12-Minute Read
College planning has long been an interesting topic to me, but it has really hit home lately. My daughter Veda is a high school sophomore and is growing up too fast. There’s a balancing act between enjoying the moments with her (when she can spare them) and prioritizing what we need to do over the next two years before she starts college.
My wife, Pavi, and I probably share the same wishes as many of you, parents of college-bound children. We want Veda to find a college that helps her thrive by aligning with her goals and learning style. We also want to find a price point that gives us a reasonable “return on investment.”
That may sound cliché, but it’s more important than ever in the age of artificial intelligence, when access to knowledge is more democratized than ever before. We need to be smart shoppers for college. Because the pool of high school graduates is shrinking (the ‘enrollment cliff’ we’ve heard so much about), colleges are competing for Veda’s attention more than ever. This gives us, the parents, a unique bit of leverage if we know how to use it.
Because this is an area that personally affects me, I thought I’d take a different approach to this blog post. My goal is to walk you through how I’m evaluating strategies for Veda’s future education. This may help make the process feel more real to you.
Every situation is unique, and some of the points I mention may not apply to your situation. But I’m pretty sure there’s at least one takeaway in this (longer than normal) blog to help you improve your college financial plan.
In this piece, we’ll explore:
- Rules and Nuances of the Financial Aid Game
- Strategies We’ve Considered – Asset and Income “Shifting”
- How to Create Your Own “Tax” Scholarship
#1 – Rules and Nuances of the Financial Aid Game
One of the trickiest parts of college shopping is determining the true out-of-pocket cost you’ll pay for a given institution. The cost of attendance (COA), also known as the “sticker” price, is listed on any university’s website. But that’s only the start.
Financial aid, whether it’s need-based or merit-based, can make some colleges more affordable than their sticker prices. It’s like there are massive coupons out there, but we must figure out which ones are redeemable in our unique situation.
Merit-based aid, or academic scholarships, is more a function of your child’s credentials: grades, test scores, extracurriculars, and how well they write essays. Need-based aid, however, takes the details of your financial situation into account. We’ll focus on that part next.
The Formula
After you complete the FAFSA, typically annually in the year before each new college year (as early as October 1st), this is the basic formula that gets applied.
Cost of Attendance (COA) – Student Aid Index (SAI) = Financial Need
This formula itself makes part of the game easy to identify. If you’re seeking need-based financial aid, your goal is to lower the Student Aid Index (SAI) relative to your target school’s Cost of Attendance (COA), thus maximizing need.
For a more in-depth look at the formula with some examples, you can check out our earlier piece: How to Play the College Financial Aid Game.
Broadly, the key point is that household income is the largest determinant of your SAI, followed by your assets. Generally, parent-based income and assets are assessed at a lower rate than student income and assets.
Timing
Income is assessed using a two-year lookback, which allows you to plan ahead. For example, if you have a child entering college in 2027, they will look back at the income reported on your 2025 tax return. In our case, 2028 is Veda’s start year, so our income reported this year (2026) will be used in the aid calculations.
Put another way, every income-related decision we make from now until December 31st, 2026, is effectively “permanent” in the eyes of the 2028-29 FAFSA. As we’ll see in the next section, this is the year where we (might) want to be more intentional with our income than ever before.
Assets are assessed at the time you complete the FAFSA application. This gives you a little more flexibility to plan strategies for your “balance sheet” at the last minute. Some of these are also described in the next section.
Nuances
So, part of this game is determining whether you have a financial “need” to begin with. Then your next step in the search is to find schools that award a higher percentage of need-based aid. Keep in mind that if you choose a public out-of-state school, you may not qualify for any need-based financial aid at all. You could end up limiting your college list to in-state public universities or private universities, depending on how each institution handles financial aid.
The majority of universities in the US use the FAFSA, but many of the notable and prestigious private universities use the CSS Profile.
Business Owner Tip: Under the latest tax bill (OBBBA), Family-owned businesses with fewer than 100 employees are completely excluded from the FAFSA asset calculation again (they were briefly included in recent cycles). But schools using the CSS Profile might take a deeper look at your business’s value.
For the strategies that follow, note that they are mostly intended to optimize the FAFSA. The CSS Profile approach is more complex and may not provide any benefit, or even reduce your benefit, when you engage in a given strategy.
But there are exceptions. For example, the FAFSA approach no longer gives you a break if you have multiple children in college at the same time, whereas the CSS Profile may be more forgiving.
#2 – Strategies We’ve Considered – Asset and Income “Shifting”
Let’s make this more personal now. With the rules of the game in mind, my wife Pavi and I face some interesting decisions. Do we deliberately rearrange our assets and income to qualify for more financial aid? If so, here are a few strategies we could implement.
College 529 Plan “Re” Gifting
We established a College 529 Plan for Veda shortly after she was born. We contributed modestly to the account over the years, such that it could probably fund about two years’ worth of public in-state (Texas) college costs today.
