Get Educated First!
By Jack Schacht, My College Planning Team
So, you want to help your grandchild fund his or her college tuition? What a great gift! After all, paying for college is the second largest expense most families will ever tackle, as tuition continues to increase at twice the rate of inflation.
Case in point: this year, according to CollegeData.com, the average cost of an in-state public college is $24,610. The average cost at a private college is $49,320. Meanwhile, the outstanding student loan debt is approaching a mind-boggling $1.4 trillion.
No wonder so many grands want to help their grandchildren out. According to a survey by Fidelity Investments, more than half of American grandparents are either helping to fund their grandkids’ tuition or planning to do so down the road.
However, it’s not nearly as simple as writing your grandchild a nice big check. A monetary gift to your grandchild may result in a tax event on your end or interfere with financial aid eligibility on theirs. In order to avoid such financial perils and pitfalls, grandparents need to do some research and planning.
Have a Family Discussion FirstWhile surprises are usually great fun, this is one situation when surprises can backfire in a big way. Let your grandchild and his or her parents know your intent upfront, so you can coordinate funding together.
For example, according to IRS guidelines on gift exclusions, you can give up to $14,000 a year to your child or grandchild without paying gift tax. However, that monetary gift to your grandchild will count as untaxed income, which may reduce his or her aid eligibility on their FAFSA (Free Application for Federal Student Aid).
Ditto if you want to pay your grandchild’s college tuition directly. The IRS may not count it as a gift from you, but depending on the college, your payment may negatively impact your student’s eligibility for aid.
This may not matter, of course, if your grandchild isn’t eligible for needs-based aid in the first place. But you may not know unless you first determine your EFC (Expected Family Contribution) which is determined by family income and who in the family earns the income .It is also determined by assets, who owns those assets and in which accounts the assets are held.
Learn the Ins and Outs of Tax-Advantaged 529 Plans
For many grandparents, a 529 savings plan offers many advantages. The existence of a grandparent-owned 529 isn’t factored in on the FAFSA. Earnings on your investments are tax-free, and 33 states also offer tax breaks on contributions. Furthermore, withdrawals aren’t taxed if the funds are used for qualified educational costs.
However—and it’s a big however—once funds are withdrawn to pay for tuition, distribution is considered income on your student’s FAFSA for the next two years. Once again, eligibility for financial aid may suffer.
As a result, some experts suggest holding off making contributions from your 529 plan until students are college juniors and have filed their last FAFSA.
And be aware: 529 plans vary by state, and you do have the option of setting up an out-of-state plan that may offer more attractive features. Even once you decide to pursue a 529 plan, there is still plenty to learn and consider.
Know Your Options
While the 529 plan is a very popular college funding choice for parents and grandparents, it’s certainly not the only option. For example, you can also consider a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. These typically offer more investment options than 529 plans, but involve turning control of the account over to the student when they reach a specific age. Another big problem with these accounts is that they are assessed as a child asset on the FAFSA and those assets are assessed at a much higher rate than those held by a parent.
In addition, there are Coverdell Education Savings Accounts (ESAs), which offer a whole different set of pros and cons. The upshot: take the time to learn what all your options are before you make a decision.
It Takes Some Homework to Fund an Education!
Helping your grandchild fund their college education is truly a gift that will last a lifetime. But in order to make the most of it, you need to do your homework. Talk to your grandchild and/or their parents about their goals and plans. Do your research as a family. And by all means, take advantage of the many resources and experts that are available to you. Together, you can ace this!
Jack Schacht is the founder of MyCollegePlanningTeam.com, a Naperville, Illinois based organization that brings together experts from both the academic and financial services communities who work in coordination to help families find the right college for the right price. Contact him at 630.871.3300 or Jack@mycollegeplanningteam.com.
Grandparents who plan to help pay for college are also encouraged to attend one of our free workshops that are presented each year throughout the Chicago area.