The Importance of Saving for College Back »

Written by Carrie Johnson (former SDSU Extension Family Resource Management Specialist).

According to College Board, 2014-2015 tuition and fees for an in-state public 4-year college costs on average $9,139 per year. In addition to tuition, room and board will cost another $9,804 per year. These two expenses make up the majority of college costs but there are additional expenses (books/supplies, personal, and transportation expenses totaling approximately $4,388) added to these as well. In total a 4-year education will run about $23,410. Costs are higher if the student attends an out-of-state, private, or for-profit institution.

Many families don’t realize that federal financial aid will not cover all of their child’s college education. Even families with a low Expected Family Contribution (EFC) need to be prepared to pay some expenses out-of-pocket or take out additional student loans at higher interest rates.

Below is an example of a possible federal financial aid package for a family (dependent student) of a first-year student with a zero EFC (2015-2016 amounts):

Pell Grant: $5,775
Subsidized Direct Loan: $3,500
Unsubsidized Direct Loan: $2,000
TOTAL: $11,275

As you can see the first year alone the student will be short $12,135. Some of the financial package already includes loans, so having them take an additional $12,000 in loans each year for four years will seriously impact their future financial lives. Direct Loan limits for dependent students do increase every year the student is in school lowering the amount of non-federal funding needed:

First-Year: $5,500 (no more than $3,500 in Subsidized);
Second-Year: $6,500 (no more than $4,500 in Subsidized);
Third-Year and Beyond: $7,500 (no more than $5,500 in Subsidized).

So, what are the options to fund the difference between federal aid and college sticker price? Below are some options for families to consider.

1. College Savings

A 529 prepaid tuition plan, 529 savings plan, Coverdell Education Savings Account, or Roth IRA are great places to put money aside for future students. Most even provide some tax benefits to the saver. Each plan has different benefits and risks, it’s important for you to do your homework to see which one is best for your situation.

2. Parent Loan for Undergraduate Students (PLUS)

PLUS Loans are federal loans for parents. These loans offer fixed interest rates (2015-2016 rates: 6.84%) and offer deferments while your student is in school at least half-time. A few things to remember is that these loans are your loans (not in the student’s name) and cannot be transferred to them upon graduation. These loans also carry an origination fee when the loan is disbursed (As of 10/1/2015: 4.272%). I have worked with families in the past who were able to take out a home equity line of credit at about half the interest rate. One parent said that if she was going to take out a loan anyway, she might as well get the best rate she could even if that meant using her home as collateral

3. Private/Non-Federal Student Loans

There are a lot of non-federal student loan options available to students. Most of these loans will require the student to have a cosigner and if the student does not make payments, that cosigner will be required to do so. A few other things to think about when taking out a private student loan is that the interest rate will probably be variable and higher than the current federal student loan (up to 18%). These loans are not available to flexible repayment plans as federal student loans are and they cannot be consolidated with federal student loans.

4. Part-Time Work

I can’t tell you the number of times I have heard someone say that if college students would just work, they wouldn’t be so far in debt. Students are working; A 2011 U.S. Census report determined that 71% of college undergraduates worked while in college. The truth is that it isn’t possible for students to work a part-time job to cover their college costs like in the past. If a student is only making minimum wage, they would have to work more than a full-time job to pay for their education. This doesn’t mean student should not work. By working a part-time job they can pay for books, supplies, travel, personal, and other expenses.

5. Choose a Less Expensive School

Even by starting at a two-year community college to get some coursework done can save families thousands of dollars (as long as those credits transfer). Or, maybe the student wants to work in a field that only requires a technical degree instead of a traditional 4-year degree. Or, check with your state to see if there are programs available for you high school students to earn duel (high school/college) credit at a reduced rate. For example, in the state of South Dakota high school students can enroll in college-level courses for $40/credit hour and receive both high school and college credit.

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