At a time when college debt is at a historic high — with the national student loan debt balance at $1.32 trillion — strategic planning around funding a higher education is no longer just a recommendation, but an imperative.
READ: Students and Families Forced to Think Creatively as Tuition and Debt Outpace State Spending
“College affordability has been going downhill, so people need to look at every possible resource when figuring out how to pay for school and also when choosing a college,” says Mark Kantrowitz, a nationally recognized expert on student financial aid, best-selling author, and publisher of Cappex.com, a free website that connects students with colleges and scholarships.
By “every possible resource,” Kantrowitz means everything from traditional student loans and scholarships to newer, less traditional methods such as crowdfunding and income-share agreements. However, he emphasizes the need to evaluate the benefits and drawbacks of each, as not every approach is best for every student.
Income-Share Agreements
These private alternatives to traditional student loans cover all or some of the costs of a student’s college education and, similar to loans, require repayment. However, instead of paying a fixed dollar amount per month, as with student loans, income-share agreements require students to compensate investors via a fixed percentage of their income for a set period of time after graduation.
“The main difference is that [income-share agreements] are perceived as shifting the risk of failure from the student to the investor,” Kantrowitz says.
In these agreements, how much a student has to repay depends on his or her salary after graduation. The downside to this, Kantrowitz says, is that investors may be less likely to invest in students pursuing low-paying majors and more likely to invest in those studying high-salary disciplines.
But investors can attempt to make up the difference in earnings by adjusting the income percentage and the duration of the agreement. “So instead of requiring you to commit to 0.2 percent of your income for every $1,000 received if you’re going into, say, computer science, they might require you to agree to 0.4 percent for a fine arts degree,” says Kantrowitz.
For students entering more lucrative fields, he recommends loans over this method, as they may end up repaying more than they borrowed. But for low-income students, these agreements may be more appealing.
“Low-income students are much more risk-averse than middle- and high-income students,” Kantrowitz says, “so by shifting the risk, it makes it more attractive to them.”
Currently, income-share agreements are not widespread, although attempts have been made since the ’70s to grow them. And while Kantrowitz believes they will continue to increase in popularity — given that Purdue University just launched its own program — he doesn’t see them becoming a dominant college funding method.
529 Plans
Also known as a college savings plan, a 529 plan is a popular investment option that makes saving money for college easier due to its many tax advantages. Most states allow a limited tax deduction for contributions made to these plans. In addition, any earnings from these investments are exempt from federal and state income taxes if used to pay for qualified education expenses, such as tuition, fees, books, and room and board at eligible institutions; these include most accredited colleges, vocational schools, and professional and graduate schools.
Each state may have multiple plans to choose from, although many are available nationally. Experts recommend that students explore options beyond their own state, particularly if their state has no income tax. While the majority of 529 plans only allow investments in large mutual funds, individuals are able to make selections based on their risk tolerance.
An important item of note with 529 plans is the lifetime contribution limit, which cannot exceed the total cost of the beneficiary’s education; in many states, this amount is between $300,000 and $400,000.
Crowdfunding
Widely synonymous with Kickstarter.com, the online fundraising platform launched in 2009, crowdfunding as a means of funding one’s education is a relatively new concept. Yet as the cost of higher education increases, more young people are exploring this as a viable option. By August 2015, about 130,000 educational accounts were created on GoFundMe.com, another crowdfunding website, raising a total of more than $20 million.
The benefit of these websites is that they are often free to use, and students owe nothing in return for the money they receive. But Kantrowitz says the majority of students seeking funding through these platforms aren’t successful. “Even among those who do get funded, they don’t get funded to their full goal,” he says.
While he is skeptical of the idea of complete strangers sponsoring random students’ education, he says that those who choose to go this route must have a compelling story.
Work-Study & Other Opportunities
The Federal Work-Study Program provides part-time jobs for undergraduate and graduate students who’ve demonstrated financial need, allowing them to earn money to cover the cost of tuition and fees. Currently, 3,400 institutions participate in the program.
“The benefit of a work-study job is it’s part-time, and if you’re working 10 or 12 hours a week, your academic performance actually improves,” Kantrowitz says. “You get better grades because you’re forced to learn time-management skills.”
Because work-study awards are offered on a first-come, first-serve basis, it is recommended that students apply early for financial aid. While wages may vary by institution and job, those eligible will earn at least minimum wage.
Other on-campus roles, such as student government positions or resident assistants, provide additional opportunities for tuition assistance, reduced tuition, or free housing. “At some colleges, the head of student government is treated like an employee, and they get paid,” says Kantrowitz.
Furthermore, off-campus organizations such as SponsorChange.org reward students who volunteer by paying down their student loan debt.
Employer-Paid Tuition Assistance
The Society of Human Resource Management’s (SHRM) 2014 “Employee Benefits Survey” revealed that 54 percent of organizations offered undergraduate educational assistance, while 50 percent offered assistance at the graduate level; institutions surveyed consisted of more than 500 SHRM members, including both privately and publicly owned and for-profit and nonprofit organizations, as well as government agencies.
The average maximum reimbursement amount was $4,591. However, employees can receive up to $5,250 in employer-paid tuition assistance tax-free.
Companies such as Starbucks, Apple, Best Buy, Home Depot, Gap, and AT&T are said to offer some of the best plans. While stipulations and benefits vary by employer, they often include reimbursement for courses taken toward an undergraduate or graduate degree. Some companies require that the degree be geared toward the industry they’re in, but others are less specific.
Kantrowitz says that many employers require employees to earn at least a B in all courses in order to be eligible for reimbursement. And while tuition-assistance programs offer a free — or at least affordable — way to earn a degree, employees taking advantage of these are often required to continue working for their employer for a set number of years after graduating. “The typical [rule] is a year of work commitment for each year of support,” Kantrowitz says.
Assessing Affordability
Beyond examining all potential funding options, Kantrowitz recommends that students and their families begin the college search by first comparing their available resources with the net price of prospective schools.
“[Students are] chasing a dream, and oftentimes, they have become completely enamored with a particular college well before they have any consideration of whether it’s affordable or not,” says Kantrowitz.
Applying for aid early, saving money, becoming financially literate, and selecting a college you can afford are all responsible tactics for tackling higher education funding, he says. But in a perfect world, he says that total loan debt wouldn’t exceed a person’s starting salary.
“If your total debt is less than your annual income, you’ll be able to repay your student loans in 10 years or less,” Kantrowitz explains. “That’s a reasonable amount. Anything more than that is going to be a stretch.”●
Alexandra Vollman is the editor of INSIGHT Into Diversity.
