[Editor's Note: This guest post is from Brad Bobb CFP® of Bobb Financial, a fee-only financial planner that specializes in working with medical professionals and federal employees. This article is about saving on the COST of college rather than the best ways to SAVE for college. We have no financial repationship.]
Paying for college can easily be one of the biggest expenses that parents will incur during their lifetimes. Although it is likely to cost a significant amount of money, it isn't much different from other major purchases that you will make in your lifetime; knowledge and preparation can help you save a significant amount of money.
Most people know that they should save and invest money to pay for future college costs, but not everyone starts saving as early as they should. It's also rare for a family to have enough in a 529 plan to fund 100% of college. It’s not a good idea to have all of your college costs come from a 529 plan, due to penalties for taking money out of a 529 plan if you have too much in the 529. That being said, this discussion is about saving on the cost of college versus saving for college.
[Editor's Note: While I agree that not all your college costs should come from a 529, I wouldn't spend too much time worrying about putting too much in there given the multitude of options available (penalty-free scholarship withdrawals, changing beneficiaries or just paying the penalty/taxes) in the rare cases where it happens.]
How to Save on the COST of College for the High-Income Earner
1. Financial Aid (Don't Assume You Won't Qualify)
The first thing you want to do it determine if you will qualify for financial aid. There is a lot of misconception regarding financial aid, just because you have a good job and an income of $100,000 or better doesn’t mean you won’t qualify for aid. It’s possible to receive financial aid with an annual income of $200,000 or even $250,000. Based on income alone, a family of five with an income of $225,000 would have an Expected Family Contribution (EFC) of $52,782. If college costs $70,000 and your EFC is $52,782 then you have a demonstrated financial need of $17,218.
It is also important to understand that a family’s EFC is a per household number. An EFC is the minimum amount a family is expected to pay for college whether one or five kids are in school.
However, if you have been a loyal follower of WCI and have a high income, you likely won’t qualify for financial aid by the time your kids are going to college. You can check your EFC with this tool.
[It's good not to assume, but don't be surprised when you don't qualify-ed]
2. School Selection is Key!
Far too often I have seen higher income earners send their kids to an elite, very expensive college. The reason for doing so is normally because their kid wants to. I would really like to drive a Lamborghini but unless you are financially independent, I don’t know that it makes sense to do so, much the same as sending your kid to an elite school. If one of your goals is to attain financial independence and retire early, it pays to be selective in your college search.
Brad Bobb
College can cost anywhere from $20,000 a year up to $70,000 a year. A $70,000 a year education doesn't necessarily translate to higher income or a better job after graduation. There have been multiple studies on this subject, and some show that for a select few majors the school may matter. Other studies show that employers are more concerned with skills and applications of those skills versus where someone went to school.
Elite schools rarely give scholarships. From my experience, it is common for high-income families to have kids that are very good students. Good grades and good ACT/SAT test scores can equal sizable scholarships at many schools, however, 568 Presidents Group schools like Northwestern, Yale and Notre Dame don't offer academic scholarships.
A kid that gets into an elite school, can likely go to a mid-tier or lower level school at a significantly lower cost. Is it worth paying an extra $50,000 a year to go to an elite school? If you pay for one kid to go to Yale, are you going to tell your next kid they can’t go because it costs too much? This is yet another question to consider when your firstborn is school searching — can you afford to pay for two, three, or four elite educations?
Here is a real example of an engineering major that got accepted to MIT. The student also applied to Case Western Reserve, a very good school but it doesn’t have the same name recognition of MIT.
- Cost of Attendance at MIT = $63,250
- Cost of Attendance at Case Western Reserve = $59,634
MIT doesn’t offer merit scholarships, however, Case Western Reserve offered this student $20,000 a year in merit scholarships. The cost of Case Western Reserve is $23,616 a year cheaper than MIT, for a total of $94,464 cheaper over four years.
This scenario is not uncommon, most students that get into elite schools can get a significant amount of scholarships from mid-tier schools and significantly cut the cost of college.
