College can be a major expense for students and their families, so it’s important to be prepared ahead of time and understand all your options for paying for college when the time comes to enroll. The average cost of yearly tuition and fees for in-state students at a public four-year college is $9,410, according to CollegeBoard. For out-of-state students, the cost is $23,890 per year. The cost of attending a private four-year college is even higher, with an average annual cost of $32,410. And those costs don’t even include housing, food, books, supplies and other expenses.
If those numbers seem astronomical, don’t panic. There are plenty of ways to pay for college, from student loans and scholarships to financial aid. Keep reading to see your options and find out how most Americans are paying for college today.
How Much Are Most Americans Paying For College?
Sallie Mae and Ipsos surveyed 1,000 undergraduate students and 1,000 parents of undergrads to find out how much Americans are paying for college and how they are doing it. The survey found that on average, families spent $26,226 on college for the 2018-19 academic year, including all expenses.
How To Prepare For College Costs
Clearly $26,000 is a lot of money, and if you haven’t started prepping to pay for college, it might be difficult to know where to start. Fortunately, the Sallie Mae survey identified the four main strategies families used to prepare and help make college more affordable:
- 40% researched college costs and financial aid ahead of time
- 36% created a budget to determine how much they will cover with savings, loans and other sources
- 18% have students taking AP classes or dual-enrolling in community college so they will enter college with credits
- 14% invest in students’ talents to help them qualify for college scholarships
How To Create a College Budget
More than one-third of the families surveyed created a college budget to help them determine how they will pay for it. If you don’t already have a plan in place for how to pay for college, consider using an online college planning calculator. For example, Vanguard’s College Savings Planner lets you see the amount you need to save for college based on your child’s current age, the annual college cost, your planned contribution and your current savings balance. Sallie Mae also has a College Planning Calculator that lets you see the full cost of college and factors in your savings as well as potential scholarships, grants and loans. It also shows the salary needed to support a loan payment, and how much you should be saving for college.
How Are Most Americans Paying For College?
The Sallie Mae survey found that, on average, 43% of college costs were covered by family savings and income. The next highest percentage was scholarships and grants (31%) followed by borrowing (24%). Two percent of those surveyed said costs were covered by other relatives or friends.
How Families Can Save For College
If you’re a parent or guardian, it’s best to start saving for your kids’ college as soon as possible. That being said, you shouldn’t prioritize college savings over other financial goals. Your top priorities should be paying off debt, setting up an emergency fund that will cover three to six months of expenses and putting 15% of your income into a retirement account, according to the Dave Ramsey blog.
Once you’ve taken care of other financial needs, you can start putting money toward your child’s college fund. Ramsey recommends using one of three tax-favored plans for college savings.
Option 1: Education Savings Account
With an Education Savings Account or ESA, you can make tax-free withdrawals when the funds are used for qualified education expenses. The money in the account also grows tax-free. You can contribute up to $2,000 a year per child until they turn 18.
Note that there are income restrictions for this plan. Single-income households are eligible for the full contribution if their modified gross annual income is less than $95,000, though they can make partial contributions if their income is between $95,000 and $110,000. Joint-income households are eligible for the full contribution if their modified gross income is less than $190,000, with partial contributions available to those with incomes between $190,000 and $220,000.
Option 2: 529 Plan
Unlike the ESA, there are no income restrictions with a 529 plan. Two types of 529 plans are available — a prepaid tuition plan and an education savings plan. The prepaid plan lets you save money for a specific college or university but it can’t be used for future room and board. An education savings plan can be used at any college or university and also includes room and board.
With a 529 education savings plan, you can choose from a variety of investment options. You also can withdraw up to $10,000 from the account per year to pay for tuition.
Option 3: UGMA & UTMA Custodial Accounts
Though custodial accounts are not specifically for college, parents can open them for their children, who can later use them to pay for higher education. The Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) both allow minors to own securities through trusts called custodial accounts. With a UGMA account, parents can invest in stocks, bonds and mutual funds on behalf of their children. With a UTMA account, minors can own securities as well as other types of investments such as real estate, fine art and patents. Anything that is put into a custodial account is irrevocably the property of the trust, but the custodian controls the account until the child reaches the age of trust termination. Any income from the custodial account must be reported on the child’s tax return but at the lower child rate.
