Financing Education: How College Can Become More Affordable

In the first module of High Water Women’s financial literacy curriculum Make Money Work For You, we talk about whether education “pays off”. If you’ve attended the course, the chart below may be familiar. Not only does education help you make more money on average, it also gives you better job security as indicated with the unemployment rate % below:

earnings_by_education

This exercise is a great thought experiment, but attending college is much easier said than done: for many, it requires a detailed and thoughtful plan to fund. In this post we’ll explore some of the options available to help students finance their education in order to make the idea of attending college more tangible.

Savings

Saving a little bit over time can go a long way to finance education, in part due to compound interest – over time, you earn interest not only on the initial amount you’ve saved but on interest you’ve generated which allows your money to grow faster.

There are many different types of accounts that allow you to save for educational purposes. For example, 529 plans are tax-advantaged investment vehicles designed specifically for education savings. The contributions grow on a tax-deferred basis, which allows your money to grow more quickly at the outset. Coverdell Education Savings Accounts (ESAs) are another type of tax-advantaged savings vehicle for education purposes.

Financial Aid

Most schools offer some degree of financial assistance, which can be either need-based or merit-based. Financial aid can be offered in several different forms, such as scholarships and work-study.

The biggest advantage of scholarships is that, unlike student loans, they don’t need to be repaid. Students will need to submit an application to win a scholarship, which is often based on need or merit, depending on the type of scholarship. Scholarships can be granted by the school you’re attending or by a private organization, such as a company, a nonprofit or a community group. Free services like Scholly can help you to navigate the different types of scholarships and suggest ones you might be eligible to apply for. Always keep in mind the following tips as you apply: prioritize applying for need-based scholarships first, try to find niche scholarships that you qualify for, cast a wide net, be wary of scams and – perhaps most importantly – pay attention to application deadlines!

Work-study programs are part-time jobs on or near campus for eligible students – it’s a form of financial aid offered by the school where students receive aid in exchange for the student working on campus. Students are typically responsible for securing their own work-study jobs. The jobs pay students directly at least once a month, and students earn hourly wages up to the amount they were awarded as part of the work-study program for the year. It’s important to remember that work-study awards often won’t cover the full cost of tuition for the year, so students often supplement work-study jobs with other savings or financial aid.

Grants

There are many different types of grants awarded to students that help them pay for education. Like scholarships, grants don’t need to be repaid. Grants come from a number of different sources, including governments (both federal and state), colleges and private organizations. Most grants are awarded based on an applicant’s financial need. This is determined based on the income an applicant reports on the Free Application for Federal Student Aid (FAFSA), a form that every US college student fills out in order to be eligible for need-based financial aid. Federal Pell Grants are one notable federal grant program – these grants often go to families who earn less than $30,000 annually. You may also be qualified to apply for grants at the state level, though remember to check eligibility requirements as these vary by state.

Student Loans

When thinking about financing education, loans should be your last resort as they are a much more costly way to finance education compared to the other alternatives discussed above. That said, but many students find themselves in a situation where they must take out loans because scholarships, grants and savings often are not sufficient to cover tuition for the full year.

Student loans are offered primarily by two parties: the government and private lenders. As a general rule, federal loans typically offer lower interest rates and borrower protections which are more attractive to students. To apply for federal student loans, students will need to fill out the FAFSA.

There are several key differences between federal loans and private loans. Federal loans are almost always lower-cost and easier to repay, whereas private loans are generally more costly than federal loans and offer little flexibility if you are having trouble making your payments. Many federal student loans are subsidized and have fixed interest rates, but it’s important to note that the amount of money you borrow is limited. If you default on your federal loan, it is possible that part of your wages and your tax refund could be withheld by the government. Private loans typically allow students to borrow larger amounts, but the interest rate and monthly payment could change with little warning, and these loans often offer fewer options for when and how much you repay. If you do use private student loans, make sure you source a few different options to compare the interest rates and protections offered by each organization.

If you’re considering taking on student loans to help pay for college, be sure to do so responsibly. It’s important to think about the borrowing costs associated with taking out a loan and to ensure you will be able to repay the loan after school. A good rule of thumb is to aim for student loan payments that don’t exceed 10% of your projected after-tax monthly income your first year out of school. The NerdWallet student loan calculator can help you estimate what your monthly payments might look like in the future.

These are just a handful of ways students finance their college education, but there are many more options available! Head on over to the Money Chat forum if you have any questions about this post or suggestions on other ways to make education more affordable.