Helping Grandchildren Pay for College 


According to a 2014 Sallie Mae survey, 17 percent of students currently rely on family to help them pay for higher education. Forbes states that this percentage is only expected to grow, as more and more grandparents are creating estate plans that benefit their families. While helping the grandkