May 22, 2012

How to Pay for College

You can pay for college in one of 5 ways:
  1. Be an unbelievable athlete and go to college on a scholarship.
  2. Be an unbelievable student and go to college on a scholarship.
  3. Be fortunate enough to live in a state that offers everyone a scholarship and be diligent enough to keep that scholarship.
  4. Be fortunate enough to have parents or family members who are willing to provide funds for your college expenses.
  5. Take out a student loan.
To be quite honest, alternative 1 and alternative 2 are not really options for very many people. Alternative 3 is awesome, but with rising education costs and shrinking state budgets, it is getting more and more academically difficult for students to keep state-sponsored scholarships. Alternative 4 is pretty sweet as well from a college student’s point of view, but it requires sacrifice and long-term savings on the part of the family members providing the patronage. Alternative 5 is in many cases necessary, but starting your adult life and working career with a large debt can be fairly daunting.

Not very many people end up being amazing athletes or Einsteins, but everyone can recognize how valuable not paying for college was, or would have been. That is why many families sacrifice and save for years so their children can go to college without having to face the difficulties generated by a large student loan. Here are a few suggestions for how you can save enough funds to help send someone you really care about to college, without having to sell a kidney:
  • Start saving sooner rather than later. If you can save just $100 per month from the time a child is born until they graduate high school and invest it in a prudently diversified portfolio averaging 8% a year, you could have around $48,000 in the child's college fund.
  • See if any grandparents, great aunts, great uncles, or any other friends or family members are willing or able to make a contribution for college. Funds can always be invested in custodial accounts, and as long as the gift is not more than the annual gift exclusion (currently $13,000 per person), there won’t be any gift tax consequences. You have to be careful, but don’t be afraid to ask others tactfully. A lot of people like seeing their assets help people during their lifetime as opposed to after they're gone.
  • See if your state offers a 529 plan. 529 plans are qualified tuition plans that are sponsored by states and designed to encourage saving for future college costs. There are two possible types of 529 plans: pre-paid tuition plans and college savings plans.
    • 529 pre-paid tuition plans allow you to purchase tuition credits at today’s rates that ensure tuition in the future. With education costs continuing to sky-rocket, it’s easy to see why this is a popular choice. Be careful though as many of these plans require the beneficiary to be a state resident, and you might not want to limit someone’s college choices to that extent.
    • 529 college savings plans allow you to invest funds for the purpose of paying someone else’s college expenses. The beauty of college savings plans is that, in most cases, any earnings are not subject to federal or state taxes. Be careful though as you could actually lose money depending on market fluctuations. 
  • When it comes time to actually pay college expenses, there are also some tax benefits out there if you pay qualified education expenses for yourself, your spouse, or a dependent. You should look at the Tuition and Fees Deduction, the Lifetime Learning Credit, and the Hope Credit (the Hope Credit is replaced by the American Opportunity Tax Credit until the end of 2012 unless it is extended).
Please remember that anything you save and are willing to give to people you care about for them to go to college is more than they should expect. Also, don’t forget that saving for your retirement and looking out for your own financial security is more important than providing for anyone to go to college. It’s very selfless and kind to help someone else pay for college, but our loved ones can always work through college, go to a less expensive school, or choose alternative 5.



  1. Excellent post, Tom. Great advice that we all need to follow as soon as possible!

  2. Just to add to your advice... Apprenticeships are a good way of securing extra funding through your time at college. Doing an apprenticeship along side studies can provide you with great experience and extra money.