Both the contributor and the minor can benefit from these accounts. The contributor gets certain tax advantages, while the child can use the funds to pay for college or any living expenses as they need. In this respect, these accounts are less limiting than other savings plans.
Families Are Covering Roughly One-Third of College Costs With Scholarships and Grants
After income and savings, scholarships and grants cover the next-biggest chunk of college costs for the average American family. The Sallie Mae survey found that the average family covers 31% of college costs with scholarships and college grants.
Scholarships and grants provide funds for college that don’t need to be paid back. They are essentially free money, so it’s important for students to apply for any scholarships and grants they qualify for.
How To Find College Scholarships
A number of search tools are available for students to find college scholarships. For example, Sallie Mae’s free Scholarship Search lets students access more than 5 million scholarships that are worth up to $24 billion. To use the search tool, students create a profile and then get matched with scholarships that fit their skills, activities and interests.
Numerous other resources are also available for students who seek scholarship money. For example, they can contact financial aid offices of colleges they’re interested in, meet with high school counselors, use the U.S. Department of Labor’s free scholarship search tools, contact professional associations and other organizations related to their fields of interest, or meet with their employers or their parents’ employers.
How To Apply For Grants
Like scholarships, grants can be need-based or merit-based, though most fall into the former category. Need-based grants are awarded based on a family’s economic situation and are determined by the Free Application for Federal Student Aid (FAFSA) form and the Expected Family Contribution (EFC) form. If you believe your child will qualify for need-based grants, take the following steps.
Step 1: Fill Out the FAFSA
To determine which federal and state grants a student might qualify for, it’s important that students fill out a FAFSA form. This form lets colleges see how much financial aid a student qualifies for and must be submitted for a student to receive grants, work-study and federal loans.
You can find the FAFSA form here.
Step 2: Submit the FAFSA as Soon as Possible
The FAFSA form can be submitted every year starting on Oct. 1. The earlier you submit the form, the better your chances, as many grants are awarded on a first-come, first-served basis.
Students should have access to all relevant information needed to fill out the form. This typically includes:
- Student’s driver’s license and Social Security numbers
- Parents’ Social Security numbers and birthdays
- Family federal income tax returns
- W-2 forms
- Bank statements
- Family investment information
Step 3: Review Financial Aid Rewards
If you qualify for financial aid, you’ll receive a financial aid reward letter from any college that accepts your student. This award letter will outline the grants, scholarships, work-study and federal student loans for college the student has qualified for. Be sure to review these letters carefully when deciding which school’s package you will accept.
How To Cover College Costs With Grants
Financial reward letters will outline any grants a student qualifies for. Grants typically cover a full academic year and the school will pay out the money in at least two disbursements. The money is usually applied directly to the cost of tuition, fees and room and board for those who live on campus. Any additional money is paid to the student to cover other college costs.
It’s important to note that most grants are given on a year-by-year basis, so if a family’s financial situation changes, a student might not be eligible for a need-based grant the following year. With merit-based grants, a student might not qualify if their GPA falls or they fail to meet other requirements.
Be sure to fill out a new FAFSA form every year so your child receives all the grants they qualify for.
Families Borrow Money To Cover About a Quarter of College Expenses
According to the Sallie Mae survey, on average, 24% of college costs were covered by borrowing money. Unlike a scholarship or grant, student loan money must be paid back — with interest.
Federal vs. Private Student Loans
Two types of student loans are available: federal and private. Federal student loans and federal parent loans are funded by the U.S. government, while private student and parent loans are funded by a lender such as a bank, credit union, state agency or school. Private student loans are usually more expensive. They also offer fewer perks such as fixed-income rates and affordable, income-based repayment plans.
Types of Federal Student Loans
You can find out if you qualify for federal student loans by filling out the FAFSA form. Three types of federal loans can be used to pay for undergraduate education:
- Direct subsidized loans: These are need-based loans that don’t accrue interest during the time students are in school at least half-time or during the first six months after they leave school, called the grace period. Students can also defer paying back these loans under certain circumstances.