3. Will You Pay for Grad School?
Another thought to ponder is paying for grad school. Most kids that I see go to elite schools end up going on to grad school. How much more will that cost? Do you plan to pay for your kid’s grad school? Med school? These are all things to consider before choosing a school.
4. ACT/SAT Prep Helps!
ACT and SAT scores can have a big impact on the amount of scholarship money kids receive. An ACT score one point higher can translate to thousands of dollars in scholarships.
The University of Alabama has a grid that shows exactly how much students will receive in scholarships for their ACT scores.
| ACT Score (+3.5 GPA) | Per Year Award | Four Year Award |
| 27 | $3,500 | $14,000 |
| 28 | $4,000 | $16,000 |
| 29 | $13,000 | $52,000 |
| 30-31 | $17,796 | $71,906 |
| 32-36 | $26,950 | $107,800 |
Going from a score of 28 to 29 equates to $9,000 more for four years! I suppose it’s possible, but I have yet to talk to a student who didn’t improve their score after going through an ACT prep class. Most companies that do ACT prep will tell you that the average increase is four points. It’s worth the investment, do it!
5. Know How Colleges Operate: You CAN Appeal Their Offer
Colleges are businesses, and many schools will not give you their best offer the first time. If your student has one school in mind, it is still a good idea to apply to multiple schools. If you apply to four similar schools, and the one your student wants to go to doesn’t come back with the best offer, then appeal the offer.
Applying to multiple schools helps to get the universities to compete with each other. If you have an offer that is $10,000 better than the rest, you can use that award letter to send an appeal back to the other schools. There is a chance that those schools will come back with a better offer. The good news is that if a school lowers its offer by $3000, that is actually $12,000 over four years!
6. Tax Planning
One method to help ease the cost of college is to do some tax planning. Tax planning can consist of gifting assets, paying kids, and even setting up employer benefits like Section 127 or 132 plans.
The 32% income bracket starts at $315,000 and the top tax bracket of 37% starts at $600,000 for married, filing jointly. Capital gains tax rates are 15%, and 20% if you are in the top tax bracket. If your income is above $200,000 ($250,000 married) you have to add another 3.8% to the capital gains rate. Most docs will be paying at least 18.8% on capital gains.
Gifting Assets
One way to save some tax dollars is to gift appreciated assets to your kids. If you do this early, your kid can sell assets annually up to $2,100 of gains and pay no income taxes. A parent in the top tax bracket would pay almost $500 of taxes on $2100 of gains, but a child wouldn’t pay any taxes. [Technically, the first $1,050 per year is tax-free and the 2nd $1,050 is taxed at the child's bracket, which is 0%.-ed]
Are You Self-Employed? Pay Your Kids an Income
Disclaimer: The example below is meant to provide an example of how tax planning can help lower costs. I am not a CPA, and one would be needed to implement some of these strategies. There are a number of variables that need to be considered such as FICA taxes, household income, child tax credits, and paying a fair wage.
Paying your child an income at an early age is a great way to save some tax dollars. It’s also a great way for kids to learn responsibility and work ethic.
Thanks to the new higher standard deduction, a self-employed person can pay their child up to $12,000 and the child doesn’t pay income taxes [or payroll taxes if the child is a minor, the business is not a corporation, and the only owners are their parents-ed.] If you are in the highest tax bracket this could potentially save you $4,440 per year. If you start paying your child a salary at the age of 11, and pay them through age 21, you can save over $40,000 in taxes. Even if you start late, you can still get significant savings by employing your kids.
Self-employed parents in the highest tax bracket may want to look at paying their student an even higher income. Paying your child a higher income can be advantageous in a number of ways:
- Lower tax rates on income for the student
- Lower capital gains rate
- Student can get the American Opportunity Tax Credit (up to $2,500 per year of college)
If a student can pass the support test (accomplished by paying for half of their support with income and sales of appreciated assets) then they can take advantage of the American Opportunity Tax Credit (AOTC).
Here is an example of how this strategy can play out.
