5 Strategies to Pay for College Today

Military.com| by Pam Wilson, USAA

This content is provided courtesy of USAA.

College costs are rising. The economy is down. But finding a way to pay for that degree is still worth it. Find out how you can foot the bill.

With high tuition and the tough job market, you may wonder if getting a college degree is still worth the cost. It is, according to recent research.

A U.S. Census Bureau study released in September 2011 shows your education level affects your paycheck: If you work full time and year-round, a bachelor's degree can help you earn between $681,000 and $1.2 million more than a high school diploma.

To help streamline your college banking and find the cash to pay for an education in today's economy, here are five methods and their pros and cons.

How Much Should You Borrow?

Experts recommend that student loan payments stay at or below 10% of the expected monthly gross income for new graduates in your field. For example, if an education major can expect to land a teaching job paying $30,000 a year, with a monthly gross income of $2,500, his or her maximum student loan payments should be around $250 a month.

So when you're taking out student loans as an undergraduate, think about the terms of repayment after college and whether your likely monthly income will cover the cost, as well as your living expenses. And once you've graduated, budget so you make those loan payments by their due dates each month. A sure way to hurt your credit rating is to not pay bills on time.

1. Find Free Money

Whether you're on your own or living under your parents' roof, you could benefit from financial aid.

To start the process, fill out and submit the Free Application for Federal Student Aid. Each school you apply to will tell you what types of aid and how much you qualify for. Colleges and universities use the FAFSA as the basis for awarding federal student aid. Some also use it to determine your nonfederal aid, which can include state-level grants and scholarships.

Pam Proctor, an independent college consultant and author of "The College Hook," suggests applying to 10 to 12 colleges and universities to increase your options. "When it comes time to make decisions, you will have financial aid packages to compare," she explains.

Taking the time to apply for scholarships and grants also can pay off. Also known as gift aid, this money doesn't have to be repaid. In addition to academic-related awards, look for offerings from associations, colleges, religious organizations and foundations that target your demographic or affiliations. Check out Fastweb to see what's available.

PROS

You get a portion of your college costs paid for.
You can add any scholarship recognition to your resume.

CONS

The FAFSA paperwork can seem daunting.
Finding and applying for grants can be tricky.

2. Look for Loans

Although starting your career with student debt isn't ideal, student loans may need to be part of your college financing plan, along with grants, scholarships and part-time wages.

One of your best loan deals is a federal Direct Loan, which can either be subsidized or unsubsidized, depending on your financial need. With a subsidized loan, the government pays the interest while you're in college.

Tax Relief

Uncle Sam also provides help with the burden of college costs, if you qualify. Consider:

The American Opportunity Credit, worth up to $2,500 for qualified expenses per eligible student.
The Lifetime Learning Credit, worth up to $2,000 each year per eligible family.
The Tuition and Fees Deduction, which reduces taxable income, up to $4,000, by the amount paid to a post-secondary institution.

Income and other restrictions apply. Learn more about these options on irs.gov at the Tax Benefits for Education: Information Center, or discuss them with your tax advisor.

If you don't qualify based on your financial need or a federal loan isn't enough to cover the tab, you may consider private loans to fill the gaps. Generally, private lenders offer student loans at higher rates.

PROS

You receive money for school.
You can deduct up to $2,500 in student loan interest if you earn less than $75,000 or $150,000 if married filing jointly. The IRS Publication 970 offers details on these tax benefits for education.

CONS

You begin your career with debt, since you have to pay back most loans, usually with interest.
Graduate and professional students will pay more for federal loans starting July 1, 2012. Currently, the government pays interest on the loans for graduate and professional students up to $23,000 per year while they are in school. That benefit goes away for new loans starting next summer.

3. Serve Your Country

Military service can make your education goals a reality. The Armed Forces tuition assistance is a powerful incentive for those serving in the armed forces to pursue their education. Both enlisted and officer military members can receive up to $4,500 annually for tuition and fees.

Eligibility, service requirements, application processes and restrictions differ among the military branches, National Guard and Reserves.

Another military option is the Post-9/11 GI Bill — an updated version of the World War II era legislation that may have helped your grandfather settle back into civilian life This benefit is offered to members of the military who have served at least 90 days on active duty since Sept. 11, 2001. Depending on length of service, the bill pays 40% to 100% of tuition and fees at a in-state public college or university, or up to $17,500 at a private or foreign school.

Unlike the Post-9/11 GI Bill, The Montgomery GI Bill requires service members to enroll in the program and pay $100 per month for a year ($1,200) in order to receive a monthly education benefit. Benefits vary, but a full-time student in college could receive approximately $1,500 a month through this program.

You can prepare for military service and pay for college at the same time through ROTC programs. Some college students get their entire tuition tab picked up through ROTC and have an opportunity to serve in the Army, Navy, Air Force or Marine Corps after they graduate.

PROS

With the tuition assistance program, most of your tuition and fees are covered. Military on-the-job experience may translate into college credit.
In certain situations, the new GI Bill allows transfer of benefits to spouses and children. As of Oct. 1, 2011, you can use it for nondegree programs and other professional training.
GI Bill benefits are tax-free.
ROTC programs can result in a full, four-year scholarship.

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CONS

Your studies may be interrupted by required military relocations or deployments, if you choose the Tuition Assistance Program.
The Post 9/11 Bill requires specific length of service to qualify for transferability of benefits to a spouse or child.
Tuition benefits can expire, so you need to apply for assistance within the specified timeframes.

4. Get Help at Work

If you're employed, look into whether your company offers a tuition-assistance program. Benefits often include payments for undergraduate- or graduate-level tuition, fees, books, supplies and even equipment. Some companies require that your coursework relate to your job.

PROS

A bachelor's or master's degree paid for, all or in part, by your employer. Up to $5,250 annually for school — tax-free. The money doesn't have to go toward a full-degree program. Some companies may offer more toward your degree, though any amount above the $5,250 would generally be considered taxable.
The possibility of a boost in pay with your new credentials.
You can study at your own pace, as most employers don't require a full-time enrollment policy.

CONS

Some companies require a minimum grade-point average and won't pay the education costs upfront. If you're laid off, you may end up paying some of the tab.
Some employers require you to remain on staff for a certain period of time after you finish your schooling, so make sure you're happy where you're working.

5. Turn to Family and Friends

Are you comfortable asking for help with tuition or accepting monetary help from generous family members or friends? Make sure any benefactors know about qualified transfers.This arrangement allows individuals to pay an unlimited amount of tuition directly to a qualified institution of higher learning on your behalf without being subject to the gift tax. The education exclusion allows the donor to help you out and avoid any tax burden at the same time. You and the one with the checkbook should consult a tax advisor before entering into this arrangement.

PROS

Knowing someone is in your corner can help motivate you in pursuing your degree.
Your college costs are reduced.

CONS

Sometimes such gifts can come with strings attached. Make sure you'll maintain autonomy over your course of study and that there are no objectionable expectations before you allow someone to pay your bill for you.
It can be hard to know whether you can depend on regular tuition payments from this source. A change in the donor's circumstances or a falling-out can mean you're on the hook for the tab when you weren't expecting to be.