Q3: Back-to-School Financial Planning and College Funding

September means back-to-school season, and if you're a high-income earner with kids approaching college age, this time of year probably brings mixed emotions. Pride in your children's academic achievements, excitement about their future opportunities, and—let's be honest—some anxiety about the financial reality of higher education costs.

College costs have reached significant levels, with total costs of attending a private university often exceeding $60,000-70,000 annually. Even in-state public universities typically require $25,000-30,000 per year for the full cost of attendance. For families earning $250,000+, this creates a unique challenge: you likely earn too much to qualify for need-based financial aid, but you also can't simply write a check for $240,000 to $280,000 per child without impacting your other financial goals.

Understanding your options and the mechanics of various college funding strategies can help you make informed decisions that align with your overall financial situation.

The College Funding Challenge for High-Income Families

Here's the reality that many high-earning families face: the Expected Family Contribution (EFC) formula used for financial aid assumes families earning $200,000+ can contribute most or all of college costs from current income. The formula doesn't consider your other financial obligations like retirement savings, mortgage payments, or supporting aging parents.

This means families earning $250,000-$500,000 often find themselves in a "financial aid donut hole"—earning too much for substantial aid but not enough to comfortably cover full college costs while maintaining their lifestyle and financial security.

Example 1 - One child: A family with a $400,000 household income, one child, and $2 million in retirement assets would likely have an EFC approaching full college costs—over $60,000-70,000 annually for a private university. Even with substantial savings, funding four years for one child ($240,000-280,000) without any planning could significantly impact other financial goals.

Example 2 - Multiple children: The same family with two children faces even greater challenges. While having multiple children in college simultaneously may provide some financial aid benefits under the old system, the new FAFSA rules have reduced this advantage. Funding overlapping college years could require $120,000-140,000 annually when both children are enrolled, potentially totaling $480,000-560,000 for both children's educations.

529 Plans: Still Your Best First Option

Despite recent legislative changes and increased scrutiny, 529 college savings plans remain the most tax-efficient vehicle for college funding for most high-income families.

2025 529 Plan Benefits

Tax advantages that compound over time:

• Tax-free growth on investments
• Tax-free withdrawals for qualified education expenses
• State tax deductions in many states (varies by state)
• No income limits for contributions
• High contribution limits ($18,000 per donor per beneficiary in 2025 without gift tax implications, or $90,000 with five-year gift tax averaging)

Recent enhancements:

• Starting in 2024, unused 529 funds can be rolled to Roth IRAs for beneficiaries under certain conditions
• Expanded qualified expenses including K-12 tuition (up to $10,000 annually)
• Some student loan repayment allowed (lifetime $10,000 limit)

Strategic 529 Implementation Considerations

For high-income earners, 529 plan benefits can be maximized through coordination with overall tax planning:

Timing contributions: Families expecting lower future tax brackets (perhaps due to career changes or retirement) might consider the timing of 529 contributions relative to state tax deduction benefits.

Asset allocation approaches: With college costs typically rising faster than general inflation, more aggressive growth strategies are common for younger children. A common rule of thumb: 100 minus child's age as equity percentage. An 8-year-old might have 92% in stock funds, transitioning to more conservative allocations as college approaches.

Multi-state considerations: Some families explore using multiple state 529 plans—their home state plan for tax deductions, plus potentially a higher-performing out-of-state plan for additional contributions.

Beyond 529s: Alternative College Funding Strategies

College Funding Strategy Comparison

Taxable Investment Accounts

Taxable accounts offer flexibility that 529 plans don't provide. While you lose the tax-free growth benefit, you gain:

• No restrictions on fund usage
• Access to tax-loss harvesting strategies
• Ability to use funds for graduate school, wedding expenses, home down payments, or other family priorities
• More investment options than typical 529 plans

Implementation approaches: Some families fund 529 plans to cover approximately 60-70% of projected college costs, with taxable accounts covering the remainder. This approach aims to capture tax benefits while maintaining flexibility.