One “problem” with parent-owned 529 plans is that they are included as available assets in the financial aid formulas, as they should be. But one recent rule change is that grandparent-owned 529 plans do not harm your financial aid eligibility. Put another way, they do not count as assets nor do they count as income when the account is distributed to pay college expenses.
This essentially creates a path to gift our 529 plan to my parents (Veda’s grandparents) so they can pay part of her college expenses from that account. There are some nuances to executing this properly, but the key thing is trusting the grandparents, which, in our case, we very much do.
While this is a home run for FAFSA schools, be aware that many private universities using the CSS Profile still want to see these assets, regardless of who owns them.
This approach entails some administrative work and will require future cooperation from the grandparents. Overall, it’s a bona fide strategy to keep on the table.
Pay Off Mortgage
Outside of the 529 plan, we have other “countable” assets in taxable brokerage and bank accounts. We also have a modest balance remaining on our primary home mortgage.
As home equity is excluded from the financial aid formulas, one strategy is to “simply” pay off the mortgage. For example, we’d sell assets in our brokerage account and pay off the mortgage before we complete our first FAFSA application. Reminder: Unlike income, which is based on your tax return two years prior, your assets are determined as of the day you file the FAFSA.
One critical consideration here is whether paying off a mortgage is a good long-term decision. We explored that in our earlier blog: Thoughts on Paying off a Mortgage Early. In our case, it would improve our household cash flow but reduce our liquidity, which may be very important once college starts! Our mortgage also has a much lower fixed rate than what’s available in today’s loan market.
It’s an interesting trade-off to consider. Reducing our liquidity could mean taking on more student loans during Veda’s college years. That may not be our ideal path, but it deserves some consideration.
Increase 401k Contributions
This may be more powerful than either of the previous two strategies. For one, retirement accounts themselves don’t count as assets towards financial aid. Secondly, if you lower your income using pre-tax contributions to a 401k (or other qualified plan), it lowers the income reported to the schools and can lower your SAI considerably.
Here are the general 2026 401k limits:
- Employee Deferral: $24,500 (up from $23,500 in 2025).
- Catch-up (Age 50+): $8,000 (totaling $32,500).
- Super Catch-up (Ages 60-63): $11,250 (totaling $35,750)
- If you’re over 50 and earned over $150,000 in 2025, be sure to note the new rules that may limit your pre-tax We explored that in our piece: New Year, New Rules: Your 2026 401(k) Strategic Roadmap
In our case, we would utilize an Individual (Solo) 401k plan because my wife and I are currently the only employees of our small business. This typically allows a higher contribution than you would have in most employee-only arrangements. Not only can we each contribute up to the first (under age 50) amount shown above, but we can also do an employer “profit sharing” contribution at up to 25% of wages paid, subject to an annual cap of $72,000 (excluding catch-ups).
In our case, if we maximize this approach, we could run into a similar issue to the previously noted strategy of paying off the mortgage. We might need to use some of our taxable brokerage assets to fund the 401k, reducing household liquidity.
It’s important to remember that for this type of strategy, only work-based retirement plans like a 401k and 403b can be used. If you contribute to a traditional IRA or SEP IRA, for example, those contributions are directly shown on your tax return and get added back in the income assessments for financial aid.
Accelerate Business Expenses
If you’re a business owner, another way to lower reported income is to spend more money. Sounds a bit facetious, but it’s not about your business’s gross revenue; it’s the net income that gets reported.
If you have legitimate business spending needs, accelerating those into the years that count in the FAFSA formula could make a lot of sense.
Of course, in our case, we’re not a “capital-intensive” firm, so we might need to get a little more creative than other businesses.
Aside from financial aid, another thing you can explore is whether there are ways to lower your income enough to qualify for the American Opportunity Tax Credit. This is a federal tax credit of $2,500 for up to four years ($10,000 total per child).
This tax credit is subject to income-based phase-outs. For example, a Married Filing Jointly couple in 2026 starts to phase out at an AGI of $160,000, with a complete phase-out at $180,000.
It’s probably no surprise that purposely lowering income can often cause more damage than good. But if there are ways to do so somewhat naturally within the scope of your career/business goals, it can be worth exploring, like we are.
#3 – How to Create Your Own “Tax” Scholarship
Let’s switch gears a little. It’s possible we won’t be aggressive with any of the strategies mentioned in the last section. Why?
Based on our target schools (a list that’s still being refined) and goals for out-of-pocket costs, we may simply not qualify for need-based financial aid. Our SAI, even adjusted for the strategies previously mentioned, may exceed the cost of attendance, thus eliminating financial need.
In that case, we could redirect the focus to school selection, possibly to schools that offer more merit-based financial aid.
Another thing we can do is put more focus on family tax savings. Some college planning experts call this creating your own “tax scholarship”. Here are a few ways we’ve considered approaching this:
Business Strategy #1 – Hiring Your Kids
This applies, of course, only if you’re a business owner. In our case, we can hire Veda into our business on a part-time basis and pay her wages. What does this accomplish?
