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College: Going it alone
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October 8, 2001: 7:00 a.m. ET
A variety of financial tools can help you cut those costs down to size.
By Kamala Nair
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NEW YORK (CNNmoney) - You knew going to college wouldn't be easy. There would be study labs, term papers, and more all-nighters than you could count. But add to that the stress of paying your own way and you've just created a recipe for sleep deprivation and post-graduate debt.
Studies have shown more than half of students today are funding their own educations. The National Center for Education Statistics (NCES), in fact, reports nearly 51 percent of undergraduates are considered financially independent from their parents - an overwhelming number considering the price of a degree today.
According to the College Board, the average annual cost of a 4-year degree at a public university is $11,338, while a 4-year degree at a private college or university costs at least $24,946.
Those numbers may look daunting, but the good news is that a variety of tax-advantaged tools, loans, and grants have sprung up to make it easier for college students to cut those costs down to size.
Step by step
Lynn McIntire, a certified financial planner (CFP) with Carter Financial Management in Dallas, emphasized it is important for students to consider a wide range of financing options when developing a plan, as financial aid is a limited resource.
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A variety of tax-breaks, loans, and grants make college possible for anyone. | |
The first step students should take is to complete and submit the Free Application for Federal Student Aid (FAFSA) every year. These forms are available at local high schools, as well as through the financial aid office of any college or university.
Students can either apply for low-interest federal loans or private loans.
First year independent students may apply for up to $2,625 through the federal Subsidized Stafford Loan, which is based upon financial need. The interest rate cannot exceed 8.25 percent, and repayment and interest do not begin until six months after the student ceases to be enrolled.
The federal Unsubsidized Stafford loan, made through private lenders, works much the same, except that it enables students to borrow money regardless of income or need. It also requires them to pay interest while in school, on top of a 3 percent insurance fee.
Through the need-based federal Perkins Loan, students may borrow funds each academic year at a 5 percent interest rate, and are allowed an aggregate amount of up to $20,000.
Going private
Students also, of course, can apply for private loans through most commercial lending institutions under the stipulation that they have a co-borrower. Interest rates are generally based on the London InterBank Offering Rate (LIBOR), along with an additional percentage, adjusted quarterly.
However, while loans comprise more than 60 percent of financial aid awarded each year, the most desirable forms come by way of grants and scholarships. Grants, which are given by federal and state governments and individual colleges, are generally awarded based on merit or need.
The Pell Grant Program and the federal Supplemental Educational Opportunity Grant Program (FSEOG), both federally funded programs, are examples of such "gift aids" that benefit low-income applicants.
The federal Work-Study Program also helps pay for jobs on and off campus as part of need-based financial aid packages. Through the program, individual schools use federal funds to provide students with employment on campus or in pre-approved community service agencies to help cover the cost of their education.
In order to qualify for work-study, students must complete the FAFSA each year and check "yes" in the student employment section of the application. The number of hours students may work is based on course load and academic progress.
Working the tax breaks
McIntire warns that if a student has a savings account in their own name, or if they plan to work beyond the federally approved work-study program, that income could bump them out of contention for financial aid eligibility.
That's where Uncle Sam comes in.
Several tax-advantaged tools are helpful for college students who pay their own way.
Funds directed into a Qualified State Tuition Program (QSTP) or 529 plan, for example, will not be counted against the student for needs-based programs. These assets are available for qualified tuition costs and are non-taxable if used for educational purposes by the beneficiary. But minors who open such accounts must do so with the help of a parent or legal guardian.
The Hope Credit, which is limited to the first two years of undergraduate schooling, provides a tax credit of up to $1,500 per student subject to annual income caps for educational expenses. The Lifetime Learning Credit provides an additional tax credit of up to $1,000 per family (or student as the case may be). It, too, is subject to income caps.
Paying your dues
Along with financial aid options available, McIntire stressed students should save responsibly during their college years. In many cases, that means holding down a part-time job during the school year, and a full-time job during the winter and summer breaks.
Indeed, saving money acquired throughout the college years can relieve much of the stress associated with post-graduation debt.
"Not only can you start paying back your loans as soon as you graduate, but you also gain saving skills that will help you throughout your future," she said.
Worth the effort
When others are out partying, while you're sweeping floors, experts say it helps, too, to remember you're not alone.
The Bureau of Labor Statistics reports that 56 percent of students between the ages of 16 and 24 work either full-time or part-time. And many say it's been a character-building experience.
Alexandra Pedisich, for example, who has been a legally emancipated youth since she was 17 years old, said covering her own tuition costs has given her a heightened sense of responsibility.
Pedisich, who is entering her sophomore year at Wellesley College in Massachusetts, is paying for her education through a combination of financial aid from the college, work-study, non-renewable scholarships, and government grants. In the upcoming school year she expects to take on a part-time job, as well as apply for a private loan.
"Paying for college yourself isn't easy," she admitted. "It's challenging to find a balance between work and study. I'm here to study, but I need to work in order to do that - you can't let them contradict each other. There is always a danger of forgetting academic interests."
Initially, Pedisich said, she worried that her extra responsibilities would not allow her enough time to fully explore the educational resources at Wellesley, and alienate her from her more carefree peers. But she has since concluded that paying for her own education has provided her with invaluable skills for the future.
"Regardless of how difficult it is, I wouldn't change my situation because it's made me a much stronger person," she said. 
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