How to Pay for College
Second only to owning a personal residence, paying for college will likely be one of the largest expenses you will have to cover in your lifetime. While it may seem as daunting as attaining the education itself, with thoughtful decision-making and careful planning, it can be managed.
First and foremost, we want to make clear in this article that we will minimally address the option of taking out student loans to cover an undergraduate's education. At Incline Financial Planning, we firmly believe that leaving an undergraduate program with debt is an option of last resort and if absolutely necessary, it should be kept as minimal as possible. The burden of debt can force graduates into decisions that may not align with their career or life goals, but rather with the necessity of repaying that debt. The biblical quote "the debtor is slave to the lender" resonates deeply in this context. We harbor a strong aversion to debt, particularly student loan debt, as it has had detrimental effects on countless lives, undermining the very purpose of pursuing higher education.
Having established the principle that debt should only be considered to finance an undergraduate education as a last resort and kept as low as possible in such instances; the question arises: How then should one pay for college?
First, College Choice
As with any goal, we must start with the desired end state in mind. For example, if the goal is to become an airline pilot, something we know quite a bit about, it would be reasonable and ideal to acquire the necessary certification and qualifications at an institution that you like at a price you can afford.
Like any career path, there are multiple routes to reach the desired end state, each with different costs. To become an airline pilot, you can pursue training at a university, in the military, or at your local airport. University training tends to be the most expensive option, while training at a local airport or with the military offers cost-saving alternatives, with military training often being “free” in exchange for a commitment to serve in the US Military (We extend our gratitude to those who do so).
Ultimately, the point is that all three paths lead to the same career, albeit with varying costs and experiences along the way. While we are not here to debate which path is superior, we firmly believe that the best path is one that you can afford, that fits your needs, and without resorting to debt.
While we all come from different financial backgrounds. If you have the means to afford education at a private institution and believe it's worth it, that's excellent! However, if financial constraints limit your options, attending a local community college before transferring to a state university while working to pay your way through school, is a viable alternative. Though it may take longer, leaving college debt-free, we believe, is a pursuit worth enduring.
Most often there are multiple paths to reach the same goal. Find the one that aligns with your educational and financial needs and remember, attempting to finance a champagne education on a beer budget with debt has both short and long-term consequences.
Second, Financial Aid from the government
To receive financial aid from the government, you must first fill out the FAFSA (Free Application for Federal Student Aid). This form allows the federal government to determine who receives grants which are provided to students with little means to pay for school.
The FASFA form results in a Student Aid Index (SAI), indicating how much the student or family is expected to pay for college. In some cases, particularly those with little assets or income, this number can be negative, possibly as low as -$1,500.
Another crucial factor in the calculation for federal grant money is the Cost of Attendance (COA) of the specific school. If attending school at least half-time, the COA includes estimates for tuition, fees, books, supplies, housing, food, transportation, loan fees, miscellaneous expenses, childcare, disability-related costs, and study abroad programs.
Once the SAI is determined, it is compared to the COA. If the SAI is lower than the COA, the student is likely to receive grant money to cover the full COA or the difference between the COA and SAI.
Multiple considerations affect your SAI including:
1. The income and assets of a child will impact SAI more than the parent’s income and assets.
2. Income is based on the prior, prior year (e.g., for 2024, based on 2022 income), while asset values are based on the day the FAFSA is submitted.
3. Qualified distributions from a 529 account owned by a child, parent, or grandparent are not included in income but may count as assets if owned by a parent or child.
4. Retirement plan savings and equity in the primary residence are not considered assets for calculating the SAI.
5. Small farms and businesses are now included as assets for calculating the SAI.
6. In cases of divorced parents, schools using FAFSA consider the income and assets of the parent providing the most financial support.
7. If your financial situation changes, you can consider an appeal.
In general, the less money you have and the higher the college costs, the greater the likelihood of financial aid from the government will be. While filling out the FAFSA is essential, middle-class families we find have a false hope of qualifying for aid. If you earn more than six figures a year, it’s unlikely you'll receive government aid and should be prepared to finance the education independently.
Second, Other Sources to Fund College
Now that you understand how much if any aid you will receive from the government, there are multiple other sources available to fund college. Below are ways to do so and some tips to consider in ways to attend additional funding.
Grants, Scholarships, and Awards
Institutions offer their own grants, generally requiring a completed FASFA form to determine need and eligibility.
Apply early as many awards are given on a first come first served basis.
