The cost of college has increased dramatically over the last 30 years. If you paid $10,000 for a college degree in 1985 you would be paying over $50,000 today. College costs have risen 2 ½ times faster than the average rate of inflation. Most college students need layers of financial resources to pay for college.

Photo by Carolyn Forsyth


Paying for College

Once a student is accepted and has narrowed the choices, it is time to look at how to pay the bill. There are some students who will have funds that will cover their college expenses and there are the greater majority of students who are coming up a bit short.  It is important to look at that shortfall and understand how to bridge the gap. Paying for college involves bringing together all of the various pieces and understanding their value.

Student Funds:

Look at the checking account, savings account and any investment funds in the name of the student. This includes 509 Plans or investment funds that parents or grandparents might have opened for the student. The student will be expected to use 25% of these funds each year for college. When the financial aid department reviews your standing, they will factor these funds into their assessment of financial need.

Parent Funds:

Parents (assuming they have a desire to assist) will need to fill out the FAFSA form each year. This is a necessary form. It is painful for them to do this. The FAFSA allows the Financial Aid department to determine the ability of the parents to assist the student while in college. They do not expect a couple with 5 children to provide the same amount of support that a couple with a single child could possibly provide. They also look at the income of the family. Make sure the entries are correct. This does not mean mom and dad are going to provide that money, it just means that the college has determined what they could provide and allows the college to address the allocation of various grant and scholarship funds that they can make available.

The Department of Education also makes available PLUS Loans to parents. The parents can borrow all or a portion of their contribution (and the responsibility for repayment is on the parents). That does not mean that the student cannot reimburse their parents but that is a family decision.

Grants and Scholarships:

Schools have money that they can provide to students. It might depend upon what program is chosen, and how you student is doing in school (grades do count). These funds are solid gold for any student. They can cover one year or multiple years. They are a gift. They should be cherished.

There are also private scholarships that are available. A student has to apply for these separately and might have to compete for them (make a speech, work at a charitable institution, etc.). Again, these are funds that do not have to be repaid. There are thousands of these available and one has to do the legwork and write letters and possibly fill out forms. That is a high hurdle for some students. But, if successful, the payoff is money for college that is not going to cost anything and it does not have to be paid back.

Financial Assistance from the Federal and State Governments:

The Federal Government has several programs that provide financial assistance to students that are enrolled in an undergraduate degree program.  This includes Grants (funds you don’t have to pay back provided you finish college), Loans and Tax Benefits. The most widely received are the Pell Grants and Perkins Loans (based on financial need) and both subsidized and unsubsidized loans. The subsidized loans are more beneficial because the government pays the interest on the loans while you are in college. That is a major benefit.

If you are a resident of the state in which you plan to attend college, there can be state programs to assist with college.  Check with your state government website.

Students (and their parents) can currently deduct the interest cost paid on student loans.  The taxpayer must meet certain income criteria but the benefit is a reduced tax bill on any earned income. The new tax bill for 2018 currently seeks to remove this deduction. Under the proposed tax bill, the Standard Deduction is being raised and is expected to compensate for removing this deduction after 2017 (note that each persons tax situation varies).

Private Loans:

Financial Institutions also provide loans to students. They generally carry higher interest rates than government loans. The applicant also has to meet a certain level of credit-worthiness on these loans.  An applicant should understand how they qualify for these funds. Understand that as additional debt is added it has an effect upon future creditworthiness.  Private lenders will watch this and if the criteria is not met additional loans may be refused.

In the table below, three different payment scenarios are presented with varied inputs for student and parent contributions to the Net Cost of Attendance.  Borrowed Funds make up the difference.

There are ratios presented for Borrowed Funds versus the Net Cost of Attendance (NCOA) and for Borrowed Funds versus Cash, Grants and Scholarships (money that doesn’t have a cost attached).

In the first scenario, the ratio for Borrowed Funds to the NCOA is 45% and the ratio of Borrowed Funds to Cash, Grants and Scholarships is 28%. Examine what happens when a small change is made in the student contribution in Scenario 2.  The Borrowed Funds versus the Cost of Attendance rises to 61% and the Borrowed Funds are now greater than the Student and Parent contributions.  Scenario 3 makes another adjustment to the Parent contribution and the ratios jump to 76% and 58% respectively. 

While each individual has a unique financial situation, these ratios help to identify potential problems.  Borrowed Funds/NCOA above the 50% level is a warning that the current approach to college costs has an increased financial risk. This is due to the tendency of college costs to rise annually and Borrowed Funds will tend to be used as Contributions have to be earned by either the student or the parent.  If the Borrowed Funds/Cash, Grants and Scholarships is greater than 50% the potential for problems with continued borrowing for loans and potential issues with the required repayment of those loan balances is increased.

Suffice to say that both students and parents need to get familiar with the various loan programs and understand what is offered in the financial aid package.  At the end of this article are links to the U.S. Department of Education website and others that provide additional details on various loan programs.

With the various pieces in place, look at how costs are covered for the coming year. If borrowed funds are more than 50% of the net cost of attendance, both students and parents should seriously reassess the situation. Is another school choice offering a better package? Talk to the college and ask about possible adjustments (they sent an acceptance, they want students to attend and they have options as not all students accept which may free up a scholarship or two). There is no harm in asking.

Look at the cost of college for the duration of attendance. A 4-year college program requires an assessment of costs and how it will be covered each year.  College costs generally go up each year and the increases have generally exceeded the rate of inflation.  Additionally, state governments which provide funds to public universities have been reducing their support, placing more of the financial cost on the students.  In other words, don’t expect the cost of college to be the same each year of attendance.

A Final Word on the Cost of Attendance:

Nationally, the average college student takes 6 years to graduate from a 4-year college program. The biggest issue here is related to the student switching their major focus (going from Political Science to Biology).  Now that is not necessarily bad but the effect is that you are essentially getting a degree at 150% of the cost of a student that completes in 4 years.  Every decision has benefits and costs. Some universities have been introducing 3-year degree programs that allow students to complete the same degree in a shorter time.  This has significant advantages for the student that knows what they intend to study and is focused on that degree.