- Direct unsubsidized loans: These loans are not need-based and accrue interest during all periods. Students can choose not to pay interest during certain periods, but it will be added back to the base rate when they begin paying interest again.
- Direct PLUS loans for parents: Parents who want to take out a federal student loan for their child’s education can apply for Direct PLUS loans. To do so, you must fill out a Direct PLUS Loan Application for Parents on StudentLoans.gov.
Types of Private Student Loans
Private student loans can be taken out by the student or the parent from various private lenders. These loans might have fixed or variable interest rates, unlike federal loans, which only have fixed interest rates. Depending on the lender, you might be able to choose one of these repayment options:
- Deferred repayment option: Under a deferred repayment plan, students don’t make any loan payments during school or during the sixth-month grace period after they graduate. However, the unpaid interest is added to the principal amount at the end of the grace period, so the total student loan cost will likely be greater.
- Fixed repayment option: With this option, students pay a fixed amount during their time in school and during the grace period. This is typically a small amount. For Sallie Mae, it’s $25 per month. Students will pay less overall with this option than with a deferred repayment plan, but the unpaid interest is still added to the principal amount at the end of the grace period.
- Interest repayment option: This option lets students pay interest monthly while in school and during the grace period, after which they pay principal and interest. With this plan, students pay more during school and the grace period, but their total student loan cost is likely lower overall than with the other options.
How To Apply For Private Student Loans
To get private student loans, you must apply directly through the lender. Sallie Mae, which provides private student loans, recommends following these steps when applying for private loans:
- Visit the lender’s website.
- Check the interest rate, repayment options and other benefits, and compare these with private student loan options from other lenders.
- When you find the lender with the best option for you, you can apply for a loan directly on its website. When you apply, you’ll have to choose the repayment option and interest rate type you want.
- The lender will check your credit and your co-signer’s (if applicable) and come up with an offer if you qualify.
Other Borrowing Options
In addition to federal and private student loans, families might consider another borrowing option to help pay for college. These include:
- Personal loans: These can be taken out by the parent or the student.
- Tuition payment plans: Instead of paying a lump sum for tuition at the beginning of the semester, payments under this plan are spread out into monthly installments that can be paid with a direct debit.
- Home equity loans: These allow borrowers to use the equity of their homes as collateral. If you sell the house, though, you’ll be required to make immediate repayment.
- 401(k): Another option is to take funds out of your 401(k) to help your child pay for college, but this is not recommended. Remember, you can take out loans to pay for college, but you can’t take out loans to pay for retirement.
Families Typically Only Rely On Other Relatives and Friends To Cover 2% of College Costs
Unless you have a rich uncle, don’t expect other family members and friends to pitch in for your child’s college costs. According to the Sallie Mae survey, only 2% of college costs were covered by friends and other family. This underscores why it’s so important to prepare your finances early and take all the necessary steps to obtain any aid and loans needed to pay for your child’s education.
Other Ways To Pay For College: Work-Study
Students who demonstrate financial need can get part-time jobs through the federal work-study program. The money earned can be used to pay for education expenses. Jobs might be on- or off-campus and students enrolled in these jobs earn at least the federal minimum wage. However, students can only work as many hours as the work-study award allows. Check with your school’s financial aid office to see if it participates in the federal work-study program.
Other Ways To Pay For College: A Non-Work-Study Job
If a student doesn’t qualify for a work-study job, that doesn’t mean they can’t work through college to help offset living and other costs. Working during college can have a number of benefits outside of the extra income, including developing professional, teamwork and time-management skills that will appeal to potential employers once the student enters the job market.
Just keep in mind that it’s best for students to not overdo it. Debbie Kaylor, director of the Boise State University Career Center, told U.S. News & World Report that working 15 hours a week is ideal.
Should You Choose a College Based on Cost?
Cost should definitely be a factor when selecting a college. In fact, the Sallie Mae survey found that families are more likely to consider cost than academic criteria when choosing a school (77% vs. 73%). It also found that 88% of students would reject a school because of its cost.
College is expensive, but by choosing the right school and combining a mix of savings, scholarships and loans, you and your child can make affording college a reality.
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About the Author
Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert.