How Grandparents can help with the rise in College Tuition

RACHEL INFANTE, CFP®
Sep 19, 2019 8:15:00 AM

rise in college tuitionIt’s no secret that the cost of a college education today is vastly different than the cost parents and grandparents paid years ago. According to College Board Trends, the average cost of in-state tuition for a public university in 1975 was $2,510 per year (in 2018 dollars) and $10,650 for a private university. Fast forward to 2018, that same public university now has an average cost of $10,230 per year compared to private universities that now have an average annual cost of $35,830 (not including room and board). Now, more than ever, we have to plan differently in an effort to pay for such an expensive goal. If you’re a grandparent thinking about helping, here are some ways in which you can and some important things you should be aware of:

Consider Opening a 529 Plan: 

What are 529 Plans? 

They are tax-advantaged accounts specifically designed to pay for qualified education expenses (elementary through college). You would be the owner of the account and the grandchild would be the beneficiary. Since you are the owner, you get to decide if and when the money is accessed by your grandchild or beneficiary. 

How much can you contribute? 

In 2019, you’re able to contribute up to $15,000 per individual to a 529 Plan without having to file a gift tax return (although the federal gift tax exemption is rather high, so the likelihood of owing gift tax is low). There’s also a special rule with 529 Plans that allow a one-time contribution equivalent to 5 years of the annual exclusion ($75,000 in 2019 per individual). So for grandparents that have 2 grandchildren, for instance, you could hypothetically contribute up to $150,000 per grandchild or $300,000 total in 2019. You wouldn’t be able to make any additional gifts to that plan (or outright to that beneficiary) for 5 years.

How does it affect my grandchild’s student aid eligibility?

Grandparent-owned 529 Plan values aren’t included in the student’s FAFSA [Federal Financial Aid Form], however, once the student withdraws funds from a grandparent-owned 529 Plan to pay tuition, the money is treated as income on the FAFSA form for two years. A way around this is to delay payments from a 529 Plan until after the student is a junior in college and has filed their last FAFSA.

Other things to note:  

Some states also allow for a state income tax deduction (or credit) if you contribute to a 529 Plan. However, it may be required that you contribute to your state’s specific plan in order to qualify for the deduction or credit (see HERE for more information specific to your state of residence).

To summarize:

Pros:

  • Tax-deferred growth and tax-free withdrawals for qualified distributions
  • Flexibility with what qualifies as an eligible expense
  • You own and control the account
  • Beneficiary can be changed at any time
  • Larger contribution limits
  • State income tax savings in certain instances

Cons:

  • If you make ineligible withdrawals you pay income tax and 10 percent penalty on any earnings
  • The grandchild’s need-based aid could be reduced 

Pay tuition directly to the school:

Another option is to simply pay the tuition directly to the school. This can be a simple way to help with the cost and allows you the flexibility to contribute as much or as little of the tuition as you would like.

How does it affect my grandchild’s student aid eligibility?

Your tuition payment may be treated as a dollar for dollar reduction in aid eligibility for the following year or could potentially be treated as student income on the FAFSA which also would reduce aid eligibility.

To summarize:

Pros:

  • Keeps it simple and allows you to contribute without running this risk that they, or any other potential beneficiary, decide not to go to college or some other qualifying institution.
  • Tuition payments made directly to the school are exempt from federal gift tax all together but must be paid directly to the school for tuition only.

Cons:

  • Need-based aid eligibility may be affected.

Other Miscellaneous ways:

Outright gifts to kids and/or parents 

This can be done over time and parents/kids can decide how they want to save/spend those dollars. This is not ideal as it gives you no control over how they spend it.

Loan your grandchild money 

Interest rates on student loans can be high, so another option is to loan money with little to no interest attached and later convert this loan to a gift. This allows you to set the terms and may give incentives for them to finish school. You’d need to make sure you are following the right IRS rules for tax purposes as they pertain to loans and gifts.

If you are able to, financially supporting your grandchildren’s education may be important to you. These tips can help you plan for an option that benefits both you and your grandchildren.

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