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How to Pay for College
I know that the question of how to pay for college can be a daunting one. There is no denying that college can be expensive! For the 2017–18 school year, the average cost for tuition and fees at a public university for state residents was just shy of $10,000. And for a private university, the average annual cost was just shy of $35,000. That is no small chunk of change! Fortunately, there are many things you can do that will help you to pay for college for your children or for yourself. In this article I will share 14 important tips on how to pay for college.
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How to Pay for College: 14 Simple Steps to Help You Pay for College without Student Loans!
One of my proudest moments as a parent of a newborn was the day a couple of months after our first daughter was born that we opened her 529 college savings account. Though a college degree in and of itself is no guarantee of a better, higher-paying job or of job security, if you choose a field of study that teaches marketable skills and that leads to a career that pays well, the investment that you will make in your children’s education will be well worth it.
That is because even though earning a college degree doesn’t always result in a good job, there is a direct correlation between higher education and generally better-paying jobs.
Receiving a good education of some kind, whether that is through college or other job training, really is important in being able to provide a comfortable living for your family. And so even though saving for our three children’s college educations since they were a couple of months old has meant that we haven’t had as much money available for other expenses, the trade-off has been well worth it to us.
Our children may grow up largely in second-hand clothes and with mostly preowned toys, but our goal is that they will never know the stress nor feel the burden of student loans. (Or of any debt at all, for that matter—except for maybe a reasonable mortgage.) Both my husband and I graduated with college degrees without any student loans, and that’s a legacy we intend to pass on to our children.
My husband and I were able to graduate without student loans by following many of the recommendations outlined below, and we didn’t even have college 529 savings plans or education savings accounts available to us. So if you follow the suggestions below, you’ll be that much farther ahead!
1. Start saving for college expenses when your children are young.
Perhaps the very best thing that can be of most benefit to you related to how to pay for college is to start saving for college as soon as possible.
Even though it may seem counterintuitive, one of the best ways to afford saving for your kids’ college is to start when they are young. I know that means that you will likely be fairly early in your career and won’t have as much disposable income as you should have later in life. But the earlier you start, the less you will have to save because of the amazing power of compound interest.
For example, if you start saving for your child right after he is born (which is what we did), then every $1 you invest could be worth about $8 by the time he or she begins college, and worth $10 or more when he or she is a junior in college. That’s because of the rule of 72. If you are able to earn a 12 percent average annual rate of return, which is doable if you invest in good stock mutual funds, then the money you invest could essentially double every six years (on average). So after 6 years each dollar would be worth two, after 12 years each original dollar would be worth four, and after 18 years each original dollar would be worth eight. That is the power of compound interest.
As is the case for virtually all goals that you are trying to save or invest for, the sooner you begin, the better. Because saving for your kids’ college should (ideally) be a long-term goal, where you save for 10 or 15 years or more, the best way to save for your children’s college education is to invest in mutual funds. And the sooner you begin to invest, the longer your money will have to grow.
There’s a saying among personal finance experts that the best time to start investing was 20 years ago. And the next best time to start investing is today.
If you start saving $100 a month, for example, toward your child’s college expenses the month after they are born and are able to earn an average 11 percent rate of return until they go to school at age 18 (though you won’t need all of the money when they turn 18, of course), you would have $67,127 available for their college expenses. If you’ll choose a low-cost state college or university, you can pay for much (or perhaps all!) of your child’s tuition just by doing that.
Money from tax-advantaged savings account funds (which we’ll talk about in the next section) can be used to pay for tuition, fees, books, computer equipment, internet service, and even room and board.
2. Decide which savings tool is best to pay for college.
Decide which savings tool is best.
In order to take advantage of tax-free growth on the money you save for your children’s college, you can use one of three savings methods: a Coverdell education savings account, a 529 college savings plan, or a Roth IRA.
- Coverdell Education Savings Account. A Coverdell education savings account (or ESA) is a college savings account where you can save a maximum of $2,000 per year per child. The advantage of the ESA is that you have complete control over the funds that you choose to invest in. And when you open the ESA through a brokerage company such as Schwab, you have literally thousands of mutual fund accounts to choose from.
Though we started investing in our state’s 529 college savings plan (known to be one of the best in the country) shortly after our children were born, we have now switched to ESAs (through Schwab) for our children because of the greater flexibility (and thus greater potential for better rates of return) that they offer. Schwab offers low fees and has been a great brokerage company for us; it’s where we have our Roth IRA, ESA, and general (taxable) investment accounts.
- The 529 College Savings Plan. If you are able to invest more than $2,000 a year into a college saving plan for each of your children, then the 529 plan might be the best option for you, if you want to keep things simple. The 529 college savings plans are administered by various states, but you don’t have to be a resident of the state whose college savings plan you choose to use. So, for example, you could use Utah’s college 529 plan (considered one of the best in the country), even though you live in New York. You can invest up to $14,000 per year per child without incurring the federal gift tax, or you can contribute a lump sum of $70,000 (or $140,000 for joint contributors), as long as you choose to spread the gift out evenly for the next five years. If you want the greater flexibility offered by an ESA but want to contribute more than $2,000 per year, one option is to put $2,000 in an ESA and then contribute the rest that you intend to invest in a 529 plan.
