College costs have risen dramatically over the past few decades, outpacing inflation. For many families, paying for college is one of the largest financial commitments they’ll ever make, second only to retirement and buying a home. That’s why it’s critical to approach college planning, school selection, and financial aid strategies with a clear plan.
Step 1: Help your team build a strong college resume
Colleges look for well-rounded students who demonstrate academic achievement and involvement. Encourage your child to:
- Secure recommendation letters early. Ask teachers, coaches, or mentors during junior year or the summer before senior year. These individuals should know your student well and be able to write supportive letters. It’s best to make the ask during the spring the junior year or over the summer before the senior year.
- Get involved. Volunteering, student government, and extracurricular activities can strengthen applications.
Step 2: Stay organized during the application process
Deadlines for college applications and scholarships vary by school. Missing one could potentially cost thousands in aid so it’s essential to stay organized and keep track of deadlines. Create a college application calendar and check:
- Each school’s website for application and scholarship deadlines.
- Consult your guidance counselors and prospective colleges’ financial aid offices for scholarship opportunities.
Checklist:
Step 3: Compare in-state and out-of-state options
Many parents assume in-state schools are always the most affordable choice, but that’s not always true. While in-state tuition is often lower, some out-of-state schools offer:
- Competitive pricing that rivals in-state costs.
- Financial aid packages that can help reduce expenses.
- Opportunities to gain in-state residency after the first year.
- Regional tuition exchange programs, which allow students to pay in-state rates at participating schools in neighboring states.
Why this matters and other considerations
If you only consider in-state schools, you could miss out on better financial aid or academic opportunities elsewhere. In addition, consider applying to schools similar to your top choices. This is a strategic financial move. If one of these schools offers a more generous financial aid package, you may be able to use that offer to negotiate better aid from your preferred school.
Step 4: Build a Balanced College List
When helping your student choose colleges, consider three key factors: academic fit, social fit, and financial fit. A well-rounded list should also include:
- Safety schools: Institutions where your student is likely to be admitted.
- Target schools: Where your student’s academic profile matches the average admitted student.
- Reach schools: More competitive options that may require stronger credentials.
Did you know?
Why it matters:
Having a range of schools provides flexibility, negotiating power, and a safety net in case the dream school doesn’t work out.
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Step 5: Finding the right college fit
Choosing the right college isn’t just about rankings, it’s about finding the best fit for your student academically, socially, and financially. Here’s how to evaluate each factor:
Academic fit
A college should offer your student’s intended major and match their academic strengths. Even if your child is accepted into a highly selective school, it may not be the best choice if the workload is overwhelming.
- GPA and standardized test scores play a key role in admissions and merit-based financial aid.
- Understand test-optional policies. Many colleges no longer require ACT or SAT scores for admission, but they often still use them for merit-based scholarships.
- Consider test prep or retakes if increased scores could improve aid eligibility.
Social fit
Campus culture matters. Items to consider:
- Campus life: Clubs, sports, Greek life, and student organizations.
- Size and setting: Look at the overall size and culture of the school. A student from a small town may feel overwhelmed at a large university. Also, some towns are built around the university – giving it a very different feel than a university located in the middle of a metropolitan city.
- Readiness for independence: If your child isn’t ready for a big transition, starting at a local Community college and transferring later can be a smart move. If this is a strategy that your family chooses, keep talking with your student along the way to keep their long-term goals in focus. Although this may sound like a great plan, less than 20% of students who start at a community college go on to finish a four-year degree within six years.1
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Financial fit
Understanding the true cost of attendance and what aid is available is essential. Start by completing the Free Application for Federal Student Aid (FAFSA) and, for many private schools, the CSS Profile. These forms determine eligibility for:
- Need-based aid
- Merit scholarships
- Work-study programs
To estimate the cost your child’s education, use each school’s net price calculator to estimate your out-of-pocket cost. Compare this to your family’s budget and savings plan.
Step 6: Explore additional financial resources
Athletic scholarships
Only about 2% of high school athletes receive athletic scholarships, and full rides are rare – usually reserved for top-performers at NCAA Division I schools – and most often reserved for high-profile sports like football and basketball.2 Most scholarships are partial, and Division II often provides smaller awards. Division III schools don’t offer athletic scholarships but may provide need-based and merit-based aid.
