Higher education is a major planning concern for many individuals with growing children. As has been well documented, the cost of higher education continues to rise and has historically outpaced general inflation, making it an increasingly significant financial planning consideration even for high-income households. Given the significant benefits higher education brings to society, a host of government-sponsored and college- or university-run financial aid programs exist to help families fund the increasing cost of higher education. The majority of these programs are need-based, offering greater aid to families with lower incomes or multiple children in school. Others are merit-based, awarded for academic, athletic, or artistic excellence regardless of income. In addition to programs that directly offset education costs, a number of loan programs exist to ensure financing is available for costs not covered by direct aid. The availability of this type of financing and the flexibility of repayment options far exceed what is possible with most other types of financing such as home or auto loans.

Importantly, even high-income families may qualify for financial aid in certain situations, especially at high-cost institutions.  For example, Harvard fully funds the cost of college, including room and board, for families with incomes up to $100,000 per year and provides free tuition to families with incomes under $200,000 per year. At higher levels of income, aid in the form of grants will become minimal or unavailable. Where this point lies varies widely from one institution to another.

Even at higher levels of income, it is often a mistake to assume that no aid will be available, especially if you are working with higher-cost institutions. You should fill out the FAFSA regardless of your income level. Many institutions use it to determine not just need-based aid, but also merit-based grants and eligibility for unsubsidized loans, which are available to all income levels.

While income is often a primary driver of aid, assets such as 529 plans also impact the amount of aid offered by a school or federal aid program. While planning around assets is not as impactful as is often believed, being aware of and attentive to how assets are held can help families have realistic expectations about the aid they will receive and the steps to take where possible to maximize aid amounts.

How High-Income Families Should Approach the FAFSA and CSS Profile

For high-income families, obtaining financial aid often starts with completing one of two essential applications: the FAFSA and the CSS Profile. While these are traditionally associated with need-based aid, many colleges use them to determine merit aid or offer low-interest financing options, both valuable tools for families with substantial earnings.

On the federal level, the Free Application for Federal Student Aid (FAFSA) serves as the starting point for the determination of the aid package a family may qualify for. This form is produced by Federal Student Aid, an office with the U.S. Department of Education. Even if you don’t believe you will qualify for any aid, completing a FAFSA is a best practice. Many colleges and universities utilize this form for their own aid determination, which may phase out at higher levels than federal aid. A FAFSA is also required to obtain unsubsidized student loans, which are available to families at any income level and may be a helpful financing option in planning for education funding.

In addition to federal aid, many institutions administer their own private programs funded by endowments or other sources. Some of these institutions have adopted an alternative application for their own aid determination, known as the College Scholarship Service (CSS) Profile. This profile was developed and is administered by the College Board.

Both of these forms are lengthy and entail providing a variety of details regarding the student and their family. Questions cover student and family circumstances, details of family income, and information on assets owned by the student and family. Generally, the CSS Profile will ask for more in-depth information regarding family finances, with a consequentially more complex methodology. The FAFSA remains somewhat higher level and utilizes a methodology with fewer inputs. Each of these forms is available beginning October 1 in the year prior to enrollment at a college or university. Given the importance of these forms and the complexity that may be involved in gathering needed information, it is a good idea to start work on completing them as soon as they are made available.

Understanding the FAFSA and the Student Aid Index for High-Income Households

After a FAFSA is processed by Federal Student Aid, an official Student Aid Index (SAI) value is assigned to the student. This value is used as the basis for determining eligibility for aid.  For high-income households, understanding how the Student Aid Index is calculated is essential to setting realistic expectations and identifying planning opportunities to improve potential aid eligibility. The SAI is determined based on several key financial factors, each weighed differently in the calculation:

• Parental Income: Expected contributions from parents’ income range from under 5% for lower-income families to well over 30% at higher levels of income.
• Parental Assets: Notably, some assets, such as equity in your primary residence and the value of retirement plans, are not counted in this calculation. Assets that are included in the calculation – such as taxable investments and 529 plans – will be expected to be drawn down by about 3% to over 5% per year to help fund education costs.
• Student Income: As with parental income, a portion of income earned by students will be expected to be utilized for education funding. The portion to be contributed may be minimal or none at low income levels, or may exceed 30% at higher levels of income.
• Student Assets: Compared to parental assets, student assets are expected to be drawn at a much higher rate of 20% per year, even at lower asset levels.