- Roth IRA. If you are hesitant to invest money (or all of the money) for your children’s college savings in a dedicated education savings account because you’re afraid that they might not use all of the money that you invest in these plans or accounts and you don’t want to have to pay the 10 percent penalty to use the money if they don’t, then you can choose to invest instead in Roth IRAs for college savings, and the tax advantages are the same as investing in one of the two options mentioned above. However, the obvious disadvantage of this method of saving for college is that if you use the money for college, you won’t have it available to you for your own retirement expenses. But if you know that you will have ample money saved for retirement in other accounts, then this could be a good option for you. Or you could choose to save some of the money in an ESA or 529 and some in a Roth IRA.
Check out these related articles:
- 6 Simple Steps to Start Saving for Kids’ College
- How to Start Investing for Retirement: 5 Simple Steps
3. Decide how much you intend to contribute to save for your kids’ college.
In order to help you decide how much money to invest for your children’s education, an important factor to consider is how much of their college expenses you intend to cover. Some parents choose to pay 100 percent of their children’s college education, some choose to contribute 50 percent, and some contribute less.
Because we want our children to feel ownership of their education and because we hope that they will take their education more seriously if they feel some of the weight of having to pay for it, we’re intending to pay 50 percent of their college expenses. Or, rather, we’re intending to pay 50 percent of the average cost of tuition and fees for the state colleges in our state (though we will likely help some with housing and food and so forth as well). We hope that this will encourage our children to choose their school carefully and to not choose the most expensive college in the state.
If you can afford to pay for all of your children’s educational expenses and if they have already shown a great work ethic and other character traits you want them to have, then paying all of their college expenses may not be a bad idea. However, if paying all, most, or even half of your children’s college education will put your own financial security or retirement at risk, then you should look at contributing less or increasing your income or assets, or both.
4. Decide which mutual funds to invest in to help you pay for college.
As long as you have a timeframe of at least five years and you have a decent risk tolerance, you should invest in mutual funds when saving for your children’s college, in order to benefit from the greater growth that these funds historically provide (over bond funds and savings accounts and CDs, for example). If your child or children will be entering college in less than five years, then your best bet would be to use a regular savings account (or a money market account) or a CD.
But assuming you have at least five years before you will use the money, choose growth stock mutual funds that have been around for preferably 10 years or more and that have good track records. When deciding which mutual funds to invest in for your children’ ESA or 529, important factors to consider are the long-term rate of return, the expense ratio, the type of mutual fund (large cap, small cap, mid cap, and international), and the longevity of the current fund manager.
5. Make automatic monthly contributions to your children’s college savings funds.
The best way to ensure that you reach your goal of saving x amount for your kids’ college education is if you make automatic monthly contributions to your children’s ESA or 529 accounts. With the Schwab education savings accounts, for example, this is easy to set up.
Pro saving tip: Read this article for more information on how to automate your finances in order to save for your children’s college educations, invest for retirement, pay your bills, save for emergencies, and more.
6. Look for ways to increase your income to be able to save more money for your kids’ college educations.
If you want to be able to save more toward your children’s college educations, one of the best solutions might be to work on increasing your income. For more information on how to earn more money, sign up below for my free 10-day Earn More Money, Change Your Life challenge so you can start working on increasing your income today!
7. Expect your children to work during high school to help pay for their college.
Set the expectation that your children will work during high school during summer vacation and possibly after school as well to help pay for their college education. My dad owned his own company while I was growing up, and I worked in his office from the time I was a freshman in high school till I was a junior in college. I know that the opportunity to work in the various roles that I did taught me a lot about not only hard work but valuable skills such as communication and interpersonal skills as well, in addition to word processing and other office skills.
8. Lead your children to choose an affordable school.
One of the most important things you can do when saving for your kids’ college is to guide them in this very important decision of what school to choose. Even though most college freshmen are technically adults, they don’t have the experience or financial wisdom, generally speaking, to always make good decisions. They need your help, as their parents, to make wise and financially prudent decisions during this very important time of transition in their lives.
And because you are helping to foot the bill (or might be footing the entire bill) for their college education, you have the right—and the obligation—to help your children to make good financial (and other) decisions that they won’t regret down the road.
Long before you send them off to college, sit down with your high schooler and explain to them very clearly that you are willing to contribute x amount to their college education each year, but for you to be willing to pay that amount, there are some conditions that they have to meet. Here are some examples:
- They will attend an in-state public school. Unless you have a very inexpensive private school in your state (with a price comparable to the state schools) or your child has a scholarship to a private or Ivy League school or something like that, set up the expectation now that your children will attend a public college.
