Advising clients stuck in the college tuition no-man's-land

Clients might find themselves in a quandary of being too wealthy for their children to qualify for financial aid but not wealthy enough to easily pay for their college educations.

In that type of situation, there are several strategies for affording kids' college that financial advisors can help with, including planning ahead when students are younger and negotiating between schools.

Fidelity Investments found that 88% of parents report being motivated by their own student debt to support their children in saving more, while 55% said paying off those loans delayed retirement savings, according to research released Aug. 26. Forty-eight percent said their own student loans impeded saving for their children's college.

This all comes at a time in which college tuition is increasing faster than in inflation. Further, 15 schools now cost more than $100,000 per year for tuition, fees and books, according to an analysis by The Washington Post of data from The Princeton Review, and plenty others priced just short of that should break that threshold soon.

"It is something where it can be a burden, especially some of these schools topping $100,000 a year, and you add up some of the other expenses, you're talking a half a million dollars, easily, to pay for school, and even for somebody who's relatively well off, coming up with a half a million dollars is not easy," said Mitchell Kraus, who co-founded Capital Intelligence Associates with his father.

READ MORE: Two must-have client conversations for college planning: 529s, FAFSA

And even if those expenses are out of reach, parents' income might disqualify them from receiving federal aid or grants from the colleges themselves.

"Parents shouldn't expect to receive major financial aid" from public institutions if they make about $75,000 to $150,000, and if they make $150,000 to $250,000, eligibility is "pretty minimal," said Nickolas Strain, a Valencia, California-based senior wealth advisor and chair of the Wealth Advisory Committee at registered investment advisor Halbert Hargrove.

Other options include getting merit-based aid and raising the likelihood of receiving aid by applying to more schools, he added. Starting out at junior college, or community college, also lowers costs. Hiring college counselors can be worthwhile to help with the preparation process, "if you're fairly well off financially and you can afford a couple thousand dollars."

Some prospective students try to negotiate scholarships in a similar way to how some working professionals negotiate salaries.

"I know a lot of clients who have had kids get in, [and] they don't quite reach the financial aid threshold, but they start playing the schools off against each other, and they've been able to get some discounts," Kraus said. "'Thank you for accepting me, but my second choice school is about to give me $30,000 a year. Is there anything you can do?' And some schools will play that game, and some schools won't."

Clients could also consider sending their children to less expensive schools that could still provide a quality education.

"The question is priorities: Is the priority in education? Or is the priority 'the best education' or a fitting education?" Kraus said.

Start saving early

Strain outlined how clients can make plans to pay for tuition costs. Total costs might be $400,000, multiply that by two or three children and then calculate monthly savings required over, for example, 16 or 18 years, he said. Annually, parents should check they're on track, and be prepared to save on an annual basis $25,000, $50,000, $75,000 or however much it needs to be, "so that parents aren't shocked."

Those who didn't start seriously preparing early enough could also find themselves struggling, said Travis Poodiack, co-founder of Keene, New Hampshire-based registered investment advisor Birch Financial Group. They may shorten the college savings timeline by S contributing less to a 401(k) and using private student loans, he added. Also, some children work during the summers to pay for books, for example.

Fidelity Investments found that parents who expect their children to cover part of their own college costs only expect them to pay for 38%, which is down from 41% in 2024.

READ MORE: Navigating the new student loan rules on repayment plans

Be careful about receiving large gifts

Advisors can also help coordinate the timing of large monetary gifts to the parents of prospective college students and consider the impact gifts can have on the parents' status when their children apply for aid.

John Pantekidis, general counsel and a managing partner at TwinFocus, a Boston-based registered investment advisor, cautions clients about the effects of gifting when wealthy relatives give to less wealthy relatives.

"If Uncle John and [Aunt] Jane give money to Mom and Dad, [the kids] are no longer able to get financial aid," said Pantekidis. "For one family, I can tell you that's a real problem where we're postponing gifting until one of the children finishes college because that will definitely impact her ability to get financial aid."

READ MORE: How to help clients pay less for college

Another strategy Kraus described is an approach he has seen a self-employed client take. He said he has "a client who has his own business, and he pays himself a very little salary, and he shows up for financial aid and is not making much income."