The first table shows taxes that the parent would incur.
| Wages | $20,000 |
| Tax rate | 37% |
| Income tax on wages | $7,400 |
| Long Term Capital Gains (sale of assets) | $25,000 |
| Capital Gains Rate (20% + 3.8%) | 23.8% |
| Taxes on unearned income | $5,950 |
| Total tax on parent’s wages (earned income) | |
| and sale of assets | $13,350 |
The following table shows the taxes that an independent student would incur on the same wages and sale of assets.
| Income | $20,000 |
| Standard deduction | -$12,000 |
| Net Wages | $8,000 |
| Tax rate (10% on up to $9,525 ) | $800 |
| Long Term Capital Gains (LTCG) | $25,000 |
| Capital Gains Rate (0% assuming no Kiddie tax) | 0 |
| Tax on unearned income | $0 |
| Gross Federal tax | $800 |
| American Opportunity tax credit | ($2,500) |
| Total tax | +$680 (up to 40% of the credit is refundable) |
In the first scenario, the parent paid $13,350 in taxes. If the parent chose to employ the student and gift appreciated assets as the second scenario illustrates, the tax savings is $14,030 a year. If this strategy can be implemented over four years of college, the parents can save almost $56,120 in taxes. No state taxes were used in the illustration, so if your state has a state income tax, the savings would be higher.
This strategy can work well for high-income families, but I would highly recommend working with your tax professional to implement.
More Ways to Hire Your Student: Section 127 and 132 Plans for the Self-Employed
There are a couple of IRS codes that allow business owners tax savings when paying for education.
Section 127 plans allow employers to provide employees with up to $5,250 a year in tuition assistance. The dollar amount is tax deductible for the employer and tax-free to the employee when used for tuition assistance.
Hiring your student would allow them to take advantage of the $5,250, which is pre-tax dollars, therefore it would cost a parent in the top tax bracket $8,333 (37% fed tax) in after-tax dollars. The business also gets to tax deduct the $5,250, which saves the business $1,942 if it is in the 35% tax bracket. It would ordinarily cost the family $8,333 to pay for $5,250 of college, but by using a Section 127 plan it would only cost $3,307.
It is important to note a couple elements of Section 127 plans:
- There must be a written plan in place
- The same benefit must be offered to all employees
- It is only available for employees age 21 and above
Section 127 plans are best used for small companies and can be used for a student’s last two years of school (assuming the student is age 21) and grad school.
Section 132 is called the Working Condition Fringe Benefit. Section 132 plans don’t have to be offered to all employees, and there are no dollar limitations. A requirement for a Section 132 plan is that the education must be job-related. If your student’s education is job-related, a Section 132 plan could be an ideal fit.
Important Note
This is a ton of information to process, but very important if you want to save on the cost of college. While I have a pretty good understanding of the tax law, I am not a tax professional. I do believe it is important that people know every angle that can be used to save on cost when paying for college. A tax professional would be needed to implement some of the strategies mentioned in this article.
What is your experience? What have you done to save on the cost of college? Which of these strategies do you think would save you the most?
I like the good common sense this starts out with… keep your cost low for comparable (but not elite) schools. Then find ways to pay for it however you can. I have three kids, and so I’ll take the “don’t send your first kid to an elite expensive school as a set up for the others” advice to heart.
An important note, if you decide to pay your kid, is to make sure you are paying them a reasonable wage for whatever job you have for them. You cannot give a kid $20,000 in wages for doing chores around the house. It has to be a reasonable wage for the type of work they are doing.
Also, you have to make that much money on a side business in order to pay them those wages. You cannot pay them wages from a W-2 income and deduct the wages as expenses like you can from a Schedule C for a 1099 worker. For those that have 1099 self-income where their kid can help with the family business, I think this is a great idea. One of the many reasons it is worth being an employer rather than an employee.
I followed the in-state model and saved massive tons of money. I also worked full time almost all four years of college, mostly retail and driving a forklift. It upped the difficulty level for sure, but it also taught me time management and made me want it more than my friends who were just drawing money from their parents and spending it on beer.
