There is little doubt that a college degree is a very sound investment. Those with bachelor’s degrees earn more than $20,000 per year more than those just high school diplomas and over $1,000,000 over the course of their lives. With an average tuition cost of about $6,500 per year, totaling $26,000 over the course of the four years (not counting room, board and other expenses), a college degree, on average, will result in over a 3800% return on investment over the course of one’s lifetime.

However, paying for college is still a very daunting proposition. Though the investment is sound, $26,000 is on par with the price of a new car and college comes with a slew of living and additional expenses. All of this is at a time before most students have had any opportunity the be in the work force and earn any revenue.

This, in turn, forces most students to take out some form of student loans. Though these don’t make college any less of a sound investment since the interest on the loans is far lower than the returns on the degree, they still saddle college graduates with thousands of dollars of debt from the moment they graduate.

This is why it is important to start planning your college payment strategy as soon as possible, preferably many years before you or your son/daughter are to begin.

Savings Plans

If you have time before you or your son/daughter are to begin college, you should consider starting a savings plan. Even just a few years of dedicated investment could set aside not only a significant portion of the money needed to go to college, but also generate interest on top of the funds you invest. Every penny saved before going to college, especially “free” money earned from interest, is money that does not have to be borrowed with interest later.

The most common and tax-friendly college savings plan is a 529 plan. A 529 plan is a college savings plan that is operated by a state or an educational institution. There are two types of 529 plans. The first is a savings plan that works very much like a 401K or IRA by investing contributions into mutual funds or stocks to generate interest. The second is a prepaid plan that allows donors to prepay for their college, though these accounts do not generate interest, they can be used for private and/or out of state colleges.

The advantage of a 529 plan is the tax breaks it provides. Though the money put into the plan is not tax deductible, the interest earned by the account is not taxed so long as it is withdrawn solely for the use of paying for college. Also, it is important to note that the funds deposited into this account are under the control of the donor, not necessarily the student, and can be withdrawn at any time, albeit with tax penalties.

Currently every state offers some form of a 529 plan and many schools offer 529 prepaid plans (schools can not offer savings 529 plans). It is important to note though that your savings in your 529 plan may impact your ability to obtain need-based financial aid, though the impact is usually fairly minor.

With long-term planning and an aggressive savings strategy, it is possible to save up most of the money needed to attend college before even filling out the applications. These accounts are preferable because they pay interest to the donor, rather than the student paying for the interest, as with student loans.

Grants

If savings and/or income are not able to cover the full cost of attending a college there are many grant programs that are available to help. Grants are different from loans in that they are “gifts” that do not need to be repaid and different from scholoarships in that they are primarily need-based, where most scholarships are merit-based.

The most common source of grants is the Federal government and, to apply for grants from them (as well as many scholarships) you need to fill out a Free Application for Federal Student Aid (FAFSA). The FAFSA is an application that looks at the student and their family’s financial situation and determines what need-based grants and loans they may qualify for.

Students who are determined to have adequate need will qualify for a Pell Grant, which awards up to $5,350 per year. These grants are awarded directly to the college or university and goes toward reducing the cost of tuition. Recipients of Pell Grants may also be eligible for an Academic Competitiveness Grant during their Freshman and Sophomore year of study, which provide up to $750 for the first year and $1,300 for the second, and a National Science and Mathematics Access to Retain Talent (National SMART) grant their junior and senior year, which can provide up to $4,000 for each year of study.

All of these grants are widely available to qualifying students and are non-competitive. Students should know whether they qualify for these and other forms of Federal assistance within a few days of filling out their FAFSA online.

Scholarships

In addition to Federal grants, there are millions of scholarships available that provide various amounts of financial assistance. These scholarships are typically merit-based and, especially for ones with larger awards, are very competitive. However, there is no limit to the amount of scholarships you can apply for and receive making it a great solution for filling in some of the shortfall between what savings and grants can provide.

The first step, for many scholarships, is the same as applying for grants. A FAFSA is required for many scholarships, especially those that factor in student need. Once you have a completed FAFSA, you can then go to centralized scholarship search sites such as The College Board’s serviceScholarships.com and, the most popular, FastWeb. Though each of these sites have very large databases of scholarships, they do not have the same information so it may be worthwhile to register at two or even all three services.

