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7 Ways For High Income Families To Pay For College

Author Alvin Yam
high income family

As a physician, you’ve likely spent years paying off your student loans. Now, with your children’s education on the horizon, you’re likely thinking about ways to save for and pay their college expenses.

The costs of higher education in the U.S. have been on the rise for decades. According to the College Board, the average cost of tuition and fees for the 2023-2024 academic year is approximately $39,400 at private colleges, $10,560 for in-state students at public colleges, and $27,020 for out-of-state students at public colleges.

After adding in room and board, books, supplies, and other expenses, the total annual cost can easily fall within the $30,000 to $60,000 range.

On top of that, families need to use their net income to pay for college expenses. For high income families in the highest tax brackets, this can increase the amount of their gross income needed to cover these costs.

For example, if a family is in a 50% combined tax bracket, which includes federal and state taxes, they would need to earmark $120,000 from their income to cover $60,000 in college expenses. And that’s for one child.

Let’s look at seven ways high income families can pay for college.

1. Financial Aid and Merit-Based Aid

high income families often assume that they won’t qualify for financial aid. But before they assume they won’t qualify, it’s worth doing some homework as they might still be eligible for various forms of assistance.

Firstly, need-based aid is determined through the Free Application for Federal Student Aid (FAFSA). In some cases, the College Scholarship Service (CSS) profile is used by many private institutions.

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Need-based financial aid is awarded based on a family’s financial circumstances – income, assets, and the school’s cost. While high income families might not automatically qualify, the cost of the school can also be a factor.

The Student Aid Index (SAI) calculates how much your family is expected to contribute to college costs and takes into account your total income and assets. 

Depending on whether you are a dependent or independent student for the FAFSA, your SAI may also include your parent’s income and assets or a spouse’s income and assets.

Even if you think your family’s income is too high to qualify for financial aid, it’s smart to go ahead and complete and submit the FAFSA regardless. Here’s why:

  • There are no strict income limits for federal student aid, so you might be eligible for more than you expect.
  • The FAFSA could open doors to various types of financial support, including non-need-based options like Direct Unsubsidized Loans.

Many colleges use FAFSA information to determine eligibility for their own merit-based scholarships and grants.

Federal grants are a form of free money provided by the U.S. government and don’t need to be repaid.

Although high income families might not qualify for federal grants or subsidized loans, they could still be eligible for unsubsidized loans or institutional aid from colleges and universities. 

And some states will offer need-based aid programs that consider families with higher incomes.

If your student has excellent grades, a high GPA, or impressive standardized test scores like the SAT, skipping the FAFSA could mean missing out on potential merit aid from schools.

Moreover, your income might not be as high as you think, or it may not be high enough to disqualify your dependent from receiving federal financial aid.

Factors such as high medical expenses, multiple children in college simultaneously, and the number of children in the household can all influence the Student Aid Index (SAI), or expected family contribution.

In addition to federal student aid, many states offer their own grant programs to help residents finance their college education. These grants can be need-based, merit-based, or a combination of both. Examples include:

  • California Cal Grant: This need-based and merit-based grant program provides awards ranging from $6,000 to $12,570 for the 2023-2024 academic year.
  • New York Tuition Assistance Program (TAP): This need-based grant provides up to $5,665 per year for eligible students attending college in New York.

Scholarships

The best thing about scholarships is that they don’t need to be repaid. Scholarships are typically awarded based on a student’s achievements, talents, or exceptional abilities rather than financial need.

This means that even if your family has a high income, you could still qualify. Scholarships can be awarded for various achievements, including academic excellence, athletic skills, specific interests, or membership in certain groups.

This is one reason why high income families should encourage their children to work at excelling academically and do well in extracurricular activities, on top of preparing and studying for standardized tests like the SAT or ACT.

If your child has exceptional athletic abilities, they may be eligible for athletic scholarships, especially at the Division I and Division II levels. If your child has excelled in areas such as music, art, theater, or dance, they may qualify for talent-based scholarships.

There are also many scholarships available from a variety of sources, including schools, employers, individuals, private companies, nonprofits, communities, religious organizations, and professional and social groups.

Further, scholarships might be offered to students pursuing degrees in particular fields, such as STEM, business, or the arts. Many colleges have scholarship programs tailored to specific student populations or academic interests.

These can include departmental scholarships, diversity scholarships, and athletic scholarships.

And if your child is interested in a specific career field, professional associations often offer scholarships to students pursuing that path. These can include engineering scholarships, healthcare scholarships, and business scholarships.