1- babysitting was out of my W-2 income, but some years we qualified for a child care tax credit. Not for as much as I paid Big Sis, but I got the credit, and she maxed her Roth IRA in her teens even when I had no Sched C business (and she couldn’t really work for my locums firm!).
2- As in many financial articles, I can testify that the Alabama numbers are out of date. Big Sis got that type of award 7 years ago, but either due to the many kids like her (and many from out of state) or their football prowess they are less thirsty and Lil Sis is offered awards from a much lower scale. Current figures for UA:
ACT Score (+3.5 GPA) Per Year Award Four Year Award
27 $4,000 $16,000 (unchanged in fact up a bit)
28-29 $5,000 $20,000
30-31 $8,000 $32,000 (< half as much)
32-35 $10,470 $41,800 (< half as much)
36 $12,470 + first year free room (< half as much)
Guess they are getting closer to UT, which (perhaps partly due to needing to admit so many instate kids on the top 10% rule) offered no merit awards to my scholar. Might try the appeal route with UA's offer but doubt UT will budge. Hoping to have to pay for an elite college-every message this week and next from my kid gets an emergent review but it's usually graduation/senior news not college news.
So, try to find that state (or unrecognized private) school that is pretty awesome but still thirsty. They're out there, and you might have one in your state and know what a hidden gem it is.
You can always tell your child to get a part-time job or consider becoming a resident advisor . If it is too stressful, they can always work during summers and can use the money for tuition, books and other expenses. You can also look into cooperative education programs which will allow your child to alternate between working full time and studying full time.
I agree about being an RA. I was an RA for the second two years of undergrad and that paid me: a stipend, a free meal plan, free tuition, and free room & board. It was awesome. Go Boilers!
In the first scenario, the family’s EFC is $52,782. Tuition is $70,000/year. The difference is $17,218. Is the family expected to take out loans for the difference? Or is that amount forgiven?
EFC is from (when official) the FAFSA, nationwide. It is up to each school how it addresses shortfalls. Some have a no loans policy and give grants for the difference, others have an all loans policy, others (presumably) because they budget less money for aid can’t even help families get enough standard student or parent loans and aid to make up the shortfall so you’d have to go to a loan shark or sell a kidney. In other words they take EFC and say ‘well at our school everyone has to come up with a little bit more’.
Not that it is an issue for many people reading WCI but PLEASE be certain your less wealthy friends and relatives and neighbors understand that the expensive private schools- especially the famous ones- can be pretty cheap for those with an EFC less than 4 digits. They have huge endowments which public and less well known schools lack. Many ivies and the like- eg Harvard- now even promise a free ride to families with incomes under $65K and <10% of income under $150K. (Pretty sure this also depends on 'nonretirement' savings, so despite our retirement income being less than that sometimes, we're out of luck.)
"Harvard is more affordable than public universities for 90 percent of Americans, and equally generous for international students."
Here is a link to the schools Jenn is referring to. These are the schools that claim to have met 100% of financial need in 2016.
https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-09-21/colleges-that-claim-to-meet-full-financial-need
The 17k is the demonstrated financial need, some of which is usually covered by the school. Some schools will cover up to 100% of financial need.
Regarding loans – federal loans have good rates and are the most flexible loans available. If your child will need loans for college please do your best to stick to the annual federal limit. Private loans aren’t near as flexible, have higher interest rates, and can have high origination fees.
I agree with the school selection advice. Good grades/test scores can attract some pretty impressive scholarships to a lot of “mid tier” schools. I went to a rigorous, small, private liberal arts school that charged around $45k at the time completely free, including room and board by having great HS grades and good test scores. I absolutely loved my college experience and my degree/experience continues to serve me well. We will use 529 accounts, but I’m hoping my children can benefit from something similar!
At the public, mid-sized university where I work, a year’s tuition and fees (no books) is just $7k. Even if you add $3k for books, that’s still just $10k annually. If your kids live at home while they’re attending, that means that a four year degree can be had for around $40k.
Yes, the numbers were a little high for Utah schools too. Tuition at our state’s flagship schools is in the $6-7K/year range. But that’s pretty unusual.
