All parents want to pay the least amount of money for the best quality post-high school education (college) for their children. As the time comes closer to writing the checks or signing-off on the loan documents, the more critical it becomes to understand the dynamics of the best way to pay for college. Every family will have to decide how they will fund college. Due to the vastly different financial resources available to families, this post will serve as an introduction.
There are general two ways to pay for college: either with your household’s money or with someone else’s money. Let’s look at each of these.
The first way to fund college expenses is to pay with your own household’s resources. When I say “household resources”, I am referring to funding from either the parent (as understood on the FAFSA) and / or your student. This type of funding comes in one of two different forms: The first is out-of-pocket funding. This happens when someone in the household “writes a check”. These are typically after-tax dollars and have been accumulated through some savings vehicle – such as a basic savings account, an IRS 529 Plan, or cash value in life insurance. There are many aspects to consider when accumulating and withdrawing money from these accounts; all have their pros and cons and depending on the situation, one will be more advantageous than others.
The second type of “household resource” is commonly referred to as “self-help”. This is funding in the form of either loans or work-study. Loans can be either signed by the student or co-signed by a parent. The rule is: if you sign it, it is yours. Many costly mistakes are made because households do not understanding the dynamics and consequences of loan funding. The resource with regards to self-help is the promise to pay the loan back in the future, most often with accumulated interest. In the case of work-study, a student pays for it with their work. Keep in mind that work-study is available only to students who can demonstrate financial need.
The second way to fund college costs is to pay with someone else’s money. This could be a gift from a student’s grandparent or uncle/aunt. This type of support needs to be reported on your student’s FAFSA (Free Application for Federal Student Aid). More often though, this funding comes in the form of grants and scholarships. The beauty of this type of funding is that one does not need to pay it back. It is the so-called “free money”.
Grant funding is money provided primarily by a Federal, State or non-profit organization to assist students who do not have the means to afford college. The most common is the Federal “Pell Grant”. A student must demonstrate financial need to qualify for grant funding.
Scholarships for college is based on a meritocracy system. If your student “has” what the college is looking for, the college will often reach into their endowment resources to provide financial assistance. The qualifications to obtaining a scholarship varies from college to college. There are numerous factors that play into qualifying, most noticeably your family’s Expected Family Contribution, your student’s “wow factor” and your student’s choice of school.
The best way to pay for college cannot always be reduced to paying the least amount. Above all, it means paying with the correct resources – preferably with someone else’s money. The less money you pay for college means the more money you will have left over for other things. Moreover, one must always remember that the financial side of the college decision must be complimented by your household’s educational values.
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