Three Simple Steps: Paying for Higher Education

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Paying for higher education has become one of the most challenging tasks facing students and parents in America. The average cost at a private four-year university for tuition, fees, and room and board rose in 2012-2013 to more than $39,500, according to the College Board. Costs are up more than 25 percent in the past decade even after adjusting for overall rates of inflation. And while public schools are still cheaper, their tuition has risen at an even faster rate -- 45 percent beyond inflation.

Increasingly, families have relied on student loans to help bridge the gap between costs and their financial resources, with outstanding student debt almost four times as much it was in early 2004, according to figures from the Federal Reserve Bank of New York. And even though it looks as if Congress has agreed on a plan to hold down interest rates on new student loans -- for now -- taking on more and more debt isn't the ideal solution to the higher education price crisis.

But panicking isn't necessary either. To get a better handle on how you and your child can pay for his education, start out by trying these three simple strategies:

1. Look into college savings plans you can use to put money aside for education while taking advantage of favorable tax and financial-aid rules. 529 plans and Coverdell ESAs give you tax-free growth of your money if you use it for educational expenses, and they're treated as parental assets for financial aid purposes, leaving your child potentially eligible for more of other kinds of aid.

2. As your child approaches college age, compare the costs of prospective schools with the educational benefits to find the best fit for your child. What you pay for a given school doesn't always match up with financial prospects after graduation, and especially if your child already has a planned career path in mind, it's smart to talk to employers in the industry to find out which schools have the most useful programs to prepare students for real-world professional work.

3. If your child is already in college, learn how to read your college financial aid letter to understand exactly what the school is offering. With calculations of your expected family contribution and separate line items for scholarships and grants as well as various types of government and private loans, you still have latitude to come up with alternatives of your own that might be better tailored to your situation.

With total college costs eclipsing the $100,000 mark for many students, paying for education can seem like an insurmountable challenge. But with these simple steps, you can start to get control of your financial situation and make paying for college much more manageable.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

Three Simple Steps: Paying for Higher Education

One solution is to take advantage of some of the loan forgiveness opportunities that are already out there. The military, the federal government, and state governments offer dozens of programs that will wipe away at least part of your debt, in return for a few years of service. Most are tied to specific, in-demand professions in areas such as health care, law enforcement, and education. but others -- like the military, the Peace Corps, and AmeriCorps -- are open to people from a variety of majors and disciplines.

American Student Assistance, a nonprofit group that helps people manage their student loan debt, has produced a free list of occupation-based loan forgiveness programs. It's worth a peek -- even if you don't plan to become a firefighter, policeman, speech therapist or social worker.

Photo: Brett Holt, flickr.com

Several programs will allow you to structure your repayment of federal student loan debt based on your income. For example, if your loan payments are more than 15 percent of your discretionary income, you may qualify for income-based repayment, under which your monthly payment calculated based primarily on what you earn, and after 25 years of payments, any remaining money owed gets forgiven. Other programs, including income-contingent repayment and pay-as-you-earn forgiveness, are pegged to different income levels.
Nobody wants to die, go through bankruptcy, or suffer a total and permanent disability. However, if you experiences one of these life events, your federal student loans will be discharged. The banks behind private loans, however, may still go after your cosigners in an attempt to recoup their losses.

Assuming you're not a too-big-to-fail bank, the idea of going deeper into debt in order to make more money may sound counterintuitive. However, in many fields, a graduate degree can vastly increase earning power. "What's It Worth," a publication of Georgetown University's Center on Education and the Workforce, ranks graduate programs by their return on investment. Not surprisingly, degrees in medicine, the social sciences and hard sciences top the list.

Photo: Serge Melki, Flickr.com

Ultimately, student loans are like any other debt: Getting out from under them requires that you understand your situation and keep your focus on repayment. In this regard, the best advice is also the most obvious. First, be aware of how much money you owe and what the interest rates are on each of your loans. Work on paying off the highest-interest loans first, while making minimum payments on the rest of your loans. As you pay off each loan, take the money that you were spending on it and roll it over onto your highest interest loan.

But, while discipline is good, it's also important to reward yourself. Paying off loans is a big deal: give yourself a nice present every time you put one to bed!

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