Did you know?
Merit-based scholarships
Merit scholarships reward academic achievement, leadership, and special talents. These awards can help reduce costs and often require:
- Applications and essays
- Strong academic records
- Extracurricular involvement
Where to look:
High school guidance counselors are a great resource for finding local and state scholarships (often less competitive than national ones). If your student has selected a major, professional organizations related to that field can be a source of scholarship funding. Additionally, using online scholarship search engines can be an effective strategy.
Work-study programs
If your family demonstrates financial need through the FAFSA, your student may qualify for federally subsidized work-study jobs. These positions:
- Are often on campus or related to the student’s field of study.
- Provide valuable work experience while helping cover expenses.
Resident advisor (RA) positions
Serving as an RA in a college dorm may help reduce room and board costs. RAs provide important services to their peers and gain valuable leadership experience and skills in communication and conflict resolution, qualities that stand out on a resume.
Paid internships and part-time jobs
Paid internships not only provide income for your student, but also the opportunity to gain real-world experience and improve job prospects after graduation. Research shows students who complete internships are 85% more likely to find employment post-graduation.3 Many internships pay around $20 per hour or more, especially in high demand fields.
Part-time jobs near campus can also help students earn money, build confidence, and gain work experience.
Step 7: Saving strategies for College
Starting early is ideal, but even late-stage planning can make a difference. Here are the most common, and often most effective, ways to help save for higher education.
529 education savings plans
A 529 education savings account is one of the most powerful tools for college savings. Benefits include:
- Tax-deferred growth and tax-free withdrawals when used for qualified education expenses.
- State tax benefits in more than 30 states for contributions.
- Flexibility: Funds can be used for tuition, housing, books, and even K-12 private school expenses, trade schools, and certain apprenticeship programs.
- Retirement savings: You can roll over unused funds to a Roth IRA for your child.
For more information on 529 college savings plans, review these resources:
Late-stage college savings
It’s never too late to start saving for your child’s college education. If your state offers a tax deduction or credit for 529 contributions, consider contributing to a 529 account while your student is in college. Once the funds have been deposited, you can make a withdrawal for qualified education expenses. Most states do not impose a time requirement for how long the funds must remain in the account for you to receive the tax benefit, but it’s important to review your state’s 529 plan summary to confirm specific rules.
Roth IRAs
Roth IRAs can also be used to help pay for higher education.
- Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time.
- Earnings used for qualified education expenses avoid the 10% penalty (though they are subject to regular income tax unless the withdrawal meets the criteria for a qualified distribution i.e., the account is at least five years old and the owner is 59½ or older).
- Caution: Withdrawals from a Roth IRA, even if used for education, count as income on the FAFSA, which can reduce aid eligibility in future years.
Custodial accounts (UTMA/UGMA)
Custodial accounts are owned by the minor but managed by an adult custodian until the child reaches the age of majority, either 18 or 21, but:
- They are assessed more heavily in the FAFSA calculation (20% of assets vs. 5.64% for 529 plans).
- Once the student reaches the age of majority, they gain full control of the funds and can use the money for any purpose, not just education.
Trump Accounts
Trump Accounts, introduced as part of the One Big Beautiful Bill Act, will be available for children born between 2025 and 2028. These accounts:
- Include a $1,000 federal contribution.
- Allow up to $5,000 in annual contributions.
- Funds grow tax-deferred, but withdrawals are taxed as ordinary income
- At age 18, funds become accessible and follow IRA-like rules. Withdrawals for qualified expenses (e.g., education, first time home purchase, starting a business) are taxed at long-term capital gains rates. Non-qualified withdrawals are taxed at ordinary income rates and may incur a 10% penalty, similar to traditional IRAs.
Permanent life insurance
Some families choose to use permanent life insurance policies to borrow against the policy’s cash value for education expenses. However:
- Withdrawals may trigger taxable events.
- Internal costs of these policies are generally higher than other savings options.
This strategy is generally less efficient than 529 plans or Roth IRAs for education savings.
Direct payments to colleges
Making direct payments to colleges on behalf of a student is another strategy. If you do this:
- Payments are not counted toward the contributor’s annual or lifetime gift tax exemption.
- They may reduce the student’s financial aid eligibility on a dollar-for-dollar basis.
