Paying for college: Before you go (Part 1 of 3)

The cost of a bachelor’s degree has never been higher: an in-state student enrolling at a public university can expect to pay $38,300 in tuition and fees over the course of four years, while a student at a private university will pay approximately $130,000. The high price tag is daunting for both parents and prospective students, but with some planning, they can confidently tackle the costs.

This three-part series will show parents and students how to take advantage of the many services available to help reduce or eliminate the cost of higher education, from scholarships and savings plans to work-study programs and student loan forgiveness options.

Part one details what to do to lower costs before school starts. Experts agree that starting early is key when it comes to determining how to pay for school, whether that means researching colleges, saving money, looking into scholarships, or considering student loans.

Selecting the right school

Students today have a wide selection of schools to choose from, including technical schools, community colleges and online programs. Choosing the right institution is about more than finding the right academic fit, says Mark Bilotta, chairman of the board of Massachusetts Education and Career Opportunities Inc. and author of “Paying for College: A 2015 Guide to Saving Time and Money.”

“It really has to be a good financial fit as well,” he says. Determining whether a school is a good financial match involves more than simply looking at the price tag. Bilotta suggests asking the following questions when researching institutions:

Does the school have a history of meeting financial needs, or does it have a large endowment of over $500 million? These are important factors to consider when applying for reach or dream schools. Students who gain acceptance, but do not know how they will pay, find themselves in a tough situation.

“They’re caught in the quandary of really wanting to go but not being able to afford it. This is when poor decisions are made financially,” says Bilotta. Financial aid packages and awards at match schools and safety schools are often more common and comprehensive.

What is the graduation rate? What is the student loan default rate? Researching these statistics helps determine whether the school is a good investment of time and money. According to Bilotta, the loan default rate can help estimate how many students are gainfully employed after graduation. If the default rate is high, prospective students may want to consider alternatives.

What would this school cost me specifically? While the sticker price of a public school is lower than that of a private school, the final cost may actually be less at a private school, depending on the student. If the college has a large endowment and is eager to have that student in its next freshman class, it may offer a generous institutional award.

Schools are now required to have a net price calculator that shows families the approximate cost of attending that school. Find a school’s net price calculator on its website and see what kind of financial burden attending that school entails. It may differ significantly from the standard, quoted tuition price.

Saving and spending money with savings plans

Whether you are a parent wishing to help your child out financially or an adult heading back to school, consider speaking to a financial advisor about your goals. Financial advisors can look at your situation, give advice, help you set up new savings accounts, and put your existing accounts to good use.

“Find a fee-based advisor who will charge you an hourly rate. They’ll give you solid, unbiased advice,” says Sean Moore, certified financial planner and president of SMART College Funding. A financial advisor can also help you avoid mistakes, like assuming you do not qualify for financial aid because your income is too high, and encourage you to  explore all your options.

One option is a standard 529 plan, which allows adults to save money for their child’s education and withdraw that money at a tax-free rate to use on qualified education expenses. You do not need to have a child in mind when you open the account.

“You can start saving for college even before you have kids,” says Moore. “Start it in your own name and transfer it to a child in the future.” If you do not end up using the funds on education for your children, you can designate another beneficiary, or you can take the money out for yourself after paying applicable taxes and fees.

When it comes to saving for college, the earlier you start, the better. “Start as early as you can, and do whatever you can, even if that’s just $100 a month,” says Thomas Scanlon, a CPA and certified financial planner at Raymond James Financial Services Inc. If you feel it is too late to fund a 529 plan for your child, you have other options. Scanlon suggests considering money from a Roth IRA or a 401(k) plan as a back-up, with the 401(k) being the less desirable option to withdraw from.

You can also look into a home equity line of credit, which borrows against the equity in your home up to a fixed amount. In contrast to a loan, where the full amount is given as an upfront advance, this option works like a credit card with lower interest rates and a fixed date for repayment. To be smart, plan how you will pay the line of credit back before you take it out. “You’ve got to have some discipline if you use this tool,” says Scanlon.

Scanlon believes that both parents and children should work together to pay for school. “I think it’s a mistake to have the parent pay 100 percent or for the child to pay 100 percent.” The difficulty lies in striking a balance between students taking on the burden of large loans and parents sacrificing the security of their retirement. Moore is against parents dipping into their retirement accounts. “You can borrow for college, but you can’t borrow for your retirement.”

Winning money through scholarships

Scholarships have a great advantage over student loans because they do not need to be paid back. However, winning scholarships does require work, says Kevin Ladd, vice president of Scholarships.com. “But it pays. If a students spends three hours writing an essay and wins $1,000 — that’s a lot of money per hour.”

To find success with scholarships, start early and get organized, says Ladd. Look at all the scholarship options available to you, from highly competitive $20,000 scholarships to smaller scholarships within your community. Look at past recipients of a desirable scholarship, see what they have in common, and emulate those traits or activities.

“One of the things they’re looking for is community service: someone who’s civic-minded, someone who’s a giving person.” You are representing their organization, Ladd says, so you want to be a person they will be proud to honor publicly. Start getting involved in community service activities in junior high and you will stand a better chance of scholarship success by senior year of high school.

Do not automatically assume that you will not qualify for financial aid. Every student can find scholarships that are a good fit. They are not reserved for students with exceptional abilities. “You’re not out of the game just because you’re not a sports star or an academic star,” says Ladd.  

Borrowing money through student loans 

With over 37 million Americans struggling with student loan debt totaling approximately $1 billion, student loans have become a way of life for many people. Even with Congress keeping interest rates on federal student loans relatively low, individuals are still burdened with an average of $26,600 to pay back by the time they graduate.

Do not take money out to cover nonessentials, like spring break trips with your friends. “Take exactly what you need and not a penny more,” says Moore. Start your research on student loans to find the right ones for you on the Department of Education’s federal student aid website.

Ideally, if you have followed the advice above, you will not need to take out any loans. Just remember that every $1,000 you save on the cost of education is $1,000, plus interest, that you do not have to pay back after graduation.

Starting early is key

The consensus among experts is to start the process early. Students, start researching schools and scholarships as freshmen or sophomores. Commit to getting good grades and being involved in activities, especially community activities, from middle school on.

Parents, save as regularly as you can and help prospective college students with their financial and school research process. Starting early will prevent you from feeling overwhelmed and will offer the best chance of lowering costs before school starts.

If you are past this stage and starting to worry, never fear. In the next part of this series, we will look at how to keep education costs down while you are in school.