Navigating the college landscape for students and parents can be frustrating. Gone are the days when students could work part time jobs to cover most or all of their tuition. When students graduate, they often have a hard time paying off their loans. This forces them to delay other purchases, like owning a home. If you are a grandparent who is in a financial position to ease the burden on your grandchildren, here are some ways to help.
Pay Tuition Directly
In 2017, the annual gift tax exclusion is $14,000 per person. This means you can give up to $14,000 each year to as many people as you want without filing a gift tax return. However, if you would like to help your grandchildren with tuition bills you can pay the school directly. You will not be limited to a particular dollar amount because the Internal Revenue Code allows an unlimited gift tax exclusion when payments are made directly to an educational institution.
There are some drawbacks to this strategy when students file the FAFSA (Free Application for Federal Student Aid) form. This tuition help can reduce the aid package students receive in proceeding years. Depending on how much support you want to provide it may make sense to split planned gifts evenly over 4 years or wait to make the payments during their senior year if they do not expect to file for FAFSA in the future.
Open a 529 Plan or Contribute to the Parents’ Plan
529 Plan investments grow tax-deferred and withdrawals are tax-free if you use the money to pay for qualified education expenses. If you open a 529 plan for your grandchildren and remain as the owner, you get to maintain control of the account and possibly receive a state tax deduction depending on where you live. Most 529 plans are easy to maintain and monitor, with some plans having investment options that automatically get more conservative as the child approaches age 18.
If your children have already opened 529 plan(s) for your grandchildren, you may gift them funds to add into the accounts. Of course, since you are not the account owner, you would be giving up control over those funds entirely. You may or may not be able to take a state tax deduction for your contribution; it depends on whether they require you to be the account owner. When 529 plans are owned by parents they are considered assets that count within the Expected Family Contribution (EFC) on the FAFSA. When grandparents own 529 plans the assets are factored into the EFC calculation only once distributions start to be made from the account(s).
Help Pay Off Their Loans
If you find it difficult to navigate the college aid process and want to avoid giving money that might hurt your grandchildren’s aid package in future years, helping your grandchildren pay off college loans once they graduate may be the best alternative. Make your commitment to your grandchild clear and lay out expectations. Investigate the numbers carefully and make sure you understand what you are committing to. Most importantly make sure the gifts you intend to make are also clear in your estate planning documents just in case.
College aid planning is complex. Coordinate with your adult children to make a plan to cover the costs as best you can. Carefully consider all your options and how they will affect the financial aid packages available to your grandchildren. Seek the advice of your financial advisor to double check your methods before executing.
Elise Murphy, CFP®