Saving for college. It’s something that those of us with kids worry about – how are we going to afford to pay for little Jane or Johnny to go to school? The financial press will often tell parents not to worry about this. Jane or Johnny can get loans, so if you don’t save, you’ll be fine! Just focus on your own retirement.
Well it doesn’t always work that way. If you have a high income, the government expects that you’re going to save for college. Little Jane or Johnny may get some loans, but with a high income your Expected Family Contribution (or EFC) is going to be high. When it’s high and you don’t have savings to cover the gap, you need to take out private loans, which require a cosigner. And when you co-sign a loan, guess who’s responsible if Jane or Johnny doesn’t pay? You.
As an example of a high income person who’s bought into this thought process, let me tell you a story about a conversation I had with a friend I’ll call “John” a few months back. We were talking over lunch about various topics. John told me about their 40k+ brand new car, and a few minutes later, was talking about he she wanted to protect their money from being spent on college. He obviously thought that they could find an investment that would keep their money safe and sound from colleges, so they could enjoy it instead.
I looked at him. If college is an important goal, wouldn’t you have set that money aside instead? Second, this friend makes somewhere approaching 200k a year. The kids are still young, so there’s plenty of time to to save and let the magic of compound interest push the savings total up through time. And instead of celebrating that he has enough to pay for almost wherever her kids wanted to go, he was instead looking for ways to keep the college from getting their hands on their money.
“Um,” I said, “most aid offers are based on your income. Only about five percent of your savings are expected to go to college each year, and most schools don’t count retirement investments or your house.” I left out the explanation of the CSS profile and exceptions to this general rule, because I figured we were in very basic territory. “With a high income the only aid you’ll likely get is offers for loans.”
It seemed he was hoping to hear about a magic plan somewhere in which people who make 200k a year don’t need to pay anything for higher education. Some amazing investment where you can hide their money away and the colleges will fall over themselves to throw money at you while you continue to enjoy your money on vacations, home improvements, new cars, and whatever else. I guess the college is supposed to simply say “Oh, you make 200k but you didn’t save? You poor thing. Life is so hard for you. Here, have some grants and need-based scholarships. The child of the single mom making $40k a year doesn’t really need help anyway.”
This is exactly why goal setting and starting to save is important. If a home improvement, a new SUV, a second home, or a boat is important to you and your family – great! I don’t judge where you want to spend your money. All I ask is that you be honest with yourself. If those things are important, and college isn’t, then let your kids know that. And don’t be surprised when the college fails to make up for your prioritization.
How College Aid is Calculated – High Earners Pay Attention
A bit about how college aid is calculated – the Expected Family Contribution, or EFC, is based primarily on your income. Now you might be thinking of hiding some income by contributing to retirement accounts – sorry, it doesn’t work that way. The government essentially assumes you’ve done a good job saving so far and you can cut back on, or eliminate, retirement contributions while your kids are in college. Then they take 5% of your non-retirement, non-mortgage assets and assume you’ll use that for college every year. The bad part about that if you have multiple kids (I have 3) is that the 5% a year will really add up over time.For assets in your kids names like a UTMA or UGMA account, it’s assumed 20% of those would go to the college. After all, according to the government, the kids biggest priority should be paying for school. Over four years this takes about 80% of their savings. But your income counts much, much more in the calculation – up to 47%! If you’re curious about your own EFC go ahead and check out this calculator.
Does this mean there’s no legitimate way to keep assets from being used for college? Well, there are a few that will take them out of the FAFSA calculation. For example, using savings to bump up your retirement contributions or withdrawing from after-tax investments to help pay down your mortgage will move the assets into the “non-calculated” category. The same is true if you use after-tax money to pay off debt like credit cards or a car, or to make a big purchase. But if you go down that path, then you don’t have the money anymore to use for college – that’s why isn’t not counted. Unless you’re planning to re-mortgage your house (no!) or sell your car/boat/stuff to pay for college (you’ll be better off not buying it in the first place) or withdraw from retirement to pay for college (please don’t- a traditional account, might incur a penalty and will be taxed, plus both a traditional and a ROTH kinds of withdrawals get counted as income the next year).
What about your income? Well you can always retire early, legitimately dropping your income down. I did suggest this to my friend, since he’s talked before about retiring and trying to open her own business. As I mentioned his kids are young and he could plan to do this in 10 years or so when they head off to college. If your household income is less than $50k you can get substantial aid, or if you earn a bit more but less than you currently do you can get a bit more aid.
