Paying for College When You Earn Too Much for Need-Based Aid
Most Silicon Valley families will be expected to pay the full sticker price. That makes the savings vehicle, the timing, and the tax rules the levers that matter.
For a household with two tech incomes, the financial aid conversation tends to be short. The federal formula assumes families with high income and assets can pay, and private colleges that use their own methodology reach similar conclusions. A Bay Area family should generally expect to fund college largely on its own, so the planning question becomes how to do that efficiently.
What the aid formula assumes
The Free Application for Federal Student Aid produces a Student Aid Index that schools use to measure what a family can contribute. The formula weighs income far more heavily than assets. A planning firm's summary of the 2026-27 formula notes that parent available income is assessed at progressive rates reaching 47% above roughly $43,900, while parent assets, including 529 plans, are counted at only 5.64% of value; assets held in the student's own name are assessed at 20%. For a couple earning $500,000, the income assessment alone will exceed the cost of most schools, so shifting assets around rarely changes the outcome.
The exception is merit aid, which is not tied to need. Many private colleges and some public universities discount tuition substantially for students they want to attract, and that discount is often the only reduction a high-income family will see.
What the bill looks like
The cost is significant even in-state. UC Berkeley's 2026-27 estimated cost of attendance for a California resident living in a residence hall is $54,674 per year, of which tuition and fees are $18,214; the remainder is housing, food, books, and personal expenses. Private universities often cost considerably more.
The 529 plan as the primary tool
For families that will pay full price, a 529 plan's main benefit is tax-free growth on money earmarked for education. Contributions are treated as gifts. The annual exclusion for 2026 is $19,000 per donor per beneficiary, and a special five-year election allows a lump-sum contribution of up to $95,000 per donor, or $190,000 for a married couple, without using lifetime exemption, as Fidelity's contribution guide explains. Front-loading gives the money more years to compound and, for families with estate tax exposure, removes the assets from the taxable estate.
The trade-off is flexibility. On withdrawals not used for qualified education expenses, the earnings are subject to income tax, a 10% federal penalty, and an additional 2.5% California tax, as the ScholarShare 529 plan's disclosures note. Recent changes soften this. Beginning in 2026, up to $20,000 per year can be used for K-12 tuition and expenses, per Fidelity's summary of the 2025 legislation. Under SECURE 2.0, a beneficiary can roll up to a $35,000 lifetime total from a 529 into a Roth IRA, provided the account has been open at least 15 years, the funds come from contributions made more than five years earlier, and the annual amount stays within the IRA contribution limit, according to Fidelity's rollover overview. Beneficiaries can also be changed to siblings or other family members, so overfunding one child's account is not necessarily wasted.
Consider a hypothetical: a couple contributes $190,000 at a child's birth using the five-year election and makes no further contributions. If the account grew at a hypothetical 6% annual rate for 18 years, it would reach roughly $542,000, an illustration of arithmetic rather than a projection, and markets may deliver far less or lose money over a given period.
Other pieces of the puzzle
Grandparents in a position to help can pay tuition directly to the institution, which the IRS gift tax FAQ treats as excluded from gift tax altogether, separate from the $19,000 annual exclusion, provided the payment goes directly to the school. Appreciated stock can be gifted to a college-age child and sold in the child's lower bracket, subject to the kiddie tax rules discussed in a separate Insights article. Cash-flowing part of the cost from RSU vests during the college years is common, but it ties the child's tuition to the employer's stock price at exactly the wrong time if the market declines.
Finally, saving for college should not crowd out retirement. A student can borrow for school; a parent cannot borrow for retirement, and the 2026 401(k) limit of $24,500 reported by the IRS is a reasonable reference point for what to protect first. This article is educational only and is not investment, tax, or legal advice; consult a qualified professional about your own circumstances.
Important Disclosures
Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.
