With costs for college rising at a rate well above the general inflation rate over the last several decades, making this investment in your family’s future can be daunting and downright frustrating — even if your family is comfortable financially. Many affluent families believe they won’t qualify for any financial aid, but that’s not necessarily the case, and there are additional tactics and tools you can rely on to make this investment as wisely as possible. As your children start to think about higher education, consider these seven tips for managing college costs.
1. Submit a FAFSA (even if you don’t think you qualify)
While there are certain financial strategies to manage income and potentially become eligible for some financial aid (e.g., recognition of losses, variable income deferral, timing of income, asset titling, etc.), it’s true that higher income households are less likely to receive federal financial aid. However, high income doesn’t always mean a high expected family contribution (EFC) factor, so it could still make sense to fill out the Free Application for Federal Student Aid (FAFSA).
Your EFC is a measurement to determine what your family can afford to pay for college. In addition to the EFC, some colleges use their own methodology when determining financial aid awards, so we advise you reach out to the college’s financial aid office for more information on the process they use. In fact, private colleges discount their tuition over 50% on average, and early filing could result in more financial aid.
Even if your child doesn’t qualify for needs-based aid, they may still want to submit a FAFSA to potentially receive merit-based scholarships and/or student loans.
2. Use a 529 college savings plan
529 saving vehicles are a great way to help save for higher education — they’re tax-deferred and potentially tax-free if the funds are used for education. 529 plan assets grow tax-free while invested in the plan, and withdrawals for qualified educational expenses aren’t taxed when they come out of the plan. In addition, 529 savings accounts can be used for further education beyond a bachelor’s degree.
If grandparents or other friends and family want to contribute to a student’s college expenses, 529 plans are a great option. They have high contribution limits, and contributions are considered a completed gift, so earnings grow outside of the gift giver’s taxable estate (note that contributions will count toward your annual gift tax exclusion amount).
If you’re concerned about how 529 plans may hurt your chances of qualifying for aid, don’t be — 529 assets have a limited impact on one’s expected family contribution (only 5.64% of the assets are counted toward the EFC).
3. Consider state residency requirements for in-state tuition
Most universities and colleges offer a reduced tuition cost for students who are in-state residents. However, if your child is exploring out-of-state colleges, make sure to discuss with the college how your child could qualify for in-state tuition. This can be difficult to qualify for and residency requirements can be a substantial hurdle. However, asking this question and following the guidance could save your family a tremendous amount in tuition costs. Depending on the strategy, it may affect domicile or even independent versus dependent status.
4. Review student loan options and management
If your income or net worth is above a certain amount, student loans may not be on your mind, particularly if the plan is to directly pay for your child’s college. Although it may not make sense to take on loans, and your student may not qualify for federal student loans, if some are awarded to you, they can offer valuable benefits: access to fixed and lower interest rates as compared to private student loans; the ability for students to borrow money without a cosigner; a six-month grace period after graduation before repayment; and flexible repayment plans like income-driven repayment all make this strategy worth considering.
Federal student loan eligibility is determined through the FAFSA application, so it’s good insurance for families to apply in case personal financial situations change. In situations where you might face decreased income or there are rule changes to loan forgiveness or financial aid qualifications, you might want the flexibility to take advantage of these options. In the case of loan forgiveness, there are currently programs that specify certain professions and fields such as teaching, healthcare, not-for-profit, or public service, especially in underprivileged areas.
5. Take advantage of community college credits and potentially federal income tax credits for education funding
As you and your student consider options for a four-year college or university, don’t forget that community colleges offer classes that are often transferrable for full credit at a college or university. Community colleges can offer courses and educational opportunities comparable to a four-year college or university at a much lower cost. Be sure to look into this as an option to minimize costs; in some cases, a community college course your student takes over the summer, for example, can be a fraction of the cost of a similar class credit at a four-year institution.
In addition, the U.S. tax system offers two potentially valuable education tax credits: The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both have a number of requirements as well as income-related limitations, so be sure to consult with a tax professional before counting on either of these credits to ease the financial burden.
6. Search for merit-based scholarships and grants
There are many merit-based scholarship opportunities available to your child, and while most won’t cover the full cost of college, they can help. Merit-based aid could be awarded for academic, athletic, artistic, or leadership roles — even caddying at a golf club can help earn your child a scholarship. Most universities also offer their own various types of scholarships for incoming students in addition to state or national scholarships. Some employers even offer scholarships to children of employees — options for merit-based scholarships abound.
Help your child stay organized and diligent when applying for scholarships. Smaller scholarships or grants can have big impacts when applied together to the cost of tuition. And remember, many colleges are looking for the right mix of students, so even affluent families are often offered merit-based aid to attract students.
7. Make education part of a tax-optimized wealth transfer strategy
The IRS allows individuals to gift a certain amount of money to someone each year before the gift tax applies, known as the annual exclusion amount. For 2024, this annual amount is $18,000. Gifts used to pay tuition expenses directly to the institution are exempt from the gift tax, meaning you (or other family members) can transfer more wealth to your college student without additional tax burden. Consider opening the discussion up to grandparents or other family members that have expressed a desire to help your child with their education. However, be warned that if there’s a chance you could qualify for federal financial aid, these payments may be considered income for aid purposes.
Earlier is better, but it’s not too late
The earlier you start this process, the bigger advantage you’ll have. You’ll see your 529 plan balances grow larger, and you’ll have more time to explore scholarship options and schools. However, you can still take advantage of these tips even if your child is already attending college. Getting familiar with a school’s financial aid requirements, educating yourself on the scholarships available, and funding school in a tax-advantaged way can help you make a substantial dent in the cost of your child’s college education.
