Filling the Opportunity Gap: What Tuition Costs and What’s In Your Wallet

Economists tell us that there are certain commodities that we will pay for no matter how high the price is: such as gasoline. A college education is one of those highly valued commodities; no matter how expensive it gets, we still need it, so we do whatever it takes to get it. As if to prove this concept, the cost of a college education has tripled in the past thirty years, according to Pew researchers, and that trend is showing no sign of stopping soon (see “Is College Worth It?”). Students and families are certainly feeling the strain, but when will they break?

The answer is that some are breaking already, even though they don’t need to be. According to the U.S. Education Department, 13-14 percent of borrowers defaulted on their student loans last year as part of a rapidly increasing trend that has remained unchanged from when income-based repayment options became available three years ago (see “Education Department Report Shows More Borrowers Defaulting On Student Loans”). This is a tragic commentary on the student debt situation, made all the more tragic by the fact that it didn’t need to happen. If these same former students had been fully aware of their options, they could have switched to the income-based repayment plan before going underwater and saved themselves a world of trouble.

Unfortunately, as this statistic demonstrates, students often go into debt with little idea of what they’re doing. The best way for students to solve this issue of inexperience with debt is for them to fully know their options before they start filling out the paperwork. When it comes to federal loans, students can learn alot by reading fully and discussing with their parents the information available on government websites about the different loans and loan repayment options. Federal loans should be one of the first choices when it comes to student debt because of the low interest rates and great repayment options, but before taking out any loans students should consider a few of their other options.

Obviously, money as a gift is better than money as a loan. Pell Grants are an important source of college funds that shouldn’t be overlooked, and scholarships from the college and from other organizations can be a huge asset to the aspiring student who does his homework well. These sorts of funds have decreased in recent years, however, which has added to the importance of other sources of college funds, such as crowd funding.

Crowd funding is a way to gather money, usually from family and friends, into an online fund to be used specifically for college. Websites like FiPath and GradSave give relatives an easy way to funnel their donations into your college fund, whether that’s in yearly birthday gift installments or all at once. Other websites, like ScholarshipProz, allow students to effectually fundraise for their college education, expanding their network to include donors all over the world who might be interested in helping out a young man or woman financially through college. For more on the benefits of crowd funding, see Emily Driscoll’s “How to Use Crowd Funding to Pay For College.”

After gathering what money you can, loans are still an important part of the average college student’s efforts to get an education, and like grants and scholarships, federal loans are decreasing in their ability to cover costs. This is why private loans are also important. In getting private loans, aspiring students need to be extra careful that they’re getting their money’s worth. There are many different kinds of loans out there, and it can be tough to sort through them all, let alone compare them. It’s important to shop around until you find the best one, and one of the easiest ways to decide which one is best is by looking at its APR rather than simply at interest rates. See Driscoll’s “How to Find the Best Private Student Loan Terms” to find more important strategies for this approach.

Perhaps the best kind of loan is a family loan, if you can get it. In his article “Borrowing From Your Family, By Design,” Ron Lieber talks about a family who established a trust fund, now containing about $100,000, from which family members appointed as trustees could siphon funds to lend to the younger members of the family as they headed off to college. One of the benefits of this type of loan is that it is often interest free, and the people collecting the debt are relatives who are generally understanding and fully aware of your situation. Though very few families have an established trust fund set up, it’s certainly an idea worth taking to your parents and grandparents.

After fully understanding all these options, eventually every student has to come down to the brass tacks of basic financial management. Responsible spending, developing a savings plan, and learning how to make a budget are all important skills essential to paying for college. For a fun approach to learning the ins and outs of money and debt, check out my book, Dollars & Sense: How to Be Smart About Money.

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