amount you have saved could reduce institutional aid — especially if you open the account in your child’s name. Open the account in your name and list your child as a beneficiary instead.
- When saving in a Prepaid Tuition Plan, do your best to ensure you’re saving at a level your child will actually be able to use. If they don’t end up going to school in state, you could hit a bump in the road if you’ve been saving at state school tuition levels.
- Because you are investing, there’s no guarantee of growth. You could conceivably lose money in a 529 account.
To see if your college degree is worth the cost, you need to figure out the net price of your education and your expected salary. A good tool to crunch these numbers is the College Scorecard, provided by the Department of Education, which shows data on net cost of attendance, alumni salaries and debt upon graduation.
Be wary of relying too heavily on the data here, though. Your future salary, for instance, likely depends more on your major and profession than on the undergraduate institution you attended. Often, an even better way to figure out potential future earnings is by talking with someone who is already working in your field.
Technically, you’re only allowed to spend federal student loans on educational expenses. These can include:
- Tuition and fees
- Room and board
- Books, supplies and equipment
- Transportation while at school
- Dependent child care expenses
Unlike with 529 funds, no one will be monitoring how you spend your federal loan money. However, if you end up having the money to go on shopping sprees after you’ve paid for all of the above expenses, you’re probably borrowing too much. Consider returning the money rather than paying interest on it after you graduate.
If you’re borrowing from a private lender, check your loan agreement for any restrictions on how you can spend your private student loans.
If at all possible, yes, try to make student loan payments while you’re still in school. Make an effort to pay the interest at least, so it won’t accrue while you’re in school (or during your grace period or deferment) and cost you more money in the long run.
The only time when in-school payments don’t matter is when you have Direct Subsidized Loans — those loans won’t accrue interest while you’re in school. Even then, making principal payments early isn’t a bad thing if you can swing it.
If you take out a Direct Loan, you’ll be assigned one of nine loan servicers and will make payments through that assigned servicer.
Those who have taken out Perkins Loans may repay them directly through their school or via a loan servicer designated by their school.
Likewise, you can repay private loans directly to your lender or assigned servicer.
If you miss one payment on your federal student loans, you will have to make it up within 90 days — otherwise you’ll get reported to the credit bureaus.
If you miss several payments on your Direct Loans and don’t make payments for 270 days, you will be in default, which puts you at risk of not only being reported to the credit bureaus, but also losing all benefits of federal student loans, such as income-driven repayment options. You could also end up in court.
The consequences for missing payments on Perkins Loans and private student loans depend on the agreement you signed prior to disbursement. Private lenders can report you to the credit bureaus as soon as you’re 30 days late with a payment.
If you can’t afford your Direct Loans, apply for an income-driven repayment plan. These plans cap your maximum payment at a percentage of your disposable income to ensure that they are affordable.
If you have a private loan, you may want to look into refinancing for lower monthly payments.
And if you have a Perkins Loan, set up an appointment with your financial aid office or loan servicer to discuss your options.