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How and When to Use Savings, Loans, and Other Funds to Pay for College

Key Takeaways:

  • If you are paying for college from several sources, you should make a financial plan in advance.
  • Your plan should cover all four (or more) years of college.
  • Take subsidized federal student loans first, since they do not accrue interest while in college.
  • If you have money in a 529 plan, allow it to grow tax-free as long as possible.
  • Private or unsubsidized federal student loans do accrue interest while you are in college.

You’ve gone through all the right steps; built a college list with some financial safety schools, figured out what you can afford to pay, and defined your budget - across the four years - for what you’ll need. 

Once you have your top choice college decided (and hopefully it’s one you can afford!), you may be wondering, “ok, but how do I actually pay?”

Most families will be drawing from a variety of places to pay their college bills. And even if you have a rough sense of where the money will come from, it’s worth sitting down to put your financial plan on paper now - before you need to apply for student loans and before you receive the tuition bill.

We’re here to help. We put together a template you can use to map out your full financial plan. Click here to get the spreadsheet, and read on for how to use it.

First, think about the full cost

Financial advisors say that one of the biggest mistakes families make is that they don’t think about all four years of college. Not to mention that it might take longer: while an undergraduate bachelor’s degree is designed so that a full-time student can complete it in four years, it’s very common for it to take more! Often your financial aid information and cost information is presented only for one year, so it will take a little work and extra addition to map out the full costs you should anticipate.

Do the math and look at your student’s personal budget for every year they will be in college. The cost of attendance provided by the college is a good starting point, but you may want to go into more detail and create your own budget

Keep in mind a few things:

  • The cost of tuition and other expenses is likely to rise each year - on average, 3%

  • Your financial aid and scholarships may change in future years

  • Your student may be able to reduce their expenses by moving off-campus or living at home, so the estimates provided by the college could be too high in some cases

Second, where should the money come from each year?

If you’re like most families, you don’t have just one bank account with all the money you need for college in it! So this is not a matter of simply writing one check. It’s also probably not a matter of swiping your credit card; colleges often charge fees for credit card payments, and an unpaid balance is likely to have high penalties and interest rates.

If you have savings, investments in a 529, and/or are planning to take loans, you should consider the order in which you use those sources to pay for college. The right answer will vary according to each unique situation, so you should speak with a financial advisor to understand the full tax implications of various decisions. But we talked to Nirav Batavia, a CFP and Managing Partner at Forum Financial, about the general principles he uses to advise his clients on how to plan across all four years.

“As with most large financial decisions (buying a house, buying a car, etc.), when considering college, applicants and their families spend a lot of time finding the ideal school (as they should), but almost no time modeling out the financial implications,” he explained. “Most applicants and their families would be well-served to set aside 30 minutes to fully understand the costs and the sources of payment over the four years of college. Once the family has it laid out clearly, then they can focus on prioritizing the payments.”

When thinking about where the money comes from, he advises the following:

  1. If you qualify, take subsidized student loans first. They don’t accrue interest while you are in school and have generally favorable rates (4.53% currently) and repayment terms.

  2. Use your cash savings: since these aren’t growing in a tax-free account, there is no benefit to holding them if you will need to use them for college

  3. Then, use your 529s. By tapping savings first, you allow the 529 to continue to grow tax-free for 1-3 more years.

  4. Last, take unsubsidized or private loans. These start accruing interest immediately, so you want to give them the least amount of time to accrue while still in college.

This may not be practical for all families. If you need loans from the beginning to make your payments, it is recommended that you first take federal unsubsidized loans. The maximum in federal student loans for a dependent student is shown in the following table. Note there is a maximum allowed per year, so you may need to start taking those in earlier years in order to access the funds that you need.



If the student qualifies for subsidized

If the student does not qualify for subsidized


Subsidized loan limits

Unsubsidized loan limits


Unsubsidized loan limits

Year 1





Year 2





Year 3





Year 4





4-Year Total:





Note: Additional loans are available for subsequent years - total available is $31,000 per dependent student

If the federal loan limits won’t be sufficient, then you can look to private loans for the difference. We recommend you take those last, since they offer fewer repayment protections and will also accrue interest while you are in college. Some will charge application or origination fees and may require payments while in college also.

Also, your 529 plan may lose money in some years if the market declines. Ideally your portfolio will be rebalanced to be moderate or conservative in risk by the time your student is in college. But you can spend down your 529 in parallel with cash savings if you want to protect yourself from that possibility.

College Financial Plan

Third, make sure you have the funds available

You’ll likely pay a deposit when you first make the decision, to claim your spot - but that’s a relatively small amount (probably a few hundred dollars). Your first tuition bill, which should take any grants or scholarships into account, will arrive the summer before you begin classes. For most colleges and universities, the first payment will cover the first term (semester or trimester, for example) and is due before classes start. Subsequent payments will be due at the start of each term.

Make sure to make a plan to withdraw funds or apply for loans in time to make that bill. Colleges will provide different payment options for you if you prefer to avoid lump-sum payments.

Also remember that your cost estimates covered ‘billed’ expenses (these are expenses that are paid to the college directly, such as tuition and fees) as well as other expenses that will not show up on a bill from the college - things like off-campus meals, travel expenses, books, or other personal expenses that your student will have. Make a plan with your student about how those will be covered. Decide how they’ll access any money you are providing and ensure they also understand your expectations and the budget.

Last: keep on track

With a plan for how you’ll pay, you are in a good position to accept that spot and celebrate your college-going student! From here, we recommend you evaluate the plan every term with the student so that you can incorporate new information about the college’s costs, new financial aid or scholarship opportunities, or other changes to your finances. You should also review the budget periodically to see if you’re staying on track with all of the non-tuition expenses.