While it is no substitute for a full application, this calculator operated by the Massachusetts Education Financing Authority (MEFA) is a simple way to estimate your SAI and evaluate how changes in your circumstances may impact this figure.

When to Complete the CSS Profile

If you are applying to a competitive private institution, there is a good chance that they will utilize the College Scholarship Service (CSS) Profile in making their own aid determinations. All participating schools utilize the same form to reduce duplication, but this is a second type of application to complete on top of the FAFSA.

While the CSS application is uniform across all schools that utilize it, the methodology used in translating the application to an aid offer is not. This makes it harder to develop specific planning recommendations that will optimize aid offers based on the CSS Profile. Most schools that utilize the CSS Profile make available their own calculator based on the specific methodology they use. If there are specific institutions a student is likely to attend that use the CSS Profile, these may be helpful in estimating costs and seeing whether there are reasonable planning steps that may be taken to improve an aid offer. Caution should be exercised here before taking any drastic steps, as admission to the competitive institutions using the CSS Profile is far from guaranteed even for the most qualified applicants.

Income Planning Strategies for High-Income Families

While the particulars of the methods vary, both the FAFSA and the CSS Profile utilize reported income and assets in determining aid. In many circumstances, planning steps may be taken to reduce the reported income on these forms and consequentially improve potential aid offers from institutions.

For those families that have the ability to control their taxable income, planning steps that minimize income in the reporting periods used by aid forms can be a powerful way to improve their prospects for aid offers.

Both the FAFSA and the CSS Profile use prior-year tax information when calculating aid packages. As a result of the alignment (or misalignment) of tax years, academic years, and tax filing deadlines, the tax year that will be considered for a student’s first FAFSA or CSS Profile begins in January of a student’s sophomore year in high school. For income strategies to work, some advance planning is required.

While the particulars will vary widely based on individual circumstances, possible strategies to consider here include:

• Accelerating the exercise of stock options ahead of a reporting year.
• Delaying the exercise of stock options until after all reporting years.
• Strategically timing business expenses or income to minimize reported income.
• Selling taxable investments intended to fund education costs ahead of time to realize gains prior to reporting years, then reinvesting if desired at a higher basis.

If income can be maintained at a low enough level through the years in which tuition bills are paid, education tax credits may be utilized to reduce tax liabilities in the years in which education costs are incurred. The American Opportunity Tax Credit and the Lifetime Learning Credit are fully phased out at $90,000 of adjusted gross income (AGI) for an individual or $180,000 of AGI for a joint return. Below these levels, they may provide an attractive reduction in a family’s tax liability.

Asset Planning Tips for High-Income Families

As was mentioned briefly above, not all assets are required to be included when determining the asset figures provided on the FAFSA. Where families have the flexibility to shift assets from one type to another, this creates planning opportunities to reduce the expected contribution from assets incorporated into an aid application. While the impact of shifting assets is often overstated, it is nonetheless a viable way of impacting an aid offer.

Assets that are required to be included on a FAFSA – and that thus impact a student’s SAI – include bank accounts, investment accounts, equity in a second home or an investment property, 529 college savings plan accounts, the value of a small business, and custodial accounts. Assets held by the parent or the student will both be included, with student assets expected to be drawn down at a much higher rate than those owned by the parent.

Several types of assets are specifically excluded from the SAI calculation. Retirement plans are not required to be counted. The FAFSA defines these broadly to include employer plans such as 401(k) accounts as well as individual retirement accounts and annuities. Equity in your primary residence also does not count as an asset on the FAFSA, nor does the cash value of permanent life insurance policies.

With knowledge of the excluded types of assets, some planning steps may be taken to shift resources from included to excluded assets. Ways in which this can be done include:

• Directing ongoing savings to qualified retirement plans instead of into taxable brokerage or bank accounts.
• Using reportable assets such as taxable investments to pay down debt, including auto loans and the mortgage on your primary residence.
• Shifting ownership of any assets owned by your child to parents or other relatives. If you have savings in a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) that are earmarked for college, you could transfer those funds to a custodial 529 savings account, where they would be considered assets of the parents.