Consider looking for awards either online, at college, affinity groups, professional or civic organizations.
Do not scoff at small local scholarships, you would be surprised how many go without an applicant. 20 small awards of $1,000 can really add up.
Consider taking a job at a university. Not only do most offer free tuition to family members at that institution. Many offer exchange programs with other universities as well.
Any relatives planning to gift money? If so, consider:
Direct tuition payments to the college are not subject to gift tax and do not use the donor’s annual exclusion amount or lifetime exemption.
Distributions from third-party owned 529 accounts (e.g. grandparents) are no longer treated as income of the child. As a result, they may be used during all school years with no impact on federal need-based financial aid eligibility.
Does the student expect to become an elementary or secondary school teacher?
If so, your student may be eligible for a TEACH grant if the school has a TEACH grant program.
Did you or your spouse serve (or currently serve) in the military?
If so, your student may be eligible for certain benefits.
Would the student consider military service?
If so, the ROTC (Reserve Officer’s Training Corps) will cover most college expenses if the student serves at least four years in active duty and four years in the reserve.
Did you know, if you have more scholarship money than the education costs itself, the institution will pay you to attend? Why not flip the paradigm?
Third, Save on Taxes
Maybe you won’t get financial aid from the government, but it does not mean you won’t get any money at all from them. Here are a few tips to squeeze every penny you can from either the federal or your states government.
Is your Modified Adjusted Gross Income less than $90,000 if you are single or ($180,000 Married Filing Joint)? If so, consider the following:
You may be eligible for the American Opportunity Tax Credit for 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 (per eligible student)
You may be eligible for the Lifetime Learning Tax Credit for 20% of the first $10,000 of qualified education expenses (per tax return)
The phaseout range for these credits for a single filer is $80,000 to $90,000 or $160,000 to $180,000 if Married Filing Jointly.
Does your state offer an income tax deduction or credit for 529 plan contributions?
If so, consider an “in-and-out” strategy where deductions or credits may be allowed on contributions that are immediately withdrawn to pay for qualified education expenses.
Fourth, Save to Pay Cash
After exhausting all possibilities in getting someone else to pay for college, you now must pay. There are few obvious ways to do this. Pay as you go, save up, or a combination of both. We advocate at Incline Financial Planning that you save for college in Step 5 of our planning process. It is important to have no consumer debt, an emergency fund in place, and saving for your own retirement and well-being before saving for your kids college. Given you are at Step 5 and saving for college here are a few tidbits to make the process more efficient.
Do you have a 529 account (or are you considering opening one)? If so, consider the following:
You can use your gift tax annual exclusion amount to contribute up to $18,000 per year to a beneficiary's 529 account, gift tax-free.
Alternatively, you can make a lump sum contribution of up to $90,000 to a beneficiary's 529 account, and elect to treat it as if it were made evenly over a 5-year period, gift tax-free.
Unused 529 funds may be transferred (in the future) to the beneficiary's Roth IRA (rules and limitations apply).
Do you have a Coverdell Education Savings Account? If so, consider the following:
Coverdell Education Savings Accounts tend to be more restrictive then a 529 account.
Coverdell Education Savings Accounts can be rolled over to a 529 account, if the account beneficiaries are the same.
Do you own Series EE, or I Bonds?
If so, you may be able to exclude from gross income the interest paid upon the redemption of the bonds to pay for qualified education expenses (subject to income limitations).
Lastly, Student Loans
All options have been exhausted and you are left needing money for school. Student loans are your last option. The loans with generally the most favorable terms are in this order:
Federal Direct Subsidized Loans (needs based)
Federal Direct Unsubsidized Loans
Federal Direct PLUS Loans
Private Loans (banks, colleges, and states)
Conclusion
The journey of paying for college is undoubtedly one of the most significant financial endeavors many will face in their lifetime, second only to homeownership. However, it's a challenge that can be managed with careful planning and informed decision-making.
One fundamental principle we've underscored throughout this discussion is the avoidance of student loan debt, a stance rooted in the belief that education should enrich lives, not encumber them. The specter of debt can dictate life choices and thwart the very purpose of pursuing higher education. We strongly advocate for exploring alternative paths to finance education that align with individual financial circumstances and goals.
Ultimately, the key takeaway is that there's no one-size-fits-all approach to paying for college. Everyone’s situation is unique, and the need for professional help in navigating this part of your financial life may be warranted. As always, we are here if you need help or have a question.