You research online scholarships using online search tools such as Scholarship Search by Sallie or have your child work with their high school guidance counselor.

Lastly, your child should submit college applications early, as early applications can improve their chances of receiving grant money and other financial aid.

2. College Savings Plans

Both federal and state governments offer tax breaks to help families save for college. There are two main types of college savings account options: Coverdell Education Savings Accounts (ESAs) and 529 plans.

Coverdell Education Savings Accounts (ESAs)

This is a flexible option for college savings. These accounts allow you to contribute up to $2,000 per year per child. The money grows tax-free, and as long as you use it for qualified educational expenses, you won’t pay taxes on the withdrawals.

One of the benefits of ESAs is that you can use them for K-12 expenses and college costs. However, ESAs have some limitations. The contribution limit is relatively low, especially for high-earning physicians.

Also, there are income limits for contributors, which may affect some high income families depending on their earnings.

529 Plans

529 plans have become popular among many parents. Over 30 states offer state income tax deductions or credits for contributions to a 529 plan.

Like ESAs, the money in a 529 plan grows tax-free, and withdrawals for qualified educational expenses are taxfree as well.

One of the most significant advantages of 529 plans over ESAs is their high contribution limits. Limits vary by state, but many states allow total contributions of $300,000 or more per beneficiary.

This can be a huge benefit for those who want to build up substantial savings amounts for their children’s education.

Another advantage of 529 plans is that there are no income limits for contributors. This means that even high-earning physicians can take full advantage of these plans. Plus, many states offer additional tax benefits for contributions to their state’s 529 plan.

Keep in mind that 529 plans are more restrictive in terms of what the funds can be used for as they’re primarily designed for college expenses.

Grandparent-owned 529 plans

With 529 plans, grandparents can also open a separate 529 account for each grandchild. These contributions can help supplement any 529 contributions made by parents.

Ideally, you should front-load 529 contributions when grandchildren are young so they can maximize tax-deferred growth over a longer time to build up a larger college fund.

Also, under the new FAFSA rules effective for the 2024 to 2025 academic year, distributions from grandparent-owned 529 plans will no longer be counted as untaxed student income. Another benefit of grandparent contributions to 529 plans is that contributions are considered completed gifts, which means the assets are removed from the grandparent’s taxable estate.

3. Select a College Offering Good Value

When it comes to selecting an institution for higher education, it’s easy for students can get caught up in the excitement of the prestige of a renowned school, a beautiful campus, or impressive dorms.

But families should keep in mind what the main purpose of attending a college is, and know the expected value they’ll be getting in return.

Here are some areas to consider.

The location of the college can have a big impact on your overall expenses. Take a look at the cost of living in the surrounding area, including housing, transportation, and other living expenses.

A school in a city with a high cost of living might end up being more expensive than a comparable school in a suburban or less populated area.

If your child will commute or travel home frequently, factor in transportation costs, such as airfare or gas. Or, if your child is going away for college, factor in the costs based on how often they plan to visit home during the year.

If your child already has a strong interest in a particular field, it makes sense to select a college that offers degrees or programs that align with their intended major.

Further, a public university in your home state is almost always going to be a much more cost-effective option compared to a private university. Another alternative is for your child to start at a community college for the first two years and then transfer to a four-year institution.

Some schools, especially those with substantial endowments, are known for offering more generous financial aid packages.

The cost of tuition and fees varies between institutions, even among public and private universities within the same state. Compare these costs across your options and see how they stack up.

When you’re evaluating different colleges, also compare the financial aid offers side by side. Look beyond just the sticker price and factor in the net cost after any financial aid.

Some schools may have higher tuition rates but offer more generous aid packages, resulting in a lower net cost.

If your child is set on going to a private college, many private institutions offer tuition discounts to attract competitive students. You can even negotiate tuition costs with some private colleges since they often compete for talented students and may be willing to offer better financial packages.

Another avenue you can pursue is to speak to the private institution about exploring opportunities to pay lump sums for college, which will help you lock in tuition prices.

These could be prepaid tuition plans or negotiating a cash discount with the school for paying a year of tuition and fees upfront.

At the end of the day, evaluate all your options before deciding.

4. Your Child’s Contribution

Although it’s common for high income parents to pay for their children’s college expenses, students can play a role in paying for some of their expenses.

In addition to seeking merit-based scholarships, your child can build up their savings so they can contribute to these costs.