- They will be expected to graduate in four years (with a bachelor degree) and attend full time. If they take longer than that because they’re kind of loafing around, taking only 10 or 12 credits a semester, then they can foot the rest of the bill themselves.
- They will be expected to maintain a certain GPA. I recommend at least a 3.5, but you might find a 3.0 acceptable.
- They will be expected to work part-time (and full-time during the summer, unless they’re taking classes). Statistically, college students who work part-time earn higher grades than those who don’t. And when you think about it, it makes sense. By working college students further develop important skills like time management and a good work ethic.
- They will live by the moral guidelines you set. That means if you didn’t allow sleepovers by the opposite sex at your home, for example, you can set the same expectation for your child while he or she is away at college. And don’t feel bad about doing so!
When you hold the purse strings, you wield a lot of power. As long as you have built a strong relationship with your children already and you don’t abuse the power you have, this can be a great tool to help bring about the behaviors (and therefore the continued character building) that you want in your college-aged kids.
9. Teach your children how to budget and how to keep expenses low.
Ideally, your children will have learned from a fairly young age how to budget. However, if they do not yet know how to create and live by a budget, teach them before they leave for college. Also teach them basic principles of intentional spending. This means that they know how to differentiate between needs and wants, they know how to spend less than they earn, and they know how to save for future planned and unplanned expenses (such as emergencies) and for larger purchases.
10. Seek scholarships.
One of your child’s jobs during high school and college should be to seek scholarships. By working hard in high school and maintaining excellent grades, I was able to receive full-tuition academic scholarships (and sometimes additional scholarships for books and fees) throughout my time at college. If your child is gifted at sports or in another area, he or she should pursue scholarships that way. And there are also many smaller, little-known scholarships that they can seek.
If your child applies for 100 small scholarships and gets awarded only 10 of them, for example, but they are worth an average of $1,000 each, that’s an extra $10,000 he or she doesn’t have to pay out of pocket. That’s worth a little time and effort, for sure! Check out this article written by one of my favorite finance gurus, Clark Howard, for ideas on where to find college scholarships.
11. Seek grants.
If your children qualify for Pell grants or other grants, they should apply for them. Because I had full tuition covered I never even thought to apply for grants, but I kind of wish that I had, and then I could have used the money for other college-related expenses such as housing, computer equipment, and more. You can find information about the Free Application for Federal Student Aid (FAFSA) here. For information about other grants, you can review this list of 101 college grants and this online database of college grants.
12. Teach your kids that they will work while they’re in college.
As I mentioned above, studies have actually shown that those who work while at college earn better grades. Having your children work while they’re in school will help ensure they avoid student loans, will teach them valuable skills, and will help them to take their education more seriously (and also help keep them out of trouble by having too much free time on their hands :)).
13. Teach your children that student loans aren’t an option.
According to a recent study, the average college student graduated in 2016 with $37,000 in student loans! There’s a good chance that they won’t even make that much a year at their first job out of college! Save your children the potentially huge burden of student loans by teaching them that they (and you) will pay for college in other ways and by making education choices that you can collectively afford.
When I was at school I never even had the idea to take out student loans (fortunately!), and we didn’t consider them for my husband, either. And since we hadn’t really been taught by anyone not to use student loans, I’m so very glad that we didn’t so that we didn’t have that financial burden following us for years after college.
I had academic scholarships to pay for tuition, but I paid all other expenses out of pocket from my part-time jobs, and we cash-flowed my husband’s schooling without any scholarships or grants by my working full-time and his working part-time.
14. Expect your children to graduate in four years.
If you intend to pay much or most of the cost for your children’s college education, let them know that they will finish school in four years, or the rest is on them. On the other hand, if they will be paying much of the cost of college themselves, then going to school part time and working part time or even full time may be their best option. Because even if they graduate in five or six years instead of four, the amount of money and stress they will save by not acquiring student loans will be worth it.
And when you look at a working lifetime of 40 (or even more) years, one or two fewer years really isn’t that big of a deal in the grand scheme of things. What will have a far, far greater impact on their ability to build wealth is that you teach them to spend less than they earn (live within their means), to save, and to invest.
When you steer your children to graduate college without student loans, you can help set them on a path of a life free of consumer debt. #debtfreeforlife
A college education really can be affordable if you follow the guidelines discussed above. With adequate planning and preparation, you can help your children to graduate from college debt free. As is the case with so many things, the sooner you get started saving for your kids’ college, the better, in order to help them accomplish that objective.
By starting to save early, consistently contributing to a college savings fund, choosing good mutual funds to invest in, guiding your child to select an affordable school, and allowing him or her the opportunity to work to help pay for college, you can help your child to obtain a great college education without any student loans and help him or her learn essential financial and other lessons along the way.
Sign up for the free Personal Capital app to be able to track how your college savings accounts and other investments are doing and also view your account history to see how your accounts and overall portfolio have done over time. It’s a very helpful tool that I use regularly! Sign up for your free Personal Capital account here.
For more on this topic, read this article on how to save for kids’ college.
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