How are they paying for college?

Your neighbors sent their twins to college this fall. You politely asked where the kids were going and what they were studying. But what you really wanted to ask was, "How are you paying for it?"

You may never find out how your neighbors are financing their kids' education, but knowing how other families are paying for it can clue you in on the options available for your family.

Financial aid

Federal Student Aid

The U.S. Department of Education's Federal Student Aid office provides over $150 billion in federal grants, loans, and work-study programs annually to over 15 million students. College students can apply for Federal Student Aid by submitting the Free Application for Federal Student Aid (FAFSA). All students, regardless of their financial situation, are encouraged to fill out the form.

Parents of dependent undergraduate and graduate students can also apply for a low-interest federal Direct PLUS Loan to help offset college costs. Borrowers' eligibility for this type of loan depends on their personal credit rating and FAFSA.

Private loans

Private loans that are offered by banks or credit unions can help bridge the gap between the amount of federal funds a student receives and the actual cost of college; however, borrowers need to be selective when choosing a lender and thoroughly understand the terms and conditions of the loan before signing on the dotted line.

Private grants and scholarships

Grants and scholarships can cover a small portion of college costs or the full price of tuition, and the money doesn't have to be paid back. Companies, nonprofit organizations, and even some colleges offer financial incentives to students based on a variety of factors, like academic standing, athletic ability, and choice of major. Grant and scholarship opportunities are available to both general and niche student populations. Students should talk with their guidance counselors to see what's available.

Other ways to pay

529 accounts

A 529 college savings plan is an investment account with tax benefits that can help families save for qualified higher-education expenses.* Saving early in a 529 college savings account is a smart way to get the most out of the money you save—the earlier you invest in a plan, the longer your money has to add up and potentially grow. Money in a 529 account can be used to pay for tuition, books, and certain room and board expenses.

You can generally invest in any state's 529 plan, regardless of where you live or where your child attends school. Compare your options before choosing a plan, since some states offer certain tax benefits only to residents who participate in a plan that's sponsored by their home state.

Tuition payment plans

Deferred tuition payment plans let families pay for the cost of school incrementally. While most of these plans are offered at no cost to the borrower (provided the terms and conditions of the plan are satisfied), qualifying for a plan generally depends on the applicant's credit score.

Tax incentives

Families who are paying for college may be eligible for education tax credits, which reduce the total amount of taxes owed, and education tax deductions, which reduce the amount of income that's subject to tax. To learn more about tax benefits for education, visit the IRS's Tax Benefits for Education: Information Center.

As you can see, there's more than one way to pay for college. With some planning and determination, you can confidently send your future grad off to college, leaving your neighbors wondering.

*The availability of tax or other benefits may be contingent on meeting other requirements.