3 College Finance Tips for Scared Students (and Their Parents)

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The cost of college rises every year, making it harder for cash-strapped families to afford tuition and other costs. But with both parents and students well aware the long-term value of a degree, most families are looking for ways to cover the bills.

A recent survey from Discover Student Loans found that more than 80% of parents of 16- to 18-year-olds believe college is important to their child's future. Yet three-quarters of them worry about being able to help out enough, while an even more overwhelming majority believe their children will need to shoulder at least some of the burden.

Let's look at a few tips that could make solving the college financing puzzle a little easier.

1. Make the Most of Your Savings.

The survey found that 36% of parents expect to pay for college with money from savings, more than any other option. But only one in three of those parents named 529 savings plans as a primary source of funds.

Tax-favored 529 plans, as well the similar Coverdell Education Savings Account, can help parents make the most of their college savings by cutting the tax burden associated with saving. Unlike savings and investments held in ordinary accounts, parents don't have to pay taxes on income generated from Coverdell or 529 plan accounts. And as long as you spend 529 and Coverdell money on eligible college expenses, the distributions are tax-free as well. That can save you hundreds or even thousands in taxes over the long run.

2. Be Careful With Loans.

Parents also realize that loans will play an important role in financing college. Of those surveyed, 28% said loans would be the primary source of funding.

Unfortunately, the hardest thing about dealing with loans is getting information to understand them. Different kinds of loans have very different terms, yet lenders don't always provide impartial advice on which loans are best. Nearly half of parents rely on college financial aid officers, yet even their objectivity was called into question back in 2007, when investigations revealed that financial aid officers at several well-known colleges had taken kickbacks from lenders in exchange for adding those lenders to the preferred lender list that students received.

Now, however, laws passed in the aftermath of those scandals expressly prohibit such dealings, which is likely one reason why parents trust financial aid officers as much as they do.

Nevertheless, the best time to understand the different loans available is before your child gets a financial aid offer. By using high school counselors and getting independent financial advice in advance, you'll be better prepared to deal with loans when the time comes.

3. Understand the Whole Package.

Another tough thing to understand is the combination of sources that financial aid packages include. With students and parents starting to weigh the costs and benefits of different schools, it's important to be able to compare financial aid packages from different colleges.

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That's the idea behind the Consumer Financial Protection Bureau's work with the Department of Education in creating a financial aid shopping sheet. By fully listing both tuition and other costs and separating out grants and scholarships, work-study programs, and loans, students and parents should both be better able to see exactly what each school is proposing.

But while the Department of Education is urging colleges to use the standardized sheet, it won't require all schools to do so. That's appropriate, according to Justin Draeger, president of the National Association of Student Financial Aid Administrators. As Draeger said in a statement, "Institutions need flexibility to design a financial aid award letter that best meets the needs of their unique student populations." That means you may still need to do some legwork of your own to understand the different offers your child gets.

Don't Panic!

As difficult as financing a college education is, don't let the process intimidate you. By seeking help, you can get the information you need.

3 College Finance Tips for Scared Students (and Their Parents)

Location: Princeton, N.J.

Undergraduate Enrollment: 5,220

Total Annual Cost: $50,269

Average Debt at Graduation: $5,225

Students Who Borrow: 23%

Princeton’s no-loan financial aid policy, introduced a decade ago, means that less than one-fourth of students need to borrow, and the amount they do borrow is small. Princeton’s average debt at graduation, at a little over $5,000, is the lowest among our top 200 private colleges.

Location: Berea, Ky. 

Undergraduate Enrollment: 1,613 

Total Annual Cost: $32,894 

Average Debt at Graduation: $5,836 

Students Who Borrow: 73% 

Plenty of colleges talk about keeping costs, and student debt, down, but Berea walks the walk: This Christian-focused institution covers the full $25,500 tuition for all students, out of a mix of grants and scholarships, leaving them to cover only $7,394 in remaining costs (including room and board). It’s no surprise that average debt here is second-lowest on our list.

Location: Williamstown, Mass. 

Undergraduate Enrollment: 2,029 

Total Annual Cost: $55,360 

Average Debt at Graduation: $8,369 

Students Who Borrow: 43% 

With an average financial-aid package of about $40,000 a year, Williams brings the annual cost of its elite education to a relatively modest $15,360 for students who qualify. Williams admits students without considering their financial circumstances and meets the full demonstrated need of students who enroll.

Location: New Haven, Conn. 

Undergraduate Enrollment: 5,294 

Total Annual Cost: $53,700 

Average Debt at Graduation: $9,254 

Students Who Borrow: 28% 

An Ivy League school with a walloping endowment and a financial-aid budget of $117 million, Yale offers no-loan financial aid to more than half its students, including families earning well over $100,000. Result: Students who borrow carry away one-third less debt than the national average for borrowers at private schools.

Location: Claremont, Cal. 

Undergraduate Enrollment: 956 

Total Annual Cost: $55,700 

Average Debt at Graduation: $9,435 

Students Who Borrow: 36% 

This tiny, all-women’s school awards generous need-based and merit-based grants as well as privately funded need-based loans, which do not accrue interest while the student is in school. (Students also have access to federally sponsored loans, such as Staffords.) Scripps is one of the three members of the Claremont Colleges (a consortium of five colleges and two graduate programs that share faculty and facilities) to make our top ten for low debt.

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Motley Fool contributor Dan Caplinger has 10 more years before he has to worry too much about financial aid for his daughter. You can follow him on Twitter @DanCaplinger.

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