Interesting ideas for saving taxes on tuition; these are some strategies I’ve never heard of before and can involve significant tax savings. I’m on the fence about whether ivys are worth the extra $$, I’ve seen data that points both ways. Plus I imagine it would be hard to tell kid #1 you’ll front $50k for Harvard but not for kid #2’s $50k random liberal arts college.
“I imagine it would be hard to tell kid #1 you’ll front $50k for Harvard but not for kid #2’s $50k random liberal arts college.”
Why? ‘Your sibling got into a world renowned school and your mom and I thought that was a worthy achievement such that we’d foot the bill as long as they kept their grades up. We don’t think you’ll have the same opportunities with a basket weaving degree from Feel Good U, so you can go there if you want, but you’ll need to come up with a different plan if you want us to help fund your future.’ Seems like a great parenting opportunity to me to discuss things like the value of money, ROI, opportunity cost, the fact that the world isn’t fair, debt-to-income, etc.
Another option to consider would be community college. I actually left high school early and went to an honor’s program at the local community college. I received an academic scholarship which covered a full semester. 2 years cost just about 3000$. Then I transferred to Cornell, which accepted all the credits. So, I only had to do two years there and I got my fancy Ivy degree. Additionally, Cornell is made up of several colleges, half of which are land grant schools. They are not as cheap as state schools, but nowhere near the cost of private schools. I graduated college with only 10k of debt and had no trouble getting into graduate and residency programs.
Granted I went to college in the late 90s so a lot may have changed. But I still think two years of community college is a great deal.
for a serious student, community colleges are tremendous value. Unfortunately, most parents / kids, look down on this wonderful opportunity offered to all by the tax payers
Had 3 girls. First one got 1 year credit at the local community college for free her senior year of High School. Accumulated 180 hours of college credit over 4 years, political science and economics degree, at in state schools. Finally, decided on medical school at Saba COM (Caribbean) Is currently finishing up her anesthesia residency 2018 at UPENN, age 30. Is married with a little boy and girl. The second daughter got a little more than on year free her senior year of High school. Then she went to Saba Medical school (Caribbean), with just 90 hours of college credit, finished her college degree in her first year of medical school. Is finishing her family practice residency 2018, age 27, moving to Tampa with fiance doing oncology fellowship. Third daughter got more than one year of college credit via local community college her senior year of high school. Went to state college away from home and then medical school in the same town we live in. Despite the cost, the girls saved the family a pile of money. 1. Free college credit at the community college senior year of high school, accept to medical school with just 90 credit hours = 4 free years of college and room and board FREE (100K). 2. Went to state schools = 3 for the price of one IVY league (400K) 3. Went to the lowest cost Caribbean medical school = 2 for the price of expensive Caribbean school or attending Tufts (280K). 4. Attended medical school in our home town at cheapest tuition for medical school in the state UCF COM = 1/2 the cost of attending other schools in the state of Florida (100K). All three also attended public school through High School. Money was put into 529 plans, instead of private school (400K, plus earnings tax free, K-12). They all worked for my S corporation (?K). They put earned money into Roth IRA’s(?K). They were insured with high deductible HSA’s (100K). Hopefully, got the biggest bang for the least BUCKS. Haven’t ever figured out my savings(1.3 million plus? not including Taxes 2.0 million including), but the girls did GREAT. Only side step was the 180 credit hours on the first daughter, but she set the course for the others, hopefully will use that political science/economics degree in MEDICINE. Only started reading WCI a year ago, amazing I have been doing things RIGHT. But, still could have done better. I will keep reading WC and hopefully increase my percentage of doing things right.
Stats supposedly show those who (plan to) do 2 years community (cc) then 2 years a 4 year college (4y) are less likely to graduate in the end. I think it’s divergent groups. Those whose parents aspire from noncollege backgrounds for their kid to do college, may or may not push their kid through only because cc is affordable, and if s/he does well they might get scholarships to 4y, may prosper there, and rise a socioeconomic level or two. Locally many cc kids go into trades I was used to people starting after high school or with apprenticeships from cc, no need for 4y. RN, mechanic (aircraft at our army base), welding etc. Some wash out and end up poorly or happy to have any job, with little/no benefit from cc.
