Financing College

Paying for College: The Process Demystified

Paying for college is a scary prospect. One of the main reasons it's frightening? Many parents and families don't understand the process.

Here, then, is paying for college. Demystified.


First things first. College can be paid for out of pocket. As this is rarely an option for working families, there are three types of aid designed to help pay college tuition and costs.

Grants and Scholarships. Grants are gifts paid from the federal and state governments or from individual colleges. Scholarships are financial gifts awarded based on academic merit, sports prowess, or other special talents and skills. Both grants and scholarships do not need to be repaid, nor do they need work in exchange for receiving them. Scholarships in particular can be found and applied for through the local community, national organizations, high school alumni foundations and more.

Loans. Just like with car loans, home loans and every other type in our debt-heavy society, education loans must be repaid. The most well-known and preferred educational loans are low-interest loans awarded by the federal government based on financial need.

Work. Formal work-study is a type of aid given under a federal program that gives students part-time employment to defray costs. Students may also opt to work on-campus or off-campus jobs to help pay for tuition, supplies, and personal expenses.

How it works

Financial aid is designed to make college more affordable for students and families. It is based on the idea that anyone should be able to attend college, no matter the financial circumstances. It's offered to make up the difference between what you can afford and what college costs.

The system works by asking families to contribute to college costs to the extent that they are able. Financial aid, in the form of grants, work-study, or other awards, then bridges the gap of what's out of reach.

The amount that your family is able to and expected to contribute is called the Expected Family Contribution, or EFC. The federal government and financial aid offices use formulas to determine the EFC, considering things like any scholarships and grants already awarded, income, assets, and family size, and the number and details of other families applying for aid.

The formula expects that families will meet their contribution through a combination of savings, income and borrowing. So if the EFC is more than you can afford considering simply income, there are options.


Bridging the Gaps

The most common method of paying your share of college costs is loans. Some options:

    • Federal Subsidized Loans. If you meet certain criteria, you could qualify to borrow this need-based loan. The primary benefit of this loan is subsidizing: interest does not accrue on this loan during the time attending college. 

    • Federal Unsubsidized Loans. Students who don't demonstrate need, or need to borrow more than the subsidized loan amount, can borrow unsubsidized Stafford loans. Students and families are responsible for paying interest during the life of the loan.

    • Private Student Loans. Many non-government loans are also available to students to help meet the family share. Research these through your bank or through online lenders.

    • Parent Loans. Federal PLUS Loans are the most popular loans for parents of dependent undergraduate students, as they allow borrowing up to the full cost of education minus other aid. Federal Grad PLUS Loans helps independent grad students borrow up to the full cost of education minus any financial aid. Students receive an automatic deferment while in school.

  • Home Equity Loans. Some families find money for education by borrowing against the equity built in their home. Interest paid may be deductible on federal tax returns, but some fees may apply.

Other options for financing the expected family contribution can be relying on savings. For example, if your family has a Roth or Traditional IRA (a savings account designed to put aside money for retirement), you might opt to withdraw funds for education costs. The penalty fee for withdrawing early will be waived. However, tax may need to be paid on withdrawals.

Paying for college does not have to be a confusing burden. Learn more with frequently asked questions, college statistics and tax break details in our continuing series.


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