Welcome to this post, “How I’m Going To College Debt Free in 2022”!
If you’ve been following the blog for awhile you’ll know that I recently graduated high school and will be starting college this fall (probably already started by the time you are reading this).
I had a lot of colleges that I was considering and it was a really hard decision. One of the factors, if not the most important factor, that went into my decision was the cost of attendance at each school.
I ended up going with the second cheapest option on my list which happened to be out-of-state. I won’t be sharing the specific school I’m going to or any personal numbers for privacy reasons.
However, I do believe that I made a really good decision and I’m excited to see what’s to come.
Anyways, let’s get to the point of this post. Even though I knew how much college would cost, I never really knew how I would pay for it.
Let me explain, obviously you have a few options for how to pay for college. You can try to pay with savings, earn scholarships, take out loans, or work throughout college to try to pay as you go.
But, how do you actually make all of these work together? How much do you take out from savings each year? Where do scholarships play into things? How on Earth do you take out student loans? And how can you pay for college as you go?
These are all questions I hope to answer in this post. You see, I just recently figured out how I could go to college without taking on any debt. That’s right, I’m not going to take out any student loans to finance my education.
*Quick Note: Some people might hear this and think that I must be in some lucky situation. Maybe I’m a trust fund baby or maybe my parents are going to completely pay for my education. Don’t get me wrong, my parents have and will help, but those assumptions are far from the truth. My family is upper-middle class and have set me up in a position to be able to do this, but I’ve also worked hard to save money and to learn about strategies that will allow me to do this.
Working Hard and Saving Money In High School
My first point is actually about just that, how to set yourself up in high school to be able to do something like this.
You see, none of what I’m about to share would have been possible without me working hard in high school and saving as much money as possible.
I got a job the summer before my sophomore year when I was 15 and worked there for around 2 years. I then quit and pursued my businesses “full-time”.
The point is, I worked almost all throughout high school and made a good chunk of money. A lot more than a lot of my peers ever made.
However, it doesn’t matter how much you make, it matters how much you save. I was able to save and contribute around 30% of my income throughout high school towards my college 529 fund.
If you don’t know what 529’s are, they are accounts where you can contribute money specifically for college that gets invested and grows over time. When you are ready to withdraw the money, you can do so without taxes and penalties as long as you use the money for education expenses.
Since I was a little kid, my parents have also contributed to my 529 each month which helped the account grow to a really sizable amount.
I understand that not everyone’s family does this. I’m really lucky and grateful that my family has. However, I bet most people’s families have been saving something or are planning to help with college in some way.
Anyways, if you happen to be reading this while still in high school, the best thing you can do is work hard and save as much as you can before college.
Picking an Affordable College To Begin With
Another thing that made going to college debt free possible was picking an affordable college to begin with.
Let me just say that I was pretty meticulous in my college research. I thoroughly researched 30+ schools and ended up applying to 11. I somehow got accepted to all of them which was a blessing and a curse.
The downside was that I now had a large list to pick from and I was kind of hoping that the decision would be made somewhat for me.
I quickly had to come up with some criteria to help rule my list down. The two things that I considered to help narrow my list down were the cost and the distance from home.
Using those two factors, I narrowed my list down to 7 schools that were the most affordable and that were in-state for the most part.
The only out-of-state school that was still on my list was there because it was the second most affordable option out of everything. It was a private school that had relatively low costs to begin with and that offered really good scholarships. This is the school I ended up picking.
This brings me to the point of this section, in order to go to college debt free, you need to pick an affordable school. It sounds obvious, but not everyone thinks this way.
I was just talking to one of my friends today and he was telling me about how he was going to need to take out $20,000 of loans per year.
We’re both in similar financial situations, so how is it that he has to take out $20,000 in student loans each year and I don’t have to take out any? It all comes down to picking an affordable school to begin with.
You could have $5,000-10,000 in scholarships each year and pay $5,000-10,000 from savings each year, but if your school costs $30,000-40,000/yr, you’ll still have to take out $20,000 in loans. This is the exact situation my friend finds himself in.
So, do your research. Don’t think about savings, scholarships, loans, or any of that. Find affordable options to begin with. The cheaper the school, the less likely you’ll end up needing to take on debt.
Applying to the Right Scholarships
Now that you’re looking at affordable schools, you can start to look at scholarships as well.
A few months ago I wrote a post about the definitive guide to the college admissions process. In that post I shared my opinion about scholarships.
At the time I had only won a few scholarships here and there. But, since then I’ve won another one or two. As a result, my opinion has shifted slightly.
I now think that local, exclusive, small scholarships are the way to go. Let me explain.
I believe that it’s a lot harder, and a lot less worth it, to apply to larger scholarships. When there’s a smaller pool of applicants, you have a better chance of standing out from the crowd.
