Paying for college | Careers and education | Financial Literacy | Khan Academy

I think most people realize that college isn't necessarily a cheap proposition, so it's important to think about how you can pay for college. I think in many cases folks might be surprised that college can be more affordable than expected.

I remember when I was a freshman, my older sister was applying to college and the tuition at the college that she wanted to apply to was twice the amount that my mother made in a year. I told my sister, "What are you doing? There's no way you can afford it!" And she says, "No, there's something called financial aid. I can get things like grants and loans."

Actually, she was able to, and our family was able to afford for her to go. So how does all of that work? How can you pay for college?

First of all, some folks might be in a position to pay some or all themselves. That would literally be writing a check for the tuition. But there's also room and board; you need someplace to live. You're going to have to pay for food somehow. There are programs like 529 plans that help folks do that.

I have one set up for my own children, where you could put in a certain amount of money every year, and it changes depending on the tax code. 529 plans can also be different from state to state. But the benefit of it is you could put some money in a given year, you can invest that money, and in most cases, when you sell, let's say, the stocks that you have invested, you don't necessarily have to pay capital gains on that.

There can, depending on the state, be other tax benefits. There might even be some programs that match in certain cases, but that's the benefit of a 529 plan.

Now, if you're not going to—if you don't have a 529 plan or your family is not in a position like mine was to really pay for most of the college tuition, you have many, many other options. Broadly considered, financial aid things that will help you pay for college can really be broken down into, well, depending on how you account for it, two or three categories.

There are grants and scholarships. These are things that you do not have to pay back, and these grants are usually based on your need. When my sister went to college, when I went to college, we had significant grants from the university, and we also were eligible for Pell Grants. These are federal government grants.

There are other types of grants you can get; this is just someone outright either contributing a part to your tuition or the university itself giving a grant so that you don't have to pay that part of the tuition.

Now, you also have things called scholarships. Scholarships are usually associated with some type of academic achievement you've made, and because of that, they're just reducing the tuition or they're giving you some money towards tuition. Sometimes scholarships can be a combination of academic and financially based scholarships.

Now, those are all the things that you don't have to pay back, so those are awesome! So, grants and scholarships—try to get as many of those as you can, and you’d be surprised. They can be quite generous. A lot of wealthier universities have pretty generous grant programs for families that even make reasonable amounts of money. But obviously, the full tuition would be pretty difficult.

Then we go into the second category of things you will have to pay back, which are student loans. But even there, there are a whole bunch of categories. You could have federally subsidized student loans, where the interest on that is much lower, and there might be periods where the interest isn't even getting added to the loan amount. So, those are, in many cases, some of the best loans.

But then you could also get loans from private banks. I remember when I went to business school, I definitely had to get a big loan for the entire amount for a private bank. But the loans—you have to be careful with them. They can be useful; they can allow you to go to college, but be very careful with them. Make sure that you're going to be in a position to make the payments once you, hopefully, have a job, and once you've left college.

Now, the last piece that might sometimes be considered as part of the financial aid package is work-study. I remember when I went to college that was part of the expectation that, okay, I'm going to get some grants, I'm going to have some loans, and I'm going to have to do some work-study. So, I have to find a job when I went to campus.

By the way, you know, I found some of it was actually good experience. But those are really the big ways of paying for college.

Then, once you graduate from college, there are sometimes payment plans. Maybe if you go into certain fields, maybe if you go into the military, they might actually cover some or all of your college expenditures. Some companies might do some form of loan reimbursement, and then the government oftentimes has tuition payment plans.

We could go into a lot more detail into all of that, but just keep in mind that generally speaking, you can pay directly, and there are ways of saving up for that—some tax-beneficial ways of saving up for that. You can get grants and scholarships. Grants and scholarships are the best because it's kind of free money; they’re reducing your tuition.

Loans can be useful, but be thoughtful about whether you're going to be in a position to pay it back, and look carefully at the payment terms and things like the interest rates. And of course, you have work-study for while you're in school, and then you have payment plans and other types of things—payment programs that might happen after you graduate.