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Paying for college? How to not run out of money

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Tom Werner/Getty Images

For years, you've worked diligently to build assets to pay for a college education. For parents who've prepared for this moment, the sacrifices you've made are a gift that can help your child earn a degree and make their professional goals a reality. For students who've saved, it's a huge—and responsible—step toward your long-awaited future.

Now, prudent financial planning is as important as ever. Figuring out how to move from saving to paying for college strategically can help reduce your need for loans and provide enough continuous funding through graduation.

Here are some strategies to help you get the most out of the money you've put away.

Review what you got from the FAFSA

Colleges and vocational schools use the Free Application for Federal Student Aid (FAFSA) to identify your federal financial aid eligibility. The amount of aid available is limited, so it's critical to have filled out the form by the school's deadline. Also, since financial aid offers are issued for only the upcoming academic year, be sure you submit a FAFSA every year with your updated financial information.

If you filled out your FAFSA, you should have received a letter from your chosen school that breaks down the financial aid offers you're eligible for and estimates your total costs. Familiarizing yourself with this is the first step in deciding how you might pay for college for each term going forward.

Your FAFSA offer letter generally includes school-specific need-based grants, work-study opportunities and federal student loan options. It may also include school-specific merit or athletic scholarships. If you pursued scholarships outside your school's process, you'll factor those in next.

Make sure the Financial Aid offer letter is correct. While most schools do not make you formally accept their merit monies, if you want, or need, to borrow student loans, you'll need to formally accept those. Ideally, do this well before the bill arrives. Verify those dollars are applied to your bill first, then factor in your other means of paying for school so you're only borrowing as much as you need to.

Use your merit-based aid strategically

Grants and scholarships don't have to be paid back, which is why they're the ideal starting point for paying your college expenses. So after applying your need-based awards from the FAFSA, have your merit, talent, athletic, civic, religious and any other scholarships you've found lined up to help pay your bill.

Note how the money is issued

Depending on your sponsor, your scholarship may be paid as a one-time sum, divided among terms or doled out in installments. If your school gave the award, those funds are usually credited to your bill automatically, going toward your tuition and other costs associated with enrollment. However, a private scholarship may deliver the money to the school or give it directly to the student.

Resist spending it elsewhere

Use any scholarship money you receive directly wisely. It can be tempting to spend it on something else—a cellphone or a new laptop you think at the time is "necessary" for your education. But this could lead you to spend more of your savings or take out more student loans than you otherwise would, which can inflate your costs, whether it's by lost earnings or added interest charges.

Spending from your educational savings accounts

After factoring in any money you've been given, it's time to think about how to spend the college savings you've patiently put away over the years. To maximize the impact of this money, it's vital to have a strategy in place.

From the bill from the college, you'll have an accurate idea of how much you may need to spend for that term, and an idea of what your cost will be for the rest of that school year. With that figure in mind, you can sort out how to draw from any savings designated for educational use, such as from 529, Coverdell or Roth IRAs.

Know what it can pay for

Each educational account generally has potential tax advantages as long as you use them for eligible expenses. Review these expenses and make sure you're applying the money in those ways first. In the case of 529 plans, for example, you can make tax-advantaged withdrawals for:

  • Tuition and fees
  • Books and supplies
  • Computers and equipment
  • Room and board
  • Special needs equipment
  • Loan repayment ($10,000 lifetime limit)

Decide how to spread it out

In most cases, spreading out withdrawals from your educational savings accounts across terms gives you the best chance of success. It allows you to cover the majority of each bill as they're issued over the years, so you don't run out of money before you've completed your program.

Some families may benefit from spending down educational accounts early and planning on taking loans if they know their college costs may eventually exceed their assets. But that strategy comes with risks: You may not qualify for enough federal loans to make up for a larger shortfall in subsequent years—especially if you have a high income. So you may want to factor in taking partial loans early while planning to pay some from your educational accounts. This may also give your savings some more time to gain earnings and last longer.

Consider keeping up contributions

Keep in mind that just because you're starting to spend your college savings doesn't mean you can't still contribute. Continuing to put money into a 529, for instance, can allow you to generate more tax-advantaged earnings. Some states also offer tax incentives for contributions, which can help you make the most of every dollar going toward tuition and related fees.

Worried about having 529 money left over?

Fortunately, you have options. Check out what happens if you don't use your 529 plan.
Find out

Using your current income to avoid future debt

Don't stress if you haven't saved enough to cover the entire college bill. Given the steep cost of a college degree, millions of students are in the same boat. However, you can minimize potential student loan debt by contributing some of your current income to the bill.

If you already adhere to a budget, now's a good time to carve out a portion of your income for education expenses. You may be able to cut back on certain costs and redirect that money toward paying for college. You can make it even easier on yourself by setting up automated drafts into a 529 plan or a separate savings account you use for tuition bills.

Fortunately, most colleges break down your costs by term, so you usually only owe one part of the tuition at a time. Some institutions even provide payment plans that let you spread out your tuition bill with monthly installments throughout the academic year. Taking advantage of that feature may give you time to chip away at the balance.

If you do need to borrow to make up for any shortfall, prioritize which loans to take out. Federal student loans including Federal Parent PLUS Loans and state-sponsored loans tend to be the most accessible and typically offer the lowest interest rates for undergraduate students. But because there are limits on the amount you can borrow from these programs, you may need to use private student loans to make up the difference. However, these are usually your last option since they require a credit check, a co-signer and can be more expensive than government-backed loans depending on credit history of the borrower.

Check the bill & manage any refund

Schools usually send a bill a month or two before the first term begins. It breaks down charges for the term, including tuition, fees and housing costs. Review your statement carefully to confirm everything appears accurate. You should see any payments you already paid to the college or university as well as any financial aid you expect to receive, including scholarships, grants and loans.

If those credits exceed the amount you owe, you may be eligible for a refund from the school. It can be tempting to use this refund on items or costs not directly related to tuition, housing and books. But often the best thing you can do with it is to have the funds applied to the next term or even consider returning excess to the loans so you do not accrue interest. You can also put it into a savings account or a certificate of deposit (CD) that will hold the dollars safely, keep you from spending them and allow you to access them in the short-term if needed to graduate.

If you have loans, you may get a credit because you borrowed more than you needed. This sometimes happens because the FAFSA letter shows the total amount you can borrow, but you don't have to take the full amount if you don't need it. The less you borrow now, the less you have to pay back with interest when you graduate. If you have a credit because of a loan, adjust how much you're borrowing and see if you can apply the overage to the next term rather than pocketing or spending it elsewhere.

Planning how to pay for college

Using your funding sources wisely during your college years is key to your long-term financial health. Apply for as many scholarships and grants as you can because you don't have to pay them back later. Your payment strategy should also address how you plan to spend your savings. In most cases, you may want to spread those funds evenly across your college career to avoid potential funding shortages down the road.

If you feel like you're behind the curve when it comes to managing your higher education bills, expert advice can make a difference. Reach out to a local Thrivent financial advisor, who can recommend efficient ways to help you accomplish your education goals.

Hypothetical examples are for illustrative purposes. May not be representative of actual results.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Offered through a brokerage arrangement with Thrivent Investment Management Inc. 529 college savings plans are not guaranteed or insured by the FDIC and may lose value.

Consider the investment objectives, risks, charges, and expenses associated before investing. Read the issuers official statement carefully for additional information before investing.

Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.