Applying for Student Loans As a High-Net-Worth Person
Key POINTS:
Filling out the Free Application for Federal Student Aid is always your first step in applying for student loans, regardless of income.
In addition to federal loans, private loans may offer low-interest rates and opportunities to build credit.
You want to be able to make informed decisions about financing higher education, balancing the use of loans with other financial strategies to optimize your overall financial picture.
Applying to colleges can be an exciting yet stressful time. High-net-worth families may choose to fund their children’s education through a mix of financial resources, often incorporating 529 plans alongside education loans. When applying for financial aid, specifically loans, it will be important to know all the facts. While there’s a wealth of information available—much of it focused on families seeking financial aid—the needs and considerations of high-net-worth families are often less prominently addressed.
Should I Fill Out the Free Application for Federal Student Aid Even If I Don’t Think I’ll Qualify?
Yes, everyone should fill it out regardless of your income level. The Free Application for Federal Student Aid (FAFSA) is required for access to certain federal loans. Unsubsidized federal Stafford loans are available to all students, and there is a chance your child may qualify for subsidized federal Stafford loans, which don't accrue interest while in school. It is important to note that for high-income families, there is a slim chance of qualifying for Subsidized loans as these are need-based. Parents may instead turn to Parent PLUS loans, which are available to parents regardless of income.
Some need-based federal aid programs are awarded on a first-come, first-served basis, so it’s still wise to file the FAFSA early. Every year is different, and your own situation may change. In addition to need-based aid, some colleges require FAFSA completion in order to be considered for merit-based scholarships.
High-income families may still qualify for school-provided aid at some private colleges, especially if you have multiple children in college simultaneously. There also may be opportunities to shelter certain assets from FAFSA or lessen their impact through proactive planning. Legislative changes happen, so keeping up to date on current requirements is important. For instance, the 2023 Consolidated Appropriations Act changed many facets of the student aid process. If you own a small business and apply for aid beginning with the 2024-2025 FAFSA, your business is considered an asset. Given these nuances, many individuals find it helpful to consult with a wealth management advisor who can offer guidance tailored to their specific situation.
One thing remains true. By filling out the FAFSA, you’ve laid the foundation for your financial package.
Are Private Loans Worth Looking Into?
This is where financial planning plays a key role, as it’s important to consider all aspects of your situation. The answer here will change depending on the current structure of your portfolio, future liquidity needs, and financial goals.
Working with an advisor who understands your specific financial situation is important when weighing the pros and cons of using assets to pay for college outright versus leveraging low-interest loans. We’ll talk you through the potential impact of student loans on future financial decisions, such as home purchases or business investments.
Generally, the benefits of federal student loans often outweigh going private. However, certain circumstances such as borrowing limits, eligibility, and other personal factors may necessitate the use of private loans.
What’s Better: Federal or Private Student Loans?
Each type of loan has advantages and disadvantages.
What Are the Tax Implications of Student Loans?
Understanding the tax implications of student loans is an important aspect of education funding strategy. It is common for individuals to rely on a mix of 529 plans and student loans to cover the cost of higher education, with each source carrying distinct tax consequences. For example, a key feature of state-sponsored 529 plans is that non-qualified distributions are subject to ordinary income tax and a 10% penalty withdrawal on earnings.
Some individuals may find themselves in the unique position of carrying student loan debt, while also having some remaining assets in their 529 plan. In this case, it’s important to note that those assets may be used towards student loan repayment (up to a $10,000 lifetime limit per beneficiary) without losing the advantage of tax-free withdrawals and incurring additional penalties. There are many caveats to this strategy, one being that not every state will conform to these federal guidelines. Working with your financial planner to assess all potential factors before implementing a strategy for leftover 529 assets is important.
The IRS offers an interest deduction for eligible student loan holders. Annual interest paid on qualified student loans may be tax-deductible, subject to income thresholds and other limitations. However, certain restrictions apply. For instance, if the 529 loan repayment strategy is used—as described above—the IRS does not permit taxpayers to claim a deduction on the interest for those repaid amounts, effectively preventing any "double dipping."
How Does Paying for College Affect My Overall Financial Plan?
Whether planning for oneself, children, or grandchildren, working with Capstone can help ensure progress toward financial goals. Since there is no one-size-fits-all approach to education planning, making informed decisions about financing higher education—including balancing student loans with other strategies—is essential to optimizing the overall financial picture. For this reason, partnering with a wealth management firm experienced in advising high-net-worth individuals and families is important.
Education planning is a core service at Capstone. We’ll work with you to evaluate the impact of financing higher education on long-term financial objectives and assesses how student loans may affect various aspects of the financial plan.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.