Consumer Comeback Blog

7 Ways to Pay for College Without Student Loan Debt

Written by Jeffrey Trull

graduation-student-debt-freeAccording to The College Board, private, four-year colleges cost more than $28,500 on average based on published tuition and fees. When some or all of this cost is covered by student loans, graduates face the struggle to find a job and then may spend years paying their debt.

But taking out loans for college isn’t always necessary, and with some creativity and planning, student loan debt can be avoided entirely. Here are seven strategies for paying for college without student loans.

1. Start saving early with a 529 plan

A 529 plan can be a great way to benefit on taxes while saving for your child’s education. You’ll be able to save and invest funds for college while the earnings grow free from federal tax as well as state taxes in most cases.

But to really take advantage, you need to start early and allow years for the investment to grow. The benefit is minimal when the money is only invested for a few years instead of over a longer period, as shown in this post’s example for compounding returns. Since 529 plans are funded only with after-tax dollars, the real tax benefits are only realized when there are tax-free earnings to withdraw.

2. Work and save in high school

Saving money in high school for a college education might not sound realistic, but high school students often have the ability to earn money at a part-time job with very few expenses while living under their parents’ roof. One student, who wrote a book about his story of attending college without loans, earned $35,000 before high school graduation.

Many students might not realize how much debt awaits them after college and how much of an advantage having money saved up can be. Parents should consider sitting down and talking math with a soon-to-be college student and make a convincing argument for saving a portion of a part-time paycheck.

3. Find free money

There’s a wide range of scholarship options available, ranging from large, national competitions to small, local organizations. The amount of awards vary, too.

To really take advantage of scholarships, you or your child may need to apply for several awards and only expect to be awarded a few. With proper strategy, there’s the opportunity earn a decent return in both time and money.

Sure, filling out 20 scholarship applications can sound daunting, but keep in mind that there’s likely overlap on many of these scholarships. Essays and other questions can often be easily modified to fit responses to multiple applications.

For more on maximizing free money, Ramit Sethi explains his method for earning more than $100,000 in college scholarships.

4. Choose a school wisely

Schools vary widely in cost, and choosing the right option can mean the difference of thousands of dollars in loans after four years of college.

There’s a bit of a hierarchy of options for picking colleges. For the best deals, consider:

  • Free schools. Some colleges offer free tuition for all students. This includes Cooper Union in New York City and Berea College in Kentucky. While the options may be slim and competition tough, it’s worth a shot if any schools seem like a good fit.
  • In-state tuition. Paying in-state tuition can mean big savings. For the University of California at Berkeley, in-state students pay about $23,000 less each year than those from out of state. For Ohio State, residents pay about $15,000 less per year than those coming from other states.
  • Schools that offer a lot of aid. Don’t write off schools that advertise high tuition rates. What really matters is the net cost that students pay to attend, and some schools that you think of as expensive might actually offer the most aid, too. The Princeton Review publishes a list of the schools with the best financial aid, with Princeton, Yale, and Columbia all in the top 10 for 2012. For any school you’re considering, dig a little deeper than just the tuition cost posted.

5. Be strategic with assets

When it comes to managing your money and how it shows up on financial aid applications, some planning can be advantageous for how much aid a student is offered.

For example, cash in the bank typically reduces the amount of aid you or your child will be eligible for. If you have money in the bank and debt on the books, consider using some cash to pay off debt to prioritize what your child is eligible for in financial aid.

The name on the account matters for any savings that might be used towards college, too. College savings or other assets in the student’s name are often counted at 20% for financial aid eligibility whereas anything belonging to parents is counted at a lower rate that maxes out tat 5.64%.

For other strategies, FinAid has 15 recommendations to maximize financial aid.

6. Use tax credits and deductions

Currently, there are three different tax credits available to those who are eligible. You can only claim one per year, but the value can be up to a $2,500 credit. The options include:

  • American Opportunity Credit. For those in the the first four years of their college education, the American Opportunity Credit offers up to $2,500 in tax credit.
  • Lifetime Learning Credit. This credit offers up to a $2,000 and does not require the student be in the first four years of their post-secondary education as with the option above.
  • Tuition and fees tax deduction. With this deduction, you can reduce your taxable income by up to $4,000.

Be sure to check with IRS guidelines for tuition and fees deductions as well as a professional to see which option is the best fit for your situation.

7. Work while in school

Having a job in college can mean many different things. For those that need to fund their entire college education themselves, working a job full-time while taking classes part-time may be the best solution. While it may take longer to graduate, the net benefit in the long run from not incurring debt can be a positive.

For full-time students, having a part-time job is often a reasonable option. For those eligible, many schools offer aid in the form of work-study jobs. Many of these positions are easy to find and don’t require travel off campus.

If students are not eligible for work-study benefits, a standard part-time job can work just fine, too. Kiplinger has some of the best part-time jobs for college students, which may offer decent pay combined with extra benefits like job experience as well as free food and entertainment.

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