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By Julia Glum
November 5, 2020
Filip Fröhlich for Money

Going to college has a ton of benefits — it’s fun, educational and can lead to a roughly $30,000 annual earnings premium for people who graduate with bachelor’s degrees. But it is also undeniably expensive.

For that reason, “it’s never too early to start thinking about college,” says Megan Coval, the vice president for policy and federal relations at the National Association of Student Financial Aid Administrators. “There’s a lot of thoughtful research, work and conversations that can happen as early as seventh, eighth or ninth grade.”

No matter where you and your family are in your higher education journey, it’s smart to start making a financial plan that combines your savings and current income with student loans and “free money” from grants and scholarships. Here’s a five-step guide that’ll help you figure out how to pay for college.

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Choose your college carefully

“How much does college cost?” is a loaded question with a nuanced answer.

Not all colleges are created equally, especially when it comes to cost. For example, public institutions — which receive government funding — tend to be cheaper than private schools — which rely on their students for revenue. For the 2017-2018 academic year, the average annual cost for undergraduate tuition, fees, room and board at all U.S. public colleges was $17,797, according to the National Center for Education Statistics. It was $46,014 at private nonprofit institutions. Private for-profit colleges cost $26,261. (All those figures include both two- and four-year schools.)

But be forewarned: Those are national averages for the cost of college. Tuition and fees can vary by the type of student you are (in-state versus out-of-state), the type of school you attend and where that school is. In Wyoming, for example, in-state tuition and fees at public four-year colleges cost an average of $5,580; in Vermont, they cost $17,470, according to the College Board’s 2019 Trends in College Pricing report.

There’s also a difference between the listed price and what a student actually pays. A college’s so-called “sticker price” is often a scary-large number that doesn’t include financial aid. (Private colleges in particular end up discounting tuition by half.) In order to figure out the true cost, you’ll want to look for a college’s “net price,” which you can find with the help of institution-specific calculators or general tools like MyinTuition. It’s better to use tools to get a personalized net price, rather than just looking at an average net price.

And remember that you’re not only on the hook for tuition and fees. The full cost of college also includes room, board, textbooks, transportation, health care… the list goes on. If you need to cut corners, you might want to consider starting at a two-year college or community college before transferring to a four-year school to complete your degree.

Coval recommends you think hard about what’s manageable for you and your family.

“In the admissions world, there is this concept of ‘fit’ that’s talked about a lot,” she adds. “Students are used to hearing, ‘Think about a college that’s a good fit for you. Does it offer the major you want? A small school or large school? City or rural area?’ But one of the things to acknowledge early on is that college costs and the prices of institution are also a part of fit.”

Tap into savings

As the saying goes, “the best defense is a good offense.” This applies to paying for college, too: Parents, relatives and friends have several ways to set up savings accounts for children’s higher education. The earlier you start, the better.

The most popular option is a 529 plan, formally referred to as a qualified tuition plan. Not only do many 529s come with state tax benefits, but withdrawals are also tax-free if used for certain education expenses. Qualified expenses include college tuition, fees, books, supplies and equipment (like laptops). Thanks to the Tax Cuts and Jobs Act, signed in 2017, 529s can also be used to cover up to $10,000 annually in K-12 private school tuition.

Typically sponsored by states, 529s come in two varieties. Prepaid tuition plans allow you to purchase future tuition at today’s rates. College savings plans are investment accounts that grow over time.

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529s are set up through states, though you can open accounts in states you don’t live in.

Another way to prepare for college costs is through a Coverdell education savings account, which is a trust or custodial account intended to cover certain school-related expenses. Coverdell savings grow tax-free, like 529s, and can be used for college as well as elementary and secondary education. [do you have to pay

Contributions are capped at $2,000 a year for each beneficiary until they’re 18. The money generally has to be spent by the time the beneficiary is 30 years old.

Alternatives include accounts under the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). These are considered more flexible options than a 529 or Coverdell because the funds can be used for anything — not only education expenses. Adults hold assets for a minor until they turn a certain age, at which point the account is transferred to them.

Each type of account offers its own pros and cons, but in most cases, experts recommend 529 accounts over the other types for education savings. They have the possibility of state tax advantages as well as federal tax advantages, have higher contribution limits than Coverdell accounts, and they are counted more favorably under financial aid formulas than UGMAs.

Fill out the FAFSA to apply for financial aid

Once you’re applying to colleges, you’ll want to complete the Free Application for Federal Student Aid, or FAFSA.

You’re qualified for federal student aid if you’re a citizen or eligible noncitizen, have a Social Security number, possess a high school diploma/General Education Development certificate/homeschool equivalent, and are enrolled in an eligible program.

The FAFSA opens on Oct. 1. For the 2021-2022 school year, it closes June 30, 2022. But you shouldn’t drag your feet — some institutions and states have different deadlines and may award aid on a first-come, first-served basis. Families and college students are advised to submit their FAFSA ASAP.

To fill out the FAFSA, you’ll need to gather your Social Security or Alien Registration Number, tax records, bank statements, investment records and documentation of untaxed income. You’ll also need to create a Federal Student Aid account, or FSA ID. Visit fafsa.gov to get started.

“Even if you think you may not be eligible for federal need-based aid, we encourage everyone to still fill out the FAFSA,” Coval says. “If you want to take out any loans, even if they’re not need-based loans, you do have to fill out that form.”

