If you choose to continue your formal education beyond high school, somebody is going to have to pay for it. It will most likely be you or your parents, but it will be somebody. There are many different avenues for financing your education, so you should take some time to learn the different alternatives and decide which work best for your situation.
At this point you have probably already spent a lot of time on basic decisions such as whether to go to college in the first place, what degree you want to pursue, and which college you want to attend. Maybe a big part of your choices is not so rooted in finance, for example, you might have wanted to be a physician ever since you were a toddler. However, you would be wise not to ignore the dollars and sense side of the educational equation.
First ask yourself if college is going to be worth your time and money. Except for the possibility of after-school and summertime employment, you are going to be essentially removed from the workplace during the time that you are in school. Remember that time is the most precious commodity, because you have a limited amount of it in this life and once it is spent you can’t get more of it. Therefore you will have to make up for these years of lost salary or wages in the remaining years after you get out of college.
Consider the possibility that you might not be able to obtain the degree that you want. Even if you get accepted into the degree program that you seek, and the college that you want, there is no guarantee that you will complete the course requirements. You might find that you don’t have the motivation or discipline to study enough to do well in the courses that you have to take, or that you wind up getting a degree with mediocre grades that aren’t good enough to get you the job you want. It is better to find out this type of reality as soon as possible rather than waste four or more years and lots of money, especially if it is borrowed money. You might finish an undergraduate program for a field that it turns out you aren’t interested in or in which you can’t land a decent job but still get a graduate degree in something different that will pay off in the long run. Still, consider these possibilities and be prepared for them.
Assuming that you will successfully pursue your chosen degree to fruition, look at any available relevant data from the industry in which you want to work to try to determine how much you could reasonably expect to make over your working career. This way you will have an idea of how much you might earn after graduation.
Besides looking at the anticipated income stream corresponding to your college path, don’t forget to analyze the costs. Every dollar that you don’t have to spend for college is one more dollar in your pocket or one less dollar of loan repayment you’ll have to make. Estimate how much it will actually cost you in things like tuition, fees, textbooks and supplies. If you borrow money for these items, add in interest charges, too.
In the current educational environment, college costs have been steadily rising several percentage points every year, usually higher than the overall inflation rates. At the same time, the ability to pay for college has gotten much harder in today’s lending environment. The financial fallout from the so-called subprime lending meltdown has spread into all other areas of credit – home equity loans, credit cards, even student loans – not only in this country, but globally. Unemployment is up, as are energy and food costs. The dollar has recovered some of its lost strength but home values are still down in many places.
Keep all of this in mind as you review the following different methods for financing your college education.
Scholarships and Grants
A scholarship is an award to a student to help defray part or all of the student’s educational expenses. It is often awarded without any requirement of repayment, but some institutions such as the military require a minimum amount of service in exchange for the scholarship. Some scholarships are available only if the student attends a particular school, whereas others are available to the student regardless of which school is chosen.
Many universities are endowed with large funds with which to award scholarships. Other sources of scholarships include nonprofit institutions, labor unions, religious institutions and community organizations.
Eligibility for a scholarship can be based on a wide variety of criteria. Some academic scholarships are merit-based such as if an applicant has a certain grade point average or score on an admissions test such as the Scholastic Aptitude Test (SAT). Athletic scholarships are given to student-athletes who excel in their sport. Other scholarships are awarded to students based on their financial inability to afford college, in which case they can be technically considered a “grant”. Occasionally a scholarship is based upon the student’s affiliation with a particular entity. For example, a business might award a scholarship to children of its employees.
A scholarship can be awarded upon entry to a school or even after the recipient has been enrolled as a student at the school for one or more semesters. It can be awarded to undergraduates as well as graduate students, which sometimes take the form of fellowships. Sometimes a test called the PSAT/NMSQT (see http://www.collegeboard.com/student/testing/psat/about.html) is required for the student to be eligible for a scholarship.