Remember that these strategies for limiting assets reported on the FAFSA may not be effective for increasing private aid offers based on the CSS Profile. The methodology used by private institutions based on the CSS Profile can vary dramatically from that utilized in FAFSA processing.

Aid Decision Appeals

If your financial circumstances change from what was reported on the FAFSA or the CSS Profile, you can consider appealing the school’s decision to the financial aid office.

If your income in the reporting year was unusually high – due to a bonus or stock plan vesting, for example – you may be able to successfully appeal for additional need-based aid that is reflective of your current or average income as opposed to the inflated income level in the reporting year.

If you receive very different aid packages from what you believe to be comparable schools, you could bring this to the attention of the school that offered less aid. Some schools may make an adjustment, especially if they consider the school offering the better aid package to be a competitor.

Merit-Based Aid

Finally, a surefire way for a high-income family to obtain a competitive aid package is to look for packages that do not depend on financial need at all. Merit-based financial aid is typically awarded to students based on academic achievement or other factors, usually without regard to financial need. For high-income families, encouraging their children to apply to schools where receiving merit-based aid is more likely can be an effective way to reduce the cost of higher education.

Merit-based aid is not offered by all schools, so the first step is to understand which schools actually offer this type of aid, what amount they typically give out, and what percentage of students receive this form of assistance. Priorities also vary widely by school, impacting what areas schools review when determining merit-based aid. Merit-based scholarships can be based on academic grades, athletic ability, or artistic performance. This is an area where thinking broadly and asking lots of questions can be a great help.

In addition to educational institutions themselves, many local and national organizations also offer scholarships to high school seniors heading to college. Many of these are merit-based and may not require a full aid application. Have your child talk with their school guidance counselor to start researching available scholarships they may want to apply for.

Many schools require the FAFSA or the CSS Profile in advance of freshman year to be considered for any aid, so it is a best practice to complete these in advance of freshman year. The advantage of merit aid is that these forms are often not required in future years. As with everything, confirm with the school the filing requirements for future years.

Savings Tips for High-Income Families

A 529 plan is a great vehicle for tax-efficient college savings. There is no income limit for taking advantage of the tax benefits offered and recent changes have created additional flexibility, allowing you to roll unused 529 funds into a Roth IRA if you meet certain criteria.

Superfunding a 529 Plan

Superfunding a 529 plan is a strategy you can use to maximize the tax advantages available. This allows you to contribute up to five times the annual gift tax exclusion in a single year without facing any consequences.

Any investment growth within a 529 plan can be withdrawn tax-free if used for qualified education expenses. So the more time the funds have to grow, the more potential tax savings become available, which makes superfunding a powerful strategy.

State Tax Deductions

Another potential benefit of 529 plans is state tax deductions on contributions. This varies widely, so check the specific requirements of your state to see whether this is something you can benefit from.

Grandparent-owned 529 Plans

Recent changes to the FAFSA have opened up a new opportunity to reduce your reportable assets. The FAFSA no longer considers distributions from a grandparent-owned 529 plan as the student’s income for financial aid purposes.

This means that funds used to pay for college from a grandparent-owned 529 plan (or a 529 plan owned by anyone other than the parents, for that matter) are excluded from both the parents’ assets and the student’s income when submitting the FAFSA.

When Savings Aren’t Enough

When the net cost after need- and merit-based aid is more than you have saved, first consider how much you can fund out of your current cash flow. Then weigh the cost or benefit of putting some of your other savings on hold and redirecting the money toward college versus taking out private loans or parent PLUS loans to fund a portion of the costs.

Closing Thoughts

Navigating the financial side of the college landscape for high-income families requires careful planning. While it may feel like financial aid is out of reach, many opportunities exist for both need- and merit-based assistance. High-income families can make college more affordable by filling out the necessary forms, researching scholarships, and maximizing tax planning and saving strategies. Every family’s financial situation is unique, especially when it comes to planning for college, so if you’re  looking for personalized college planning support, please reach out to our team.