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Education Funding Strategies for the Highly Affluent


College costs are high and getting higher every year. For families with very limited income or assets, need-based aid is often available from the state or federal government or from the college itself. As family income and assets become greater, the amount of need-based aid begins to decline. For those who are truly affluent, there’s no possibility for need-based aid, so there needs to be strategies to make the cost of their sons’ and daughters’ education more reasonable.

If your family is affluent, funding options for your child or grandchild’s education can be complicated in addition to the ever-changing rules. I recently spoke to Steve Shapiro, CFP® who has worked with families to address education funding as part of their overall financial plan. His level of expertise far exceeds the average financial planner or advisor when it comes to addressing the challenge of paying for college. Shapiro practices in Santa Cruz, California but has clients around the country.

Merit-based Aid

Merit-based aid is offered by many private colleges and universities. Shapiro says that many smaller, high-cost private liberal arts colleges are competing for the students that they feel are a good fit at their institution. Many, but not all, compete by offering merit-based aid, which is not based on the family’s need, but rather the attractiveness of the student to the particular institution.  

The average “tuition discount” or merit aid package today is approaching 50% at many small, private liberal arts colleges. These schools are often not in the more popular geographical locations. Shapiro said that students often gravitate to the many of the same schools that are located on either the West and East coasts. The more impacted the school, the less the need to offer merit-based aid to attract good students.

Being at the top of the incoming freshman class (grades and test scores) increases the possibility of merit aid. In some cases, a $65,000 a year education cost could be reduced to $40,000 with merit-based aid. That is still expensive but saves $100,000 over four years. There could be additional savings since the probability of graduating in four years is more likely at a small private college than it is at many larger public colleges and universities.

A common mistake that many students from high income/high net worth families make is to apply to colleges and universities that only offer need-based-aid.  The Ivy’s are a good example – no merit aid, only need-based aid is offered. The result to the student? No financial help and the family pays the full amount – or they choose another school.  

Income Tax Savings

Another opportunity can be gifting highly appreciated stock to the student to save on income taxes. This can work well no matter what school your kids may go to. Let’s say that the parents or grandparents have stock that is highly appreciated. If the present owners were to sell the stock they would have to pay federal long-term capital gains tax plus state income tax. This could be 25% to 30% depending on the income and state of residence.

The strategy involves the gift of highly appreciated stock to the student and form 709 is filed with the IRS declaring the gift if it is over $14,000 from one or $28,000 if from a married couple. No gift tax is due when it is part of your lifetime exclusion amount. The student then sells the stock but not so much as to trigger paying capital gains on the sale. The current level is $35,000 assuming no additional income. The student files their own tax return and is not a dependent since the gift will be for over one half of the student’s support. Be sure to review this strategy with your tax professional since this can vary by state and circumstances.

Strategy for Self-Employed

Shapiro went on to explain that if a parent is self-employed or owns a business, setting up a section 127 Educational Reimbursement Plan at work is a way to pay for a portion of the education costs on a pre-tax basis. This can work well for attorneys, doctors or other affluent small business owners. The limit is $5,250 a year for educational expense on a pre-tax basis.  There are many conditions that must be met to take advantage of this useful planning tool, so caution is in order. For these self-employed or business owners, hiring their children can be a win-win situation: the business deducts the wages and saves taxes; the student typically pays no tax and can use the income to save for college.    

Education Consultant

Hiring a private educational consultant can be worthwhile with the ever-changing landscape of education funding. A private educational consultant can make a very stressful process less so, by guiding the student (and parents) through each step of the process. They often work with students in their junior and senior high school years with feedback on coursework, standardized testing schedules, etc. They offer personalized guidance and advice on the college admissions process; assist the student by identifying colleges and universities that are a good fit for the student and they review the college applications and essays/personal statements.  

These consultants help to make sure that the student meets all academic deadlines. Shapiro has seen great cost-saving results for those families that hire these specialized consultants – especially if they are aiming for the high-cost private colleges and universities. To locate one of these valuable consultants in your area, go to the Higher Education Consultants Association (HECA) website.

The truly affluent are in a better position to pay for their kids’ or grandkids’ education than the majority of families but exploring ways that can decrease those costs, or at least do so in a tax efficient fashion, are worth considering.



 (800) 347-1340