Yet the other group- WCI readers for the most part if we went this way- might’ve done just as well at 4y, but save money with cc first. Perhaps mom and dad know jr is not mature enough for 4y and the number of 4y kids from rich families who go the other way- a VP from a large company I know has one such- failing a drunken year or two at 4y out of town then returning home for a more chaperoned try either cc or local 4y- would’ve done better to do cc then 4y. Anyway I think starting from 4y grad parents or not better determines whether cc will lead on to 4y and whether cc is the better choice. So we should decide kid by kid and maybe even different routes for siblings though be prepared to explain this to the kid’s shrink in 30 years.
There are states with programs for the children of veterans. Specifically, the CALVET fee/tuiton waiver in CA and the Hazelwood Act in TX. Any vet’s kid can use CALVET but Hazelwood requires that the veteran have been a TX resident when he/she started service (its in bold at the top of your DD-214). They both have residency requirements for the student but not the veteran. I’m not sure if there are other states as these are the two that apply to me.
ignore last comment, was done on cell phone, was not meant for this thread, sorry! Can’t edit.
I know where you meant to leave it. I’ll delete it and you can repost it over on the forum where that discussion is taking place.
You guys are crazy. Here how I did it, and how my kids are doing it.
First 2 yrs in community college. Then transition to 4 yr instate university. I stayed home with my parents, and my kids stayed home at least for the first 2 years.
Sure they complained. But now they sing my praises. One is a dermatologist, one pathologist and another a dentist. NNNoooo debt. The money I saved, I put toward medical schools. The small debt they had, they paid it off before buying new cars, and this and that.
By listening to their old man, they have all done very well. They have financial freedom, and hopefully wont squander it. My only concern is that as two of them have gotten married, their partners spending habits are not very endearing.
My kids are little, but I would love it if this is the road they choose. I maintain that it was one of the best things I ever did. The minimal undergrad debt allowed me to go to not only dental school, but also medical school. I ended up with about 250k debt just from that and could not imagine adding an additional 100k undergrad debt (which would have added even more in capitalized interest on top). I think that I may not have chosen my specialty if I had that much undergrad debt.
I tell anyone who will listen to consider community college, especially if there is an honor’s program available.
Yep, the Hazelwood Act and California’s tuition and fee waiver for children of service disabled veterans are both good deals. I’m contributing to 529s for the kids as if California’s tuition waiver won’t be there when they hit college age.
If the program still is in place, then we can apply the 529 funds toward grad school, medical school, or law school. If the tuition waiver goes away or if the kid gets into Princeton, MIT, or Cal Tech, then we’ll use the 529 funds. Either way it’s good to have options and good to have the potential to have all or part of college paid for out of the (high) taxes we’ve paid over the years.
I understand the comment was not from you Jim, however to allow someone to completely bash pediatricians and speak towards us with such disrespect is appalling. I do a lot more everyday than treat ear infections and colds. In fact as a general pediatrician I have diagnosed increased pressure on the brain at a normal well child check of an infant, diagnosed testicular cancer, not to mention end stage renal failure,, stabilized infant in respiratory failure while awaiting transport,, etc, etc, etc I and my colleagues could go on and on! My pediatrician colleagues are equally or more exceedingly astute and capable.. Please, in the future have a little more respect for all physicians who may be listeners not just the “high earners,” before you bring someone on the show who feels our value is so minimal and wants to broadcast his unfounded opinions.
I have no idea what you are referring to. This post was written 18 months ago. Are you referring to the recent podcast with The College Investor? If so, send him the hatemail. I think I stuck up for docs including pediatricians pretty darn well during that podcast. I’m sitting here on a houseboat with a pediatrician right now. I agree with you completely about the value of a pediatrician, but I don’t expect every podcast guest to agree with me about everything. At any rate, see Robert’s “mea culpa” at the bottom of that particular post.