As far as exclusivity, apply to scholarships that aren’t available to everyone. Apply to scholarships available at your specific college, at you or your parents’ employers, and in your community. These are the scholarships that I had the most success with.
Finally, go after scholarships with smaller amounts. This is something that I heard when I started this process, but I didn’t follow. The smaller the amount, the smaller the pool of applicants. It may seem like it’s not worth it to apply for such a small scholarship, but every little bit counts. Truly, every little bit goes a long way. Even if you applied to a bunch of scholarships for a total of 10 hours and won $1,000, that would still be $100/hr. I don’t know about you, but I don’t know many jobs that allow you to make that kind of money.
Using College Savings Efficiently
At this point you’ve picked an affordable college and hopefully have some scholarships to cover the cost. But, we now need to know how to cover the rest. This is where you would start to use those savings that you worked hard to build up over college.
The first thing that I would recommend is calculating how much you can withdraw each year. I wouldn’t recommend using up all of your savings in the first year because you’ll be left to cover more in the years to come. I don’t know about you but I would prefer to have roughly equal withdrawals each year.
What I did was create a spreadsheet (I know this will sound a little nerdy) that showed how much I had in savings, how much I would withdraw each year, how much myself and my parents would continue to contribute to that account, and how much the account would grow each year due to compound interest.
I then had a table that showed me how the account balance would decrease each year. I could change the annual withdrawals to try to make it so the account had exactly $0 in it after 4 years (or maybe a little extra just to be safe).
At this point I was still considering taking out loans to try to keep as much money growing in my 529 as possible. The idea was that my 529 would grow at roughly 5% each year and my loans would grow by about 3% each year. That means that I would be profiting around 2% per year by using this strategy.
*Note: This is one of the examples of when it can be beneficial to take on debt. If you can generate a rate of return higher than the interest rate on your debt, it can be beneficial to take on debt.
The idea would be that I would use the money in my 529 at the end of the 4 years to pay off as much of the debt as possible.
It was going to be a small optimization, but one that would save several hundred if not thousands of dollars over the years.
However, I luckily did some research and realized that this strategy would be limited. You can only use $10,000 of your 529 to pay off debt. Any money on top of that is taxed and penalized.
So I realized that my original plan wouldn’t work and I would have to come up with a new strategy to finance my education.
Utilizing Tax Credits
At this point I was looking at taking out around $5,000/yr in student loans. It wasn’t until I researched the American Opportunity Tax Credit that I realized there was another way.
The American Opportunity Credit allows undergraduate students to receive a credit of $2,500 (up to $1,000 is refundable) as long as they pay $4,000 out of pocket to education expenses.
I know this gets a little complicated, but stick with me and I’ll do my best to explain it.
For those that are unaware, tax credits reduce your tax liability (the amount of tax you have to pay) and can even increase your refund.
This credit is meant to help students with their taxes and encourage them to focus on paying for school.
The trick with this credit is the money has to be paid out-of-pocket. It can’t be covered by scholarships, student loans, or even by your 529 (since that money is already tax free). This means you have to pay from your personal savings.
As a self-employed individual, this credit is even more beneficial. I basically choose how much I pay in taxes throughout the year since there’s no money withheld from my paychecks. If I don’t pay throughout the year, I could be left with a huge bill at the end of the year.
What I decided to do was use this to my advantage. I’ve decided to pay less in taxes throughout the year and pay that money out-of-pocket towards my education expenses instead. Normally this would result in a huge tax bill, but this tax credit wipes that out. Basically, instead of paying taxes, I pay that amount to my college.
How does this help? Well instead of needing to take out $5,000/yr in student loans, I can pay $4,000/yr out-of-pocket as I go to earn this tax credit.
How I’m Going To College Debt Free
I realize that I’ve been pretty broad so far. I haven’t used specific numbers from my situation and I still don’t intend to for privacy reasons.
However, I will share some information in terms of percentages. Hopefully this will give you a rough idea of how you too can go to college debt free.
Here’s how I’m paying for my college’s sticker price:
- 40% of price is covered by scholarships
- 40% of price is covered by 529 savings
- 20% is paid out-of-pocket by me
I truly believe that most people can also go to college debt free if they follow the following:
- Save enough for 1-2 years of college in a 529 account
- Pick an affordable college relative to what you have available
- Apply to local, exclusive, small scholarships
- Withdraw from your savings in an efficient manner
- Pay at least $4,000/yr out-of-pocket to utilize the American Opportunity Credit
The Takeaway
That’s it! That’s how I’m going to college debt free. Remember those key strategies I just mentioned and you should have a good shot at also going to college debt free. I hope you enjoyed this post! Please feel free to share any comments, questions, or concerns down below. Also if this post doesn’t apply to you, share this with someone who needs it! Otherwise, best of luck on your college journey!