How to Pay for College

Mark KantrowitzBy: Mark Kantrowitz | 

Paying for college is a complicated topic with an alphabet soup of acronyms like FAFSA, EFC and SAR. Parents worry about missing something important that will affect their child’s future. Thus, it helps to review all of the options for how to pay for college.

Most families will rely on several resources for covering college costs, as there is no single solution that addresses the need entirely on its own. These resources should be compared with the total net price of the complete college education. The net price is the difference between total college costs and gift aid, such as grants, scholarships and other money that does not need to be repaid. If the total resources exceed the total net price, then the college is affordable. Otherwise, the family may be forced to borrow an unreasonable amount of money to cover the college costs.

Laying out the Landscape of Paying for College

Like any major expense, the cost of paying for college will be spread out over time.

  • Past. Some of the money will come from past income, in the form of savings.
  • Present. Some of the money will come from current income and financial aid.
  • Future. Some of the money will come from future income, in the form of student loans.

College Savings Plans

Families can save for future college costs using a 529 college savings plan. 529 plans provide several tax and financial aid advantages.

  • Tax Advantages. More than two-thirds of the states provide a state income tax deduction or tax credit based on contributions to the state’s 529 plan. Earnings accumulate in the 529 plan on a tax-deferred basis and are entirely tax-free if used to pay for qualified higher education expenses.
  • Financial Aid Advantages. If a 529 plan is owned by the student or the student’s parent, the 529 plan is reported as a parent asset on the FAFSA and distributions are ignored. This has a minimal impact on the student’s eligibility for need-based financial aid.

529 plans offer several other key benefits, such as a reduction in the need for student loans and increased flexibility in college choice. Every dollar saved is a dollar less borrowed. It is cheaper to save than to borrow. College savings plans also allow a student to enroll in a more expensive college than the student could otherwise afford.


Choosing a Cheaper College

One of the best ways of cutting college costs is to enroll at a less expensive college. Students should apply to a mix of several colleges based on academic fit and financial fit. Use the college’s net price calculator to get a personalized estimate of the net price, to evaluate the college’s affordability.

The least expensive options generally include in-state public colleges, colleges that offer “no loans” financial aid policies and free tuition colleges.


Studying abroad for the student’s entire educational program may be less expensive than U.S. private colleges, even with added travel costs, but just as prestigious. However, the Federal Pell Grant and other government grants are not available for study outside the U.S., just U.S. federal student loans.

Although taking a detour through a community college on your way to a Bachelor’s degree may save some money, you may ultimately miss your destination. Only about a fifth of students who intend to obtain a Bachelor’s degree and start off at a 2-year college succeed in getting a Bachelor’s degree within six years. That compares with about two-thirds of students who start off at a 4-year college.

Taking a gap year may give you time to earn money to pay for college. But, the money will count against your eligibility for need-based financial aid. Also, students who take a gap year get out of the habit of studying and are less likely to enroll in and graduate from college.

You can earn college credits in high school through dual enrollment programs, as well as AP, IB, CLEP and PEP tests. Look on the college’s web site to learn about their test score requirements for awarding college credits. Even if you earn college credit, it may serve as general credits only and not substitute for specific prerequisites.

Cutting College Costs

About half the cost of a college education involves living expenses, such as room and board, books, supplies and equipment, transportation to and from college and miscellaneous/personal expenses. Each of these presents an opportunity to save on college costs.

  • Cut the cost of room and board by living at home with your parents, if they are nearby. Or live off campus and split the rent with a roommate.
  • Improve your academic performance. Getting good grades and admissions test scores can affect eligibility for academic scholarships at some colleges. Some private scholarships also depend on your grades and test scores. Maintaining good grades is often required to renew your scholarships in subsequent years.
  • Buy used textbooks and/or sell your textbooks back to the bookstore at the end of the semester. Ask the professor for their evaluation copy of the textbook. Or borrow the textbook from the college library. Rent the textbooks. Share textbooks with your roommate and other friends. Buy only the required textbooks. These tips can save about half of textbook costs.
  • Minimize the number of trips home from college. Don’t bring a car to campus, as parking costs can be expensive. Use public transportation and ride-sharing instead. If you do bring a car to campus, driving for Uber and Lyft can earn you extra money when you have free time on your schedule.

In general, your goal should be to live like a student while you’re at college, so you don’t have to live like a student after you graduate.


Financial Aid

There are two main types of financial aid: need-based aid and merit-based aid. Generally, grants are based on financial need, the difference between college costs and ability to pay. Scholarships are based on merit, such as academic, athletic or artistic talent, or strange skills, such as making a prom costume out of duct tape.