Unless there is concern about exceeding the lifetime gift exemption — which is $13.99 million for individuals and $27.98 million for married couples in 2025 — it may be more beneficial to give the funds directly to the student. If you exceed the annual gift limit ($19,000 per person in 2025) to help with college costs, you will need to file IRS Form 709 so that the excess amount counts toward your lifetime exemption.
Step 8: Understand Loan Options and FAFSA Changes
Even with savings and scholarships, many families rely on loans to cover college costs. Here’s what you need to know about federal and private loans — and recent FAFSA changes that impact financial aid.
There are two main sources of education loans:
- Federal loans (accessed through the FAFSA)
- Private loans (offered by banks, credit unions, and lenders)
Federal loans are generally more favorable because they offer:
- Fixed interest rates
- Income-driven repayment plans
- Deferment and forgiveness options
Private loans may offer lower rates for families with excellent credit, but they lack these protections.
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Federal loan options
Federal loans offer several advantages over private loans. To be eligible, families must complete the FAFSA each year. The application typically becomes available on October 1 for the following academic year, and it is recommended to submit it early since aid is awarded on a first-come, first-served basis. In addition to loan eligibility, completing the FAFSA also opens the door to scholarships and grants.
Once the FAFSA is submitted, the student receives a Student Aid Index (SAI). If the SAI is lower than the college’s cost of attendance, the student may qualify for a subsidized federal loan, where the government pays the interest while the student is in school. If the SAI is higher than the cost of attendance, the student will still be eligible for an unsubsidized loan, though interest will accrue during their time in school.
Federal Direct Student Loan
- Issued directly to the student, who is solely responsible for repayment.
- The loan is capped at a total of $27,000 over four years: $5,500 for freshman year, $6,500 for sophomore year, and $7,500 for both junior and senior year.
- Loans are offered annually and must be used within the year.
- In 2025, the interest rate is fixed at 6.39%.
- Origination fee is 1.057%.
- Builds credit history when repaid responsibly.
Parent PLUS Loan
- Parent is responsible for repayment.
- Starting July 1, 2026, parents will be able to borrow up to $20,000 per year per student
- Lifetime cap of $65,000 (minus aid received) under the One Big Beautiful Bill Act.
- The Parent PLUS Loan carries a higher interest rate than the Federal Direct Student Loan.
- In 2025, the rate is 8.94%, with an origination fee of 4.228%.
- Credit check is required, but standards are less strict than those of private lenders.
For more information on how the OBBBA has changed limits and repayment options on college student loans, including Parent Plus, we recommend reading: How the One Big Beautiful Bill Act Changes Student Loans and Forgiveness.
Comparing federal and private loans
Federal student loans offer fixed interest rates, potential loan forgiveness, deferment options, and income-driven repayment plans. These benefits may offer more flexibility and secure compared to private loans.
Private loans, offered by banks, credit unions, and specialized lenders, may have lower interest rates, but these rates depend on the creditworthiness of the parent co-signer. Private loans do not offer loan forgiveness, deferment, or income-based repayment options, making them less favorable for many families.
Institutional aid methodology
Some of the top colleges use a different approach to determine financial aid, known as Institutional Aid Methodology. These schools require both the FAFSA and the College Scholarship Service (CSS) Profile. Unlike the standardized federal process, each school using the CSS Profile has its own criteria for evaluating financial need. Some consider:
- Home equity
- Sibling 529 account balances
- Qualified retirement accounts
The CSS Profile is more complex and time-consuming than the FAFSA, often taking much longer to complete. However, one advantage is that having multiple children in college at the same time may still positively impact financial aid eligibility under the CSS Profile, even though this is no longer the case with the FAFSA.
Is College Worth the Cost?
With the rising cost of higher education, it’s more important than ever to weigh the potential return on investment and consider all available pathways, from traditional four-year degrees to vocational training, apprenticeships, and alternative credentials. By exploring financial aid options, building a strong application, and carefully evaluating the academic, social, and financial fit of each school, families can make informed choices that align with both short-term budgets and long-term aspirations. In the end, the goal is not just to attend college, but to make a smart, sustainable investment in the future.
When thinking about how you pay for college, consider talking to your financial advisor and how it fits into your financial plan. If you are not a client of Mercer Advisors, let’s talk.
