8 Ways to Pay for College
June 11, 2021 by Chevron Federal Credit Union
More families today are making college savings a priority. In fact, the number of parents who say they have a plan to pay for their child’s future college education is now at an all-time high, according to Sallie Mae’s How America Pays for College study.
Each family’s plan will vary based on what works best for them. But one thing is true for everyone: Getting a head start is key. Parents who prepare ahead of time may have the means to save more while borrowing less. Whether it’s savings, financial aid or even “free” money from scholarships or grants, there are multiple ways to fund this important goal. In a nod to National 529 Day, celebrated annually on May 29, here’s a roundup of eight popular options to help build your child’s college savings.
Save early and often
The Sallie Mae study also found that eight in ten parents pay a portion of college costs out of their own pockets. In fact, parents rely on their income and savings to cover 44% of college bills. So, commit to salt away a regular amount that works within your budget, even as soon as a baby is born. Getting an early start means more years of potential growth through investment gains and compound earnings over time.
- Use a 529 college savings plan. State-sponsored 529 plans are a tax-advantaged way to save for a wide array of education expenses like tuition and computer equipment. Money invested in the accounts grows tax-deferred and can be withdrawn tax-free. You can choose any state’s plan and use the funds at any accredited college or university. What’s more, 529s offer the flexibility to change beneficiaries within the same family (even yourself) and the plans allow relatives (like grandparents) and friends to contribute, too.
- Consider custodial accounts. Also known as UGMAs or UTMAs, after the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, custodial accounts let you set aside money or other assets in a trust for a minor child. You manage the account until your child reaches legal age—18 or 21, depending on your state. Then, a child can use the funds for college or anything else. These accounts can be opened at credit unions, banks or brokerage firms.
- Learn about Coverdell education savings accounts. Coverdells are trust or custodial accounts set up to help pay for qualified education expenses—with some different rules. Your child must be under 18 when the account is established and contributions (limited to no more than $2,000 a year) can be made until age 18. Money in Coverdells grows tax-deferred and withdrawals are tax-free. All funds must be pulled out by the time your child turns 30.
- Open a youth savings account. Encourage a child to save for their big goal, too, with an interest-bearing account that’s specially designed for them. By giving them a safe and easy place to deposit money gifts from family or their summer-job earnings someday, they’ll be able to save as they grow. For example, Chevron FCU’s no-fee MySavings Youth account for members age 21 or younger offers a rate of 6.77% on balances up to $1,000.
Understand financing options
Financial aid to help pay for college is available from federal, state, private or school sources. The average amount of aid per undergraduate student adds up to $14,940, according to the College Board’s latest report. The launch point to qualify for many kinds of college aid is the Free Application for Federal Student Aid (FAFSA) form, which is filled out before each academic year. Schools use FAFSA data to determine your federal aid eligibility for grants, work-study and loans. You can get an overview of the ins and outs of the FAFSA by reading this article about starting the application, produced by our partner Balance.
- Research federal loans. Federal student loans (such as Perkins and Direct Subsidized loans) are a good first choice because the government subsidizes them (paying the interest fees while your student is in college), defers repayment (until after graduation) and provides low, fixed interest rates. Parents of undergraduate students and graduate students can also borrow to help pay for education expenses not covered by other financial aid with federal Direct PLUS loans.
- Weigh private loans. For additional funds, student loans from private lenders may be a secondary borrowing option. In general, private loans aren’t need-based nor subsidized. And these loans typically come with higher rates than federal loans and require a co-signer.
Fill the gap with ‘free’ money
You can maximize college funds by taking advantage of grants and scholarships—money that, in most cases, doesn’t have to be repaid. These amounts can help make up some of the difference between your savings and the college price tag.
- Review available grants. Grants can come from the federal government (such as Pell Grants), your state grant agency, your college or technical school, or a private or nonprofit organization. Many are based on financial need and are often determined using information from the FAFSA.
- Earn scholarships. Along with academic and athletic scholarships that colleges may award, many public, private and nonprofit organizations offer gift aid based on all kinds of eligibility—from merit and talent to area of study and community service. Each spring, for example, Chevron FCU awards a David P. Smay scholarship to multiple students to use toward their college education. Your child’s high school guidance counselor is a good first contact for scholarship information.
Achieving the college dream
How you choose to pay for college will be unique—just like your child. But whatever methods you use, it’s a good idea to get familiar with all the options. That way, you’ll be ready to map out a funding strategy that best meets your family’s college education goals.
*MySavings rate of 6.77% (7% APY) on balances up to $1,000 and the regular Primary Share Savings rate after that.