How to Fund Your College Education

The price tag on most colleges can look frightening—as much as $30,000 per year at a private school.  The cost is lower at most online colleges and public schools, but their prices are still growing faster than inflation.  The good news is that most students don’t pay the full price, either at a traditional or online college.  There are several ways you can fund a college education for yourself or your child without breaking the bank.

Savings

If you want to save for college, it’s best to start early.  There are several ways for parents to save for a child’s college education.  In most cases the contributions are not taxed. 

The Coverdell Savings Account allows parents to contribute up to $2,000 tax-free per child to provide for education.  529 plans also allow tax-free contributions, but with fewer limits and more control in the hands of the parent. 

Savings clubs such as Upromise allow parents to save for a child’s college education by making purchases from participating merchants.  Under the plan, the merchants will contribute a small percentage of each purchase you make into a savings account for your child.  In many cases, the funds are deposited tax-free into your 529 account.

Grants and scholarships

These are generally the best way to fund a college education.  Unlike a loan, you don’t have to pay back a grant or scholarship—it’s free money.  While it helps to have good grades, you don’t always have to be the valedictorian to earn a grant. 

Many schools offer private grants and scholarships to selected students based on their ethnic background, field of study, extracurricular interests, and other factors.  You may have to fill out a separate application, or the school’s admissions counselors may simply choose you based on your common application.

In addition to the colleges themselves, businesses, nonprofits, religious groups, and other organizations also offer scholarships.  Local scholarships usually offer better odds; the pool of applicants is smaller than it is for national grants and awards.  Parents may have access to special scholarships through work or membership in a religious, military, fraternal, or union organization.

Tax breaks

The government offers two tax-break programs, the Hope and Lifetime credit, that will pay you back for college tuition and fees.  The Hope credit offers up to $1,500 per year for each eligible student, while the Lifetime offers up to $1,000 per year.  Both credits have different requirements that students and families must meet to be eligible.

Government loans

The government offers subsidized loans with controlled interest rates on a financial-need basis.  Perkins loans have the best terms; as of 2007, they are locked into a 5% interest rate and don’t accumulate interest while you’re in college. 

Stafford loans are sometimes subsidized—meaning you don’t pay interest while you’re in school—but they come in several different varieties.  Their rates are locked in around 6.8% as of June 2006.  PLUS loans are also government-backed, and their interest rate is usually about 8.5%.  They are not subsidized; you will accumulate interest during your time at school, but your interest rates will be fixed.

Private loans

Private loans are given through banks and financial institutions.  They can have interest rates as high as 20%--there is no government limit to the interest they can charge.  Private student loans are variable, so an interest rate that’s initially low can rise at any time. 

There are plenty of ways to save on college expenses.  Online degree programs are usually not much less expensive than traditional schools, but with virtual learning it’s easier to work while you earn an online degree.  Many students choose to attend an online college so they can work to pay off tuition while they’re in school, rather than incurring debt at a traditional school.

Despite rising costs at traditional and online colleges, it’s usually possible to cover tuition charges through grants, loans, and tax-free savings. Avoid signing up for more private debt than is absolutely necessary, and always insist on all the information before signing.  If you’re smart about your college financing, you could avoid crushing student loan debt in the future.