First note that the standard deduction for Single Filers in 2026 is $16,100. Assuming we had enough legitimate work for Veda within our business, we could pay her close to that deduction amount, and she would pay $0 in federal taxes on those wages.
Furthermore, we (as parents) would receive a tax deduction for those same wages paid, lowering our overall taxes. The one offsetting factor is that because of the way our business is structured, we’d have to account for additional FICA (Social Security/Medicare) taxes on wages we pay her.
Essentially, if you’re in a high enough tax bracket, hiring children can achieve family tax savings and help the kids build valuable work experience.
There’s even one more benefit. Those wages paid to Veda allow her to contribute to a Roth IRA. She can contribute up to $7,500 for 2026. Assuming this strategy could be done for her remaining high school years and college years, it could be a substantial head start on her own retirement savings.
Annual Gifts for Modest Capital Gain Tax Savings
Back in the 1980s, the tax law was overhauled to prevent a parent from reducing capital gain taxes by shifting assets to their children, who are taxed at a lower rate.
However, some modest gifting to children is still allowed. In our case, we could shift some of our investments annually to Veda to help pay for college. The key would be to keep capital gains as close to $2,700 per year (based on 2026 tax figures). This amount of gain would essentially be taxed at 0% for Veda.
If she had other unearned income, such as higher capital gains or dividend/interest income, we would be subject to the “Kiddie Tax,” and that excess would be taxed at our higher (parent) capital gains tax rates.
The “All In” Option – Having a Child Qualify as Independent
Under most normal scenarios, we’d envision having Veda as a tax dependent of ours until she’s out in the workforce earning for herself. But there can be reasons to have her qualify as independent earlier.
One reason is that we punt altogether on trying to get need-based financial aid. If we did that, we wouldn’t really care so much that Veda has assets or income in her name. True, those would be assessed at a higher rate for financial aid, but it might not make any practical difference in the out-of-pocket college costs we incur.
Perhaps the biggest reason to have her qualify as independent is to allow her to claim the American Opportunity Tax Credit of up to $2,500. Even if we lost the ability to claim the $500 “other dependent” tax credit, it’s still a “family” tax savings of up to $8,000 (4 years x $2,000).
By also shifting some capital gains to her, we create just enough tax liability on her return to fully ‘unlock’ the $2,500 credit, which might otherwise be limited if she had no tax to offset.
You really must tread carefully here. There are strict IRS requirements to qualify as independent for tax purposes. Usually, it’s when the child has sufficient earned income on her own to meet at least 50% of her support needs.
But support can also be determined from the assets the child owns. For this to work, the assets should ideally be gifted in advance (ideally in previous years) so they are clearly her legal property before she spends them on her own tuition and housing.
One tricky final part of doing this is the uncertainty about how much her college will actually cost, and that’s clearly a big part of her support needs during the college years! This is likely a “wait and see” strategy from our perspective.
Business Strategy #2 – Tuition Reimbursement Plans
This last strategy is only for children who are at least 21 years old, working in your family business, and qualify as independent for tax purposes.
This is called a Section 127 tuition reimbursement plan; it allows a business owner to pay $5,250 towards an employee’s education. It’s a tax-free benefit for the employee, while also a 100% deductible business expense. Starting next year (2027), this annual limit should also include inflation adjustments.
These benefits can be applied to tuition, books, and supplies. But it can even go further. The IRS recently removed the expiration date on using this type of plan for student loan repayments, making this a tool for post-grad planning as well.
Doing this involves some setup, including a written plan for the business. It’s important to note that all eligible employees of the business must be offered this, so you can’t just cherry-pick your own family members.
Since Veda is only 16 at the time of this writing, this is just another card to possibly play down the road, assuming this tax break remains available.
Parting Thoughts
If you made it through all this, it may be more than you ever wanted to know about late-stage college planning. And we really didn’t even touch on student loans, which is fascinating, especially given some of the recent changes limiting the amounts parents can borrow. But we’re hopeful we can minimize the use of loans in our own strategy.
While college planning has been turning my wheels more as of late, I’m trying not to lose focus on what really matters: Veda having a great college experience and education.
At the same time, the rules of the game are what they are. We might as well account for them in our financial game plan. I hope this piece has inspired you with a few practical takeaways for your own family.
If you have comments or questions on this piece, please drop me a line at: [email protected]
References
- https://www.ed.gov/higher-education/paying-college/fafsar-what-you-need-know
- https://krishnawealth.com/how-to-play-the-college-financial-aid-game/
- https://cssprofile.collegeboard.org/
- https://krishnawealth.com/thoughts-on-paying-off-a-mortgage-early/
- https://krishnawealth.com/new-year-new-rules-your-2026-401k-strategic-roadmap/
- https://www.irs.gov/credits-deductions/individuals/american-opportunity-tax-credit