A high school student interested in applying for a scholarship can often obtain relevant information from the high school’s guidance counselor. Besides national sources of scholarship funding, the counselor will be aware of scholarship sources that are more local in nature. Other useful resources can be found on the internet, such as http://www.studentscholarshipsearch.com.
A so-called “Stafford” loan is a federal loan for a college or university student. Interest on the loan is based on a fixed rate, and the student must be enrolled on at least a half-time basis. It does not require a credit check and there are no fees. The loan is either subsidized or unsubsidized. If it is subsidized then the student is not charged interest until the time that repayment is due to begin. It is based on the student’s financial circumstances.
An unsubsidized Stafford loan is available to an eligible student regardless of the student’s financial circumstances. The interest is charged on the loan from the time the loan is disbursed. Subsidized rates for undergraduates are now 4.66% and 6.21% for graduate and professional students.
Stafford loans are subject to annual and lifetime borrowing limits depending on whether the student is dependent on someone else such as parents or is independent. The limits also depend on whether the student is an undergraduate, and if so, which year of school the student is in. For example, a first year dependent undergraduate student can borrow up to $5,500.00 in subsidized Stafford loans and an additional $2,000.00 in unsubsidized loans. The limits on such a student’s subsidized Stafford loans increase to $6,500.00 for the second year and $7,500.00 for the third and subsequent years. This student would be subject to a lifetime limit of up to $31,000.00, of which up to $23,000.00 can be subsidized loans. Independent students have higher limits, up to a lifetime cap of $57,500.00. Graduate or professional students can borrow up to $138,500.00, or up to $224,000.00 for health professionals.
Parents and guardians of students desiring to borrow more than the Stafford limits can apply for a federal “PLUS” loan. The interest rate is 7.21% (which might be lowered 0.25% if repayment is made by automatic debit from a bank account) and the loan is subject to a 3% origination fee.
Eligibility for a PLUS loan includes passing a credit check, but credit standards have recently been loosened. The borrower must be a citizen of the United States, a permanent resident or an eligible non-resident. The borrower must be in good standing on other educational loans and grants.
For more information on Stafford and PLUS loans, see http://www.staffordloan.com.
Besides federal student loans, loans have also traditionally been available through private institutions. However, underwriting standards for private loans are tougher and can vary from one lender to the next. Because of the tight credit market of recent years, some banks (such as Wells Fargo and Bank of America) stopped issuing these types of loans altogether. Some of the lenders which made these loans in previous years are out of business now, and the lenders that remain are pickier about which schools they will lend for – trade schools and community colleges are not as favored, for example, as four-year colleges and universities.
A relatively new phenomenon in student loans is “peer-to-peer” type loans. For this type of loan, a student applies online for a loan in an auction marketplace, which can result in funds being provided by multiple lenders.
Other options for student loans include home equity loans for parents who own a home with enough equity to qualify for enough of a loan. These loans often have a lower rate than many other types of student loans and the interest is often tax deductible. However, in the recent housing market, homeowners typically have not enjoyed as much home equity as in the past, with some even experiencing frozen credit limits due to decreased home valuations.
Credit cards are not usually a desirable option for paying college costs because they usually charge substantially higher interest rates and fees than other types of loan alternatives. However, if used responsibly they can help the student build a good credit history and provide an emergency source of funds. The student should become familiar with how a credit card works before choosing this route for any college financing.
A student desiring to get a loan in the student’s name should consider the possibility of having a co-signer on the loan, i.e., someone who guarantees that the loan will be properly repaid. The co-signer could be a parent or other relative, but the student should make sure the co-signer has good credit so that better terms can be obtained. The co-signer should also be able to trust the student enough to be willing to co-sign the loan.
Finally, once a student has finished college, a consolidation loan might help lower monthly payments if the student has incurred multiple loans. A consolidation loan is basically just a refinance into a single loan. The federal PLUS Loan Consolidation is an option for consolidating multiple federal student loans.