In return, you’ll get a Student Aid Report from the government that includes some basic information about your expected family contribution and eligibility for federal grants.

Many institutions also use the data from the FAFSA to make decisions about their own aid. Once accepted, you’ll receive an award letter that presents out a “package of all the different financial aid resources,” Coval says. This lays out grants and loans from the federal government, state and specific college you’re looking at.

“The award notification is the point in time when the real decision-making starts, especially if students are comparing multiple institutions,” she adds.

Focus on grants and scholarships first

Grants differ from loans in that they do not have to be paid back. That’s why you’ll often hear them called “free money.” The federal government runs the Pell Grant program, which gives money to undergraduates from low-income families. The specific amount you’ll receive depends on your expected family contribution, your cost of attendance and your college plans. For the 2020-2021 year, the maximum is $6,345.

Check out state financial aid programs here. Florida, for example, has the Bright Futures Scholarship Program that awards as much as $211 per credit hour to eligible applicants. Washington has the Washington College Grant, which can cover full tuition costs at approved, in-state public institutions or put “a comparable amount toward tuition and other education-related costs at an approved private college or career training program.”

Schools also often offer what’s called merit aid to students with certain standardized test scores or other academic achievements. At private colleges especially, this is a significant form of financial aid, totaling billions of dollars a year.

Finally, you may want to take advantage of outside scholarships. Companies, nonprofits, foundations and other groups are constantly coming out with private scholarship opportunities that may offer free money with fewer strings attached than federal, state or institutional programs.

The biggest challenge is finding them. Check with your high school guidance counselor to see if they know any local scholarships you should pursue. From there, use a scholarship search engine like Niche, FastWeb or Scholarships.com to identify other grants you might be eligible for.

Warning: They may require some elbow grease. But writing an essay, filming a creative video or meeting hyper-specific requirements is arguably easier than paying for college out of pocket.

Consider work-study

When you’re filling out the FAFSA, you’ll have to answer a question about whether you want to considered for the federal work-study program, which gives part-time jobs to students in financial need. Work-study jobs pay at least $7.25 per hour — the federal minimum wage — but can pay more.

Experts recommend you always answer yes. You don’t have to take a work-study job that’s ultimately offered to you in your financial aid letter, so by answering yes, you’re simply keeping your options open.

One thing to keep in mind: Not everyone is guaranteed a work-study job, and you’ll only be approved for a limited amount of wages. The roughly $1.1 billion that the government spends on the program each year went to 612,000 undergraduates in the 2018-2019 academic year. That comes out to an average award of $1,880.

Borrow federal student loans

After running the calculations, you may still find yourself short of reaching your desired college’s net price. And in that case, you might need to consider taking on student loan debt. Coval recommends talking with your family and determining the maximum amount you feel comfortable borrowing.

“Borrowing itself is not a bad thing,” she adds. “Sometimes debt has a negative connotation, but this is an investment.”

Taking out loans to pay for college is extremely common. Some 45 million Americans have student loan debt. In the class of 2019, over 60% of graduates at nonprofit colleges left school with student debt, according to the Institute on College Access and Success, owing an average of $28,950.

There are two kinds of student loans: federal and private. Federal loans, made by the government, tend to have low interest rates and more flexibility for borrowers. Private loans, made by banks or other institutions, tend to be more expensive.

For that reason, Steve Muszynski, the founder and CEO of refinancing marketplace Splash Financial, suggests maximizing “the money the government’s going to give you” first. Federal loan options include direct subsidized loans, direct unsubsidized loans and direct PLUS loans.

One big difference between direct subsidized and unsubsidized loans, also called Stafford loans, is who pays the interest that accrues while you’re in school. For subsidized loans, which go to undergrads with financial need, the Education Department covers it until six months after you graduate. For unsubsidized loans, which aren’t based on need, you’re responsible.

The FAFSA will tell you which federal student loans you’re eligible for. Accept the ones that work for you.

After you’ve exhausted your federal options, you may want to move on to private student loans. This will require some shopping around — major companies include SoFi, Sallie Mae and Ascent. Be careful, and do your research: In addition to having higher interest rates and fewer repayment options, private loans often involve credit checks and application fees.

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Maximize current income

Even if you can’t get work-study, you can still find another job to make ends meet. In 2018, roughly 40% of full-time and 81% of part-time undergraduate college students had a job, according to the NCES.

Aside from that, review your financial situation. Can you free up any money in your normal monthly budget and redirect it to college?

This may end up benefiting you because there are federal tax credits intended to offset the cost of tuition, fees and course supplies. With the American Opportunity Credit, you can claim up to $2,500 per student for four years. With the Lifetime Learning Credit, you can claim up to $2,000 per student.

No matter what path you take, Muszynski says it’s crucial you approach paying for college in a rational way. Talk to the financial aid office at your schools, seek out scholarship opportunities and do your homework before you commit to anything.

“How much debt are you taking on? What is your financial condition? What is your future plan for a degree and a job?” he says. “Think with your mind, not your heart, when making a decision, because that can haunt you for years.”

More from Money:

The Best Colleges in America, Ranked by Value

9 Mistakes to Avoid When Applying for Federal Financial Aid

How Will Students Get College Scholarships if They Can’t Take the SAT?