As the cost of higher education continues to rise, more families are becoming concerned about how to afford a college education for their children. Financial aid programs are typically associated with helping low-income students cover the cost of tuition, so high-income families face some unique challenges when it comes to paying for college. In this blog post, we will explore the various strategies related to financial aid, tax planning, and savings options available to high-income families.

Financial Aid

Financial aid falls into two categories: need-based and merit-based.

Need-based financial aid for high-income families

As you might expect, need-based financial aid is awarded to students based on their families’ financial needs. The type and amount of aid a student receives depends on their family’s level of income and assets, the cost of the school, and the ability of the school to meet those financial needs.

Need-based aid can include Federal Pell Grants, subsidized student loans — meaning interest does not accrue until six months after the student leaves school — and the opportunity to participate in a work-study program.

You apply for this type of aid by filling out the Free Application for Federal Student Aid (FAFSA) and the College Scholarship Service (CSS) Profile.

High-income families may assume they do not qualify for need-based aid, but it’s important to remember that the cost of the school plays a big role in the calculation. So, the more expensive the school, the more likely you will qualify for aid.

It’s also important to understand how the Student Aid Index (SAI) — the amount you are expected to contribute to the cost of college — is calculated.

In general, these four categories of income and assets factor into calculating the SAI:

  • Parents’ assets increase the SAI by up to 5.64% of the value of the assets.
  • The student’s assets increase the SAI by 20%.
  • Up to 47% of parents’ income is included in the calculation of the SAI.
  • 50% of the student’s income is included, but there is an income protection allowance that is subtracted from the student’s income before the 50% is applied, so many students will not have any income factored into the calculation.

You can use this calculator to estimate your SAI.

Merit-based aid

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 a great way to reduce the cost of college.

Strategies for Maximizing Financial Aid

Fill out the FAFSA and CSS Profile

You should fill out the FAFSA regardless of your income level. Many colleges and universities require it for any form of financial aid, including merit-based aid and federal student loans. Unsubsidized federal student loans are typically available to anyone who applies for aid, and this could be a good way to access financial aid with favorable terms and no need for cosigners or credit checks.

It’s also critical to understand which schools require the CSS Profile. Many private schools use the CSS Profile and the FAFSA to assess a family’s financial need.

If your child is applying to a school that requires the CSS Profile, look into how that school calculates what aid you could be eligible for. Unlike the FAFSA, there is no standard formula CSS Profile schools use to calculate aid; instead, they use what is called the institutional methodology. For example, some schools include equity in your primary residence as an asset, while others do not.

The FAFSA and CSS Profile are made available on October 1 each year (although the release of the 2023 FAFSA is delayed until December due to changes that are being finalized), and you should consider filling them out as early as possible, as some schools consider aid applicants on a first come, first served basis.

Know which assets will count against you

Assets that are reportable on the FAFSA increase your SAI, reducing your eligibility for need-based financial aid. However, not all assets are reportable. And unlike income, which is counted based on the prior year’s tax return, assets are reported as of the date the financial aid application is filed.

Assets that are factored into the SAI include bank accounts, investment accounts, equity in a nonprimary residence or investment property, 529 college savings plan accounts, small businesses, and custodial accounts.

Assets that are excluded from the SAI calculation are qualified retirement plans, such as 401(k)s and IRAs, qualified annuities, the equity in your primary residence, and the cash value of permanent life insurance policies.

You can use several strategies to reduce your reportable assets for FAFSA purposes, including:

  • Maximizing your contributions to qualified retirement plans instead of saving into taxable brokerage or savings accounts.
  • Using reportable assets to pay down debt, including auto loans and the mortgage on your primary residence.
  • Shifting ownership of any assets owned by your child. If you have savings in a custodial account under the Uniform Gifts to Minors Act (UGMA) or 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.

You can use a net price calculator, where you enter information about your family and see what similar families paid at a specific school to estimate the impact any of these strategies might have on your specific situation.

Remember that these strategies for limiting assets reported on the FAFSA may not be as effective if your child applies to a school that uses the CSS Profile.

Reduce your income through tax planning

High-income families should also be aware of tax strategies that can help reduce the income used in determining eligibility for tax credits and calculation of the SAI.

Education tax credits for high-income families can be hard to come by. The American opportunity tax credit and lifetime learning credit are fully phased out once your modified adjusted gross income reaches $180,000 if you file a joint tax return.

But if you can manage your income, doing so strategically can increase your chances of being eligible for these credits while also making you eligible for a larger amount of need-based financial aid.

The tax year that will be considered on the first FAFSA you file begins in January of your child’s sophomore year in high school. Beginning that year, you could consider several strategies to manage your taxable income, including:

  • Accelerating or delaying the exercise of stock options.
  • Strategically timing business expenses.
  • Selling investments held in a taxable brokerage account if you plan to use these funds for college costs and anticipate recognizing significant capital gains.

Appeal decisions if you have changes in income

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

If you had an unusually high-income year because of a large bonus or an equity compensation, you could successfully appeal for additional need-based aid.

Alternatively, 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 offers less aid. Some schools may make an adjustment, especially if they consider the school offering the better aid package to be a competitor.

Look for schools where merit-based aid is a possibility

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 it.

You’ll then be more informed about your child’s chances of receiving merit-based aid. For example, if, based on information provided by the school, you expect your child will be in the top 25% of students when it comes to test scores and GPA, there’s a good chance merit-based aid will be available if the school awards aid to the top 25% or more of incoming students.

Look for other types of merit-based scholarships

Many local and national organizations offer scholarships to high school seniors heading to college. Have your child talk with their school counselor to start putting together a list of scholarships they may want to apply for.

Savings Strategies 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.

Beware of custodial accounts

Saving in a custodial UGMA or UTMA account is less than ideal for financial aid purposes. These assets are treated as being owned by the child, meaning that 20% of the balance is factored into calculating the SAI, compared to parent-owned assets, which only reduce aid eligibility by up to 5.64% of the account balance. As mentioned above, you could transfer these funds to a custodial 529 account, which would be considered parental assets. Alternatively, you could consider spending down the funds before filing 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 savings strategies. Every family’s financial situation is unique, especially when it comes to planning for college, so if you’re looking to speak with a financial advisor, please reach out to our team.

Disclaimer: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Milestone Financial Planning, LLC, (Milestone), a fee-only financial planning firm and registered investment advisor in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client’s interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.  Advisory services are only offered to clients or prospective clients where Milestone and its representatives are properly licensed or exempt from licensure.

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