Roth IRA Contributions

Here's a strategy many high-income families overlook: maximizing Roth Individual Retirement Account (IRA) contributions (through backdoor Roth if income limits apply) can serve dual purposes.

While Roth IRAs are primarily retirement vehicles, they offer unique flexibility for education funding:

• Contributions can be withdrawn penalty-free at any time
• Earnings can be withdrawn penalty-free for qualified education expenses
• If not needed for college, funds continue growing tax-free for retirement

For families already maximizing other tax-advantaged accounts, this strategy can provide additional college funding flexibility without requiring dedicated education savings.

Cash Value Life Insurance

Whole life or universal life insurance policies build cash value that can be borrowed against tax-free. While insurance products typically have high fees and lower returns than market investments, they can serve specific purposes in college planning:

• Tax-free loans against cash value
• No impact on financial aid calculations (assets inside life insurance policies aren't counted)
• Continued death benefit protection

Important considerations: This strategy typically works best for families who need life insurance regardless and have already maximized other tax-advantaged savings options. The fees and complexity often outweigh benefits for many families, making it important to understand all aspects before implementation.

Advanced Strategies for Business Owners and Executives

Business owners and executives have access to additional college funding strategies:

Hiring children in business: Business owners can employ their children and fund education through earned income. Children can contribute earned income to Roth IRAs, building tax-free college and retirement funds simultaneously.

Educational assistance programs: Business owners can establish programs providing up to $5,250 annually in tax-free educational benefits per employee—including family members employed by the business.

Stock option timing: Executives might time option exercises to coincide with college years, potentially managing income and tax brackets to optimize both federal taxes and financial aid calculations.

The Financial Aid Reality Check

Many high-income families assume they won't qualify for any financial aid and skip the Free Application for Federal Student Aid (FAFSA) entirely. This can be a costly mistake.

Why You Should Always File the FAFSA

Even families with substantial income and assets should complete the FAFSA because:

• Many schools require it for merit-based aid
• Some programs base aid on factors beyond pure income/assets
• Having multiple children in college simultaneously can significantly impact aid calculations
• Graduate school aid often requires FAFSA completion

Understanding the New FAFSA

2024-25 FAFSA Key Changes

Timing Strategies: When to Start and How Much to Save

The earlier you start, the more time compounds in your favor. But high-income families often have competing priorities that require strategic balance.

Starting Late: Strategies for Families with High School Students

If your oldest child is already in high school, you haven't missed the boat entirely. Consider:

Front-loading 529 contributions: Use the five-year gift tax averaging to contribute up to $95,000 per child immediately (or $190,000 for married couples). Even with just 3-4 years until college, tax-free growth can provide meaningful benefits.

Conservative investment allocation: With limited time horizon, focus on capital preservation. Consider stable value funds, short-term bond funds, or target-date enrollment funds.

Cash flow planning: Shift focus from savings accumulation to optimizing cash flow during college years. This might include mortgage refinancing, optimizing tax withholdings, or adjusting retirement contributions temporarily.

The Monthly Savings Target

A common question: how much should we save monthly for college?

The answer depends on your assumptions about college costs, investment returns, and how much you plan to fund from savings versus future income. Here's a framework:

Monthly Savings Targets by Timeline

Assumptions: 6% annual returns, 5% college cost inflation

Integration with Your Overall Financial Plan

College planning works best when coordinated with other financial goals rather than handled in isolation.

Common Implementation Approaches

Some families approach the college vs. retirement question by ensuring retirement security first, then determining college savings capacity. Others prefer to balance both goals simultaneously. The approach often depends on individual circumstances, timeline, and family values.

Coordination with Estate Planning

Large 529 contributions can serve estate planning purposes by moving assets out of your taxable estate while maintaining some control over the funds. The five-year gift tax averaging election allows substantial asset transfers without using lifetime exemption.