To do so, you’ll need to fill out a very lengthy profile that will cover issues ranging from grades, extracirricular activities, background and much more. These sites will then provide a list of scholarships that fit your specific profile and provide information for applying to them including instructions, deadlines and any other details. It is extremely important to follow those directions very closely to ensure that your application is processed promptly and to give you the best chance of accepting.

It is best to apply for as many scholarships as practical including a mixture of high-value and low-value ones, to increase the odds of getting as much of the funding you need and lessening the amount that you need to borrow.

Student Loans

With the costs of college rising and scholarships and grants remaining relatively flat, more and more students are turning to student loans to help them cover the costs of going to college.

Once you complete your FAFSA, you will also learn which Federal student loans you qualify for including Perkins LoansStafford Loans and PLUS Loans.

Of the three, Perkins Loans are the most desirable, as they have the lowest interest rate (capped at 5%) and can be up to $4,000 per year for undergrads and $6,500 for graduate students. However, they are only for students that already qualify for Pell Grants and require the most financial need.

Stafford Loans are the most common, with their interest capped at 6.8% Stafford Loans are more widely available and can provide more money, up to $18,500 per year.

Finally, PLUS Loans have the highest interest, capped at 8.5%, but are designed to cover the entire cost of attending college. They are very similar to Stafford loans save that, in this case, the parents are the borrower. However, grad students are eligible to obtain PLUS loans themselves.

When taking out a loan, it is important to understand how much you are borrowing, what the interest rate is and whether the loan is subsidized or not. Subsidized loans, such as some Stafford Loans, do not accrue interest while the student is attending college, making them much less expensive.

There is also a sharp rise in private student loans, student loans made without the backing of the Federal government. These loans often have much higher interest rates, sometimes well over 15%, and do not offer any Federal protections. To make matters worse, many of the companies that offer government student loans also offer private ones and it is unclear when they are making a loan offer which they are providing.

As always, be careful and understand what you are signing when you obtain student loans. Always try to get Federally-backed student loans, of any type, and make sure that you are signing onto the loan you think you are.

Other Options

In addition to the options above, there are several other means of paying for college, they include:

Work-Study: Work Study programs award students part-time jobs based upon their financial need. It is awarded by expressing interest when filing your FAFSA. Your school’s student aid office will provide you with an award amount and help you obtain a part time job that covers that. Students are paid at least minimum wage and at least on a monthly basis. These wages are taxed but, in the case of Federal work-study, they do not count when determining financial need. There are Federal and non-Federal work-study programs, the greatest difference being that the latter is not based on financial need and focuses almost solely on off-campus positions.

Employer Incentives: Many companies provide incentives for their employees to go back to college. This can be ideal for students already in the work force who want to go back to school part-time and don’t qualify for many of the other financial aid options. These incentives can range from a free class every semester to discounts on tuition.

Part-Time Work: Finally, many students do also obtain part-time, non-work-study jobs either on or off campus. Though these jobs tend to be low-paying, they are usually flexible enough to work around one’s school schedules and provide extra income. Though this money is not available to help with up front tuition fees, they can help cover ongoing expenses that may not be easily covered through other loans and grants.

All in all, there are many possible ways to obtain the needed money for college. Many students get imaginative and start up their own businesses, especially online ones, while others accept donations. There are countless non-traditional ways to earn money for college if one is willing to explore alternatives.

Bottom Line

Paying for college is difficult. It’s an expensive proposition at a time where most are doing well to simply get by. Fortunately though, there are a slew of Federal programs to help pay for school as well as other assistance available.

If you’re smart about how you pay for college, you’ll emerge with your degree while carrying only a small, reasonable amount of debt. However, if you plan poorly, you could end up with debts much higher than you expected.

The best approach is to start planning for college as soon as possible, develop a solid savings strategy and then obtain as many grants and scholarships as possible before seeking out Federal student loans. If you can do that, you will probably have everything you need with minimal burden afterward.

For many, college is one of the best times of their lives. Don’t ruin the moment or the memory through bad financial planning. Be smart about how you pay for school and you will be able to cherish the memories, as well as enjoy the degree, for the rest of your life.