With a graduating senior, I'm considering the cost of higher education for my son. Fortunately I have been saving since he was in diapers for college through a 529 college savings plan. With enough saved up for most schools, there isn't much motivation for him to apply for scholarships. I needed to introduce an incentive structure for him to do everything possible to maximize any money available.
One realization was that certain schools will give significant tuition dollars for students with certain grades and test scores, especially SAT. For example, one of the schools he is considering offered $5,000 off tuition a semester. That is appreciated, but with another 200 more points on the SAT, that number doubles to $10,000 a semester. If he has already been accepted and Mom and Dad are footing the bill, where do you find the motivation?
The agreement I came up with is to split the award with him. If he focuses on his practice tests and applies himself, he can “make more money” than he did lifeguarding all last summer. With a $10,000 tuition credit, he get’s $5,000 into his account for an eventual down payment or next car. I am still ahead, even after paying tax on the distribution although it does avoid the 10% penalty. Another option would be to gift him the money due and roll the amount that could be taken out to a siblings account of keep in for graduate school if cash flow allowed. (Source IRC Section 529(c)(3)(B)(v))