They could take up part-time jobs or summer employment or work on a side hustle. They can also explore taking on summer jobs and internships – all of which will help pay for expenses such as books and living.

Your Child’s Custodial IRA

Another potential tool in terms of your child’s contribution towards college is a Custodial IRA. These accounts are opened by parents or guardians for minor children with earned income.

One of their benefits is that they allow for tax-advantaged growth and penalty-free withdrawals for qualified education expenses.  

Contributions are limited to the child’s earned income or the annual IRA limit, whichever is lower, which is $7,000 in 2024.

Of course, withdrawing funds from their Custodial IRA to pay for college expenses will impact their long-term retirement savings potential.

Optimize Your Savings and Earnings

For most high income professionals such as physicians, a big chunk of your kids’ college expenses will likely end up being funded by your savings and earnings. With that said, there are ways to optimize your money and investments to potentially lighten this financial load.

Firstly, high income families can benefit from some tax planning. By reducing your taxable income, you might qualify for more need-based aid. Here are a few strategies to consider:

Contributing the maximum allowable amount to retirement accounts like 401(k)s, 403(b)s, and traditional IRAs reduces your taxable income. That’s because contributions are made with pre-tax dollars, which means you pay taxes on the money after you withdraw it in retirement.

By lowering your taxable income, you could impact the Student Aid Index (SAI), which determines your eligibility for need-based aid.

For example, as a couple, you might each contribute $23,000 to your 401(k) plans. This would reduce your combined taxable income by $46,000.

Another strategy to consider is deferring or delaying income. This is where you adjust the timing of your income to manage tax liabilities and potentially maximize financial aid eligibility. 

Say you’re already at the top of your current tax bracket. Your bonuses or commissions you receive could tip you over to the next higher tax bracket.

By asking your employer to give payout your December bonus in January instead, you could minimize the impact of your bonus on the tax rate on your pay for that year.

This strategy could also impact the income reported for financial aid applications, potentially lower your SAI, and help you to qualify for more assistance.

5. Review How Your Money Is Invested

Saving for college typically involves investing your savings to grow your college savings funds. You should have a plan that aligns with your family’s financial goals and will help you reach those college funding milestones.

This could mean having a mix of investments, such as stocks and stock funds for potential growth and a portion in bonds for stability. You’ll also want to consider the investment time frame.

If your child is about to head to college within the next year or two, consider an investment strategy that’s focused on more conservative strategies and preserving capital. Since you don’t have much time for risky investments to bounce back if the market takes a downturn.

If you have a few years before your child goes to college, you can take on a bit more risk since you have time to recover from market fluctuations and potentially benefit from higher returns.

If you have a decade or more before your child enters college, you have the most flexibility. You can take a more aggressive investment approach and choose investments with higher risk and higher growth potential.

6. Roth IRA Withdrawals For Education Expenses

When you put money into your Roth IRA, you’re using dollars you’ve already paid taxes on, which grows tax-free.

One feature of the Roth IRA is that you can withdraw your original contributions anytime you want, tax-free and penalty-free. You can use this for qualified educational expenses like tuition, fees, books, and supplies for you, your spouse, or your dependents.

But keep in mind that if you withdraw any earnings on those contributions, it be subject to taxes and penalties if withdrawn before age 59 ½.

7. Private Loans

After you’ve assessed all your options to pay for college, and if you still need to take out private loans to fund your child’s college education, here are the two main types.

Private Student Loans

These are loans taken out by the student, usually with a parent or guardian co-signing. Think of it as a loan for the student, but the parent helps guarantee it. Private student loans don’t have the same benefits as federal loans, like income-driven repayment or loan forgiveness programs.

The lender looks at the student’s (and cosigner’s) credit history to decide if they’ll get the loan and what the interest rate will be. Having a good credit score means a better chance of getting a lower interest rate.

You can choose between a fixed rate or a variable rate. Some lenders will allow you to pay just the interest while you’re in school or make smaller payments.

Private Parent Loans

These are loans taken out by the parent (or another person) to pay for the college. The lender will check the parent’s credit history to determine the loan amount and interest rate.

Just like student loans, you can choose between fixed or variable rates. Many private lenders don’t charge extra fees when you take out a private parent loan, such as origination fees.

Some lenders may even let other family members, like grandparents, aunts, or uncles, take out the loan. You can typically choose to pay back the loan over 5 to 20 years.

Final Thoughts

With some careful and early planning, ideally well before your child enters college, a high income family has options to choose from and should have the financial resources to pay for children’s college expenses.

 

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