Approaches That Haven't Worked Well

Based on common experiences, certain approaches frequently create challenges for high-income families:

Concentration in 529 Plans Only

While 529 plans offer excellent benefits, having too much locked in education-specific accounts can create inflexibility. The new Roth rollover rules help somewhat, but they have limitations and requirements.

Alternative approaches

Some families approach college funding challenges by building 529 savings to cover 60-80% of projected costs, maintaining flexibility through other savings vehicles. This balanced approach aims to capture tax benefits while avoiding over-concentration in education-specific accounts.

When working with financial professionals, families often find that advisors with transparent, predictable fee structures can more easily recommend strategies that optimize the family's overall situation—including approaches that may reduce assets under the advisor's management but improve the family's financial outcomes.

Skipping Financial Aid Applications

High-income families often assume they won't qualify for any aid and skip the FAFSA. However, families earning $300,000+ sometimes receive partial aid, especially with multiple children in college or at schools with large endowments.

Single-Child Focus

Parents sometimes focus on the first child's college costs without fully considering multiple children. Having two children in college simultaneously doubles annual costs but may significantly improve financial aid for both.

Delaying Financial Discussions

Many families avoid discussing college costs and expectations until senior year of high school. Earlier conversations can help set realistic expectations and influence academic choices.

Understanding Professional Guidance for College Planning

College funding involves complex interactions between tax law, financial aid rules, investment strategy, and estate planning. Different types of professionals bring different expertise to these challenges.

Types of Relevant Expertise

When college planning requires professional guidance, families often work with advisors who have experience with high-income families facing similar challenges, comprehensive knowledge of how college planning integrates with other financial goals, and current knowledge of frequently changing rules and regulations.

Professional Service Models

College planning guidance is available through various professional service models:

Commission-based advisors earn money from product sales, which can create incentives to recommend higher-commission products rather than optimal solutions.

Asset-based fee advisors charge percentages of managed assets. For college planning, this can create conflicts when advisors have incentives to keep assets under management rather than recommend strategies that might reduce their fee base—such as using funds in company 529 accounts or paying down debt.

Flat-fee advisors charge predetermined fees regardless of product sales or assets managed, allowing them to focus purely on strategies that benefit the family's situation.

Hourly advisors charge for time spent on planning and implementation.

Understanding how different professionals are compensated can help families evaluate whether the guidance they receive is truly objective, particularly for college planning strategies that may not generate ongoing fees for the advisor.

Information to Review This Quarter

September provides an excellent opportunity to review college funding information and evaluate your current approach:

College Planning Action Items by Timeline

The Bottom Line

College funding for high-income families involves balancing competing priorities while understanding tax benefits and maintaining financial flexibility. Families who navigate this successfully typically start with clear information, understand various strategies available to them, and regularly review their approach as circumstances change.

There isn't a single "perfect" strategy—rather, successful approaches coordinate multiple methods that align with family values, financial situations, and other life goals. Whether children attend elite private universities or excellent public institutions, understanding the options available can help families make informed decisions about funding education while maintaining overall financial health.

The most important consideration isn't necessarily minimizing college costs—it's understanding the relationship between education funding and other financial goals like retirement security. Effective college planning considers both educational opportunities and long-term financial stability, often benefiting from objective professional guidance with transparent fee structures that align with the family's best interests rather than product sales or asset accumulation

Up Next

Next week's article "Breaking Up with Your 1% Advisor: A Step-by-Step Guide" shows high-income earners how to break free from expensive AUM fees and switch to flat-fee financial advisors. Sophisticated investors are discovering that percentage-based advisors can cost hundreds of thousands in fees over time. Learn the step-by-step process to evaluate your current advisor, find qualified flat-fee alternatives, and manage the transition smoothly. The guide includes real fee calculations, vetted resources for finding credentialed professionals, and transition strategies. Perfect for financially savvy professionals who want expert guidance without the wealth-eroding fee structure—stop paying premium prices for basic investment management and start getting true comprehensive financial planning value.