To apply for need-based aid, file the Free Application for Federal Student Aid (FAFSA). The FAFSA is your gateway to grants from the federal government, state government and most colleges and universities. Less than 200 mostly private colleges use a supplemental form called the CSS Profile for their own financial aid funds, but these colleges must still use the FAFSA for federal and state aid.

Families should file the FAFSA every year, even if they got only student loans last year. Subtle changes in the family’s circumstances can have a big impact on the amount and types of financial aid. For example, increasing the number of children in college from one to two can be like dividing the parent income in half. Other factors that can affect aid eligibility include changes in income and assets, dependency status and marital status. Families also have a tendency to overestimate eligibility for merit-based aid and underestimate eligibility for need-based aid.

Free help completing the FAFSA is available from the U.S. Department of Education’s Federal Student Aid Information Center (FSAIC) at 1-800-4-FED-AID (1-800-433-3243). The FSAIC also runs twitter chats via @FAFSA and #AskFAFSA. The National College Access Network (NCAN) sponsors free College Goal Sunday programs in many states that provide one-on-one help completing the FAFSA.

Be sure to appeal for more financial aid if the family is affected by special circumstances. Special circumstances include anything that changed since the base year and anything that distinguishes the family’s ability to pay from that of the typical family. This can include job loss, salary reductions, high unreimbursed medical and dental expenses, high dependent care costs for a special needs child or elderly parent, casualty losses, private K-12 tuition, parents enrolled at least half-time in college, homelessness and disability-related expenses.

To find scholarships, use a free scholarship search site, such as Fastweb or the College Board’s Big Future. Never invest more than a postage stamp to find out information about scholarships or to apply for a scholarship. If you have to pay money to get money, it’s probably a scam.

Education Tax Benefits

There are several education tax benefits that can be claimed when you file your federal income tax returns. These include the American Opportunity Tax Credit (AOTC), Lifetime Learning Tax Credit (LLTC) and Tuition & Fees Deduction, which are based on amounts paid for tuition and textbooks. There’s also the Student Loan Interest Deduction, which provides an above-the-line exclusion from income for up to $2,500 in interest paid on federal and private student loans.


Employment-based Aid

There are several types of financial aid that are based on employment.

When you file the FAFSA, you may qualify for Federal Work-Study (FWS) and other forms of student employment. Even if you don’t qualify, there are plenty of part-time jobs, summer jobs and paid internships on or near college campuses.

Some employers provide employer-paid tuition assistance. As much as $5,250 a year in employer-paid tuition assistance is excluded from income. Most employers require you to get at least a B for your tuition to be eligible for reimbursement.

Employers may also offer student loan repayment assistance programs (LRAP) as a recruiting and retention tool. LRAPs typically provide $100 or $200 a month in student loan payments. These payments are counted as taxable income to the employee under current law.

Military student aid can provide money for college in exchange for enlisting in the U.S. Armed Forces. You can receive ROTC scholarships for one year before committing to military service.

Student Loans

Most students who are U.S. citizens and permanent residents may qualify for unsubsidized federal student loans and federal parent loans by filing the FAFSA, if they are enrolled at least half-time. Students with financial need may also qualify for subsidized federal student loans, where the federal government pays the interest while the student is in school and during the 6-month grace period after the student graduates or drops below half-time enrollment.

Students should always borrow federal first, as federal student loans are less expensive and have better repayment terms than private student loans and parent loans. If a student needs to borrow from the Federal Parent PLUS loan program or private student loans, it may be a sign that the student is borrowing more money than they can afford to repay. If total student loan debt at graduation is less than the student’s annual starting salary, the borrower should be able to repay their student loans in ten years or less.

A reasonable alternative to long-term debt, however, is a tuition payment plan. Tuition payment plans break up the college bills into 4-12 equal monthly installments. No interest is charged, but there may be an up-front fee of $100 or less. Tuition installment plans are a good option for families who can afford to pay the college bills, just not in one big lump sum.

There are several loan forgiveness programs that depend on the borrower’s occupation. These include Teacher Loan Forgiveness and Public Service Loan Forgiveness. However, borrowers have reported difficulty qualifying for these loan forgiveness programs.

Income Share Agreements (ISA) have been promoted as a solution to the student loan “problem.” But, ISAs are just another form of debt. ISAs require borrowers to repay a fixed percentage of their income for a specified period of time, as opposed to a fixed dollar amount for a specified period of time.


Mark Kantrowitz

Mark Kantrowitz

Publisher and VP of Research

Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make informed decisions about planning and paying for college.