The cost of a post-high school education is frightening for many families. The cost-of-attendance per year / per child will run somewhere between $10,000 at a community college and $75,000 at a private or out-of-state college. The total cost of a college education can quickly add up to between $20,000 and $250,000 per child. This leads many families to ask: how do people pay for college?
There are three main ways that families fund their children’s college education: Gift Aid, Self-Help and Out-of-Pocket. Given their financial aid award letter, each family must have a viable strategy to make college affordable.
Gift-aid is “free money”. “Free Money”, correctly understood, comes in the forms of grants and scholarships. Grant funding requires a student to demonstrate financial need. Scholarship funding typically comes from a college’s endowment resources; it is based on meritocracy. Funding college expenses using gift-aid is paying for at least a portion of one’s cost-of-attendance expenses with someone else’s money. Gift-aid is the preferred way to pay for college.
Self-help is funding in the form of either loans or work-study. Loans will be signed by the student and possibly co-signed by a parent. The premise is that one promises to pay the loan back in the future, most often with accumulated interest.
In the case of work-study, this source of funding is covered through a student’s work-study job. Keep in mind that work-study is available only to students who can demonstrate financial need. Many costly mistakes are made because households do not understand the dynamics and consequences of loan funding.
The third way that people pay for college is with out-of-pocket dollars. This funding comes from household savings or from a positive cash flow. These are after-tax dollars. Cash-flow becomes the crux of the matter for most families: Can we pay the bills when they come due? And just as important: Are we willing to pay for the college bills?
When a student applies for financial aid, colleges will offer a financial aid award letter. This “award letter” is how they can see your household pay for college expenses for the upcoming academic year, based on the financial information provided. This is the starting point for how most families will pay for college. The big caveat here is that this award letter is only good for one year. Most collegiate educational degrees take between two and six years to obtain.
There are different strategies to making college affordable. One big challenge that families must face is the expensive “opportunity cost” of taking extra semesters at college. A second challenge is that parents must run-the-numbers and be willing to tell their children that some collegiate options may not be financial acceptable. In additional there are negotiation strategies as well as EFC strategies. The best strategy is pay as much of one’s collegiate costs with someone else’s money. The discussion around affordability must shift from solely financial discussion to a value discussion.
How you pay for college requires some serious thought. This topic may not be exciting and sexy, but it is too important to gloss over and make costly mistakes.
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