The choice of school can have a big impact on how much your college will cost. Public colleges and universities tend to be less expensive than private ones because they are often heavily subsidized by the state’s taxpayers. Similarly, if you are considering a public college, it will usually be cheaper if you are a resident of the state in which the school is located. The states tend to prefer giving a break on tuition to their own taxpayers rather than out-of-staters.
Even though a community college is a public institution, it can often be thousands of dollars per year cheaper than a public four-year college or university. If you are interested in substantial savings in your costs, a community college might be for you. It is probably much easier to gain admission, and the courses you take will usually transfer in full to a four-year school. You can attend for a year or two before transferring, and yet still have the same degree as if you spent your entire time at the four-year school. You might even be better qualified for admission to the four-year school after making good grades at the community college, especially if your high school grades weren’t as impressive as you would have liked. Also, you might be interested in obtaining a two-year associate’s degree rather than a four-year bachelor’s degree, in which case you can complete the entire program at the community college.
Online college degrees are another alternative. They are a relatively new method of obtaining a college degree which allows taking classes via the internet rather than requiring the student’s physical presence in a formal classroom. An online degree allows more flexibility for your schedule, since you can take the classes from your home. If it is an accredited institution then the courses you take, like those at a community college, might be transferable to a four-year school if you decide to transfer rather than finish the entire program online.
You can decrease your college expenses by shopping around for cheaper prices. In the area of student housing, this means comparing prices for a dorm room versus an apartment, rental house or boarding house. Housing can be cheaper as you get farther away from campus, but don’t forget to take into account such differences as distance to class and availability of kitchen facilities which can affect the total cost of your college education. You can also shop around for textbooks and can often enjoy substantial savings by purchasing used instead of new textbooks. Used ones are also often available through online (see, for example, http://www.cheapesttextbooks.com). Some textbooks are available in digital form, often at substantial savings over hardcover versions, while a few are even available free online (see http://www.gutenberg.org/wiki/Main_Page).
If you want a college education but can’t afford it, remember that there is no law requiring you to go straight to college from high school. You can wait a year or so, and work while you live at home to save money for college. Keep in mind that the longer you are out of school the harder it might be to get back into the habit of going to classes, studying and taking tests. There is also always the risk that the immediate gratification of a paycheck might lure you away from pursuing that college degree.
To keep from losing your focus on a college degree, consider going to school on a part-time basis while you are also working. It might take you longer to get your degree this way, but it will give you more funds to pay for your education while keeping you enrolled in school and in the habit of studying. If you are industrious and motivated enough, you can go to school full-time and work part-time, and if you are a really hard-core hard-driving “type A” individual you could even be a full-time student while working full-time hours. (Just don’t overdo it and sacrifice your health or sanity.) Some schools offer a co-op program, in which you alternate between a full-time course-load one semester and full-time work the next.
You also don’t have to go straight into a graduate school after completing your undergraduate degree. In fact, under federal tax law, if you work for a certain amount of time (maybe two years) between undergraduate and graduate school, you might be able to deduct your graduate school expenses in calculating your federal income tax. The outcome depends in part on whether the graduate degree qualifies you for a new profession or line of employment.
Some graduate schools tailor their programs to full-time workers who go back to school on a part-time basis, such as “executive MBA” programs that offer night or weekend classes. On the flip side, other graduate schools are now starting to offer part-time morning degrees for stay-at-home mothers or others who are better able to take classes earlier in the day.
If you work while in college, between high school and college, or during summer breaks, you might want to work at a job that is related to the industry or profession that you ultimately want to enter. For example, if you want to be a physician you might pick up a job at a local hospital. This way you get some exposure to what you will later be making into a career as well as the opportunity to make helpful contacts. It also gives you a chance early in your life to learn that maybe you don’t want to be a physician after all. This is the type of lesson which is better learned earlier than later.
Another option which can incorporate work and education is to have the government pick up some or all of the tab for your education in exchange for your time in future government service. An example of this would be if you want to be an airplane pilot but don’t want to or can’t pay for all of the lessons and airplane rental required for your pilot’s licenses. If you qualify, you could have the military pay for education and pilot training in return for your commitment of several years to military service.