How to Pay for College

Colleges and universities enjoy a unique position in the American economy. Normally as prices rise fresh products hit the market. The new products provide competition that keeps prices in check. In the world of higher education, however, supply stays relatively constant, prices go up and there is very little to keep prices in check.

So what does that mean? College is expensive, and it is only going to become more expensive. So how do you pay for a college education?

There are many options when it comes to paying for college. In most cases college expenses are covered through several sources in addition to savings and earning; scholarships, loans, grants, in addition to several popular programs.

Still, the best strategy when planning for college is to assume that no aid is forthcoming and start putting the money away. The longer you have until college the more reasonable options you'll have.

Three primary methods of college funding are investments, financial aid, and loans. They are not exclusive and most people use all three.

Investments

The more time you have before college the more attractive this method is. There are several investment options for saving for college.

* Dollar Cost Averaging in Funds

A college savings portfolio should be well diversified. The further away college is the more of the portfolio that should contain stock oriented funds. Dollar cost averaging works particularly well here as college funds are generally saved over time.

Of course, the general rules of dollar cost averaging should be kept in mind, if using mutual funds avoid those with high front-end loads.

* Tuition Savings Plans (also known as 529 plans)

These typically come in two varieties, Pre-paid Tuition Plans and College Savings Plans.

Pre-paid tuition plans:

These guarantee that if you pay the price of tuition today, in a lump sum or in payments, the state will cover the cost of tuition when your child is ready to attend a state university.

College savings plans:

These are essentially state sponsored investment accounts. The state invests the money and participants share in the profit. There is no guarantee and you could actually lose money.

* Zero-Coupon Bonds

These bonds get their name from the fact that they pay their interest only at maturity. There is no interest or income until then. They are attractive to conservative investors for college education expenses because you can buy them to time them to mature when college expenses should begin.
For example, if your 2-year-old son will be starting college in 13 years (Harvard?) you can purchase a 13-year maturity zero. The longer time until maturity the cheaper the bond, so a 13 year maturity $1000 zero may sell for somewhere around $600. That same bond maturing in 5 years may cost you over $800. In both cases when Junior is ready for college that bond can be exchanged for $1000.
The big catch? You have to pay taxes on that income that you are not earning every year. Even though you get "zero" from the bond the "ghost" interest is still taxable.

* Savings Bonds

These are popular, especially to conservative investors and grandparents. When purchased in the parent's name, when the parent is at least 24 years old, and used for college tuition or fees the bond's interest can be tax-free.

There are certain income provisions to qualify, contact a tax advisor.

Financial Aid

There are several places to get specific information about available financial aid programs: high school guidance councilors, financial aid officers at the college, and the Federal Aid Information Center.

Here are a few major sources of Federal assistance:

* Pell Grants
These are reserved for the most needy students and vary greatly in amount.

* Stafford Loans
These are loans directly from the government, often through banks. The interest rate is tied to Treasury rates and usually has a 10-year pay back period.

* Perkins Loans
These are also limited to students with great need. They typically have very low interest rates and certain jobs after graduation could result in the canceling of the loan altogether. If your child takes specific jobs the government might actually pay back the loan for him or her.

* Private Loans
And of course you can always take out a private loan to help pay your child's college expenses.
Scholarships

For information on scholarships talk with guidance councilor or a college financial aid officer. Other excellent sources for scholarship information include: your employer, professional organizations, religious associations, local civics group, unions, state agencies, and social groups. You should also go to the library and look through scholarship guides.

Finally, use the Internet to search for scholarships. Try:

The College Board:
www.collegeboard.com

FastWeb:
www.fastweb.com

And finally, for more information visit:

Seven Mistakes Made When Saving For College:
http://www.e-personalfinance.com/article/7-Mistakes-Made-when-Saving-for-College.html

What is a 529 Savings Plan:
http://www.e-personalfinance.com/article/What-Is-a-529-Savings-Plan.html

College Scholarships 101:
http://www.e-personalfinance.com/article/College-Scholarships-101.html