So if you’ve always wanted to start your own business, or you’re nearing retirement age, it can be an idea to look at. Now the trick is that a lower income really means that – you’re earning less and need to live off less, or live off savings. I think this would be a fantastic option for my friend. He could step out of the rat race with a paid off house and some investments, open a small business to earn income to live and use savings to pay for college. Sounds like a dream to me, and one close to my own thoughts about my longer-term plan.
You see I have three kids – ages 13, 9, and 1. The oldest two will be done with college when I’m in my 40’s, while my later in life little guy will be going when I’m in my 50’s. With only 12 years left on the mortgage I’m aggressively paying down, I expect to be debt free-hopefully before the kids go off to college . My own college payment plan involves paying off the mortgage before my oldest goes to college so I will have additional cash flow to make the payments in addition to saving more for the younger kids. By the time my youngest hits college I hope to be retired from the 9-5 and instead doing consulting, working online, or something else where I have more flexibility.
The moral of this story? If you make $200k a year, the college financial aid train is not stopping at your station. You’ll need to make sure you have something set aside for college unless you like the idea of co-signing all those loans you’ll get offered from the nice private student loan companies.
You can check out more thoughts about college in my articles where I bust the myth that you can get loans for college but not retirement; my thoughts on how America pays for college, or how I create my college compact with my kids.
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12 thoughts on “No, Colleges Don’t Give you Aid if you Don’t Feel Like Saving”
My oldest will be going to college in 10 years time—which is also the timeframe I’ve given myself to save enough to be financially independent. So, if I understand correctly, if my husband and I saved enough to retire and we stop working and our only income is the proceeds from our investments (let’s say ~$50K/yr) then my kid will then qualify for financial aid?
Oh, and as for your questions: We make 6 figures (probably not high income enough. LOL.) but we’re not in denial of college costs. I still my own student loan payments to remind me each month. We have 529 for the kids where we put all their bday/Christmas money from relatives, plus $1k/yr from us. So, about $2K/yr/kid. Not much really but we’re more focus on saving for retirement.
Seriously, this post has so many good info that I am gonna have to go back and re-read this. Thanks!
Yes you may qualify for aid-you’ll need to run the numbers, but income is much more impactful than assets in the calculation. It sounds like you’re off to a good start with saving in the 529’s, that should help you cover your expected contribution
My wife and I have set up a 529 plan for our son and we are definitely trying to align what we value, providing a higher education for our son.
I think part of it is that my wife and I both had college paid for and watching some friends struggle with paying for college has really made up realize what a huge blessing it is to have had college paid for.
Thanks for sharing your awesome perspective like always!!!
It’s great that you had your college paid for and are looking to pass that along to your son. By starting so early you’ll need to save less overall, because that compound interest will be working for you!
It seems strange, doesn’t it, that college clearly isn’t a value for them. And yet, is it safe to assume with their incomes, that college played a part in getting them where they are today?
You tried. Perhaps as their children grow older, their values will change after all. Of course, it may have been too late to save by then…
You guessed right, they did both go to college. I assume they feel like it’s a priority but haven’t aligned their actions to their goal. Oh well, maybe they will someday!
Most people believe these myths about college financial aid. Recently, I had a few people tell me NOT to put away money in a 529 plan because you’ll be penalized for saving in it. He mentioned how he saved for his kids’ college education while his neighbor didn’t and his kids didn’t get financial aid while his neighbors’ kids did. While they will look at your savings to determine financial aid, it is a small factor compared to income (the person I spoke to is an attorney and so is his wife).
There is a lot of misinformation about financial aid. Recently, I had two people tell me NOT to save in a 529 plan because you get penalized for saving. The person told me that he saved in a 529 plan while his neighbor did not save anything for college, but the neighbor’s kids received financial aid while his kids did not. There are so many factors which I’m sure he hasn’t taken into account. While savings are a factor, income is much more significant (him and his wife probably make over $200k combined so that might have something to do with it!)
Yes, I’ve heard that too! I also had people tell me 529’s can’t be used for room and board, which is not true. I sent them the appropriate section of the tax code that demonstrates otherwise. And yes I agree, that person thinking they didn’t get aid because of their savings, while making over $200k, is misinformed about how financial aid works.
We are in the midst of this now. We are focused on merit aid because with our income and savings we are expected to pay for all of college. Quite frankly the cost of college is over priced. We told our kids if you are smart enough to go to college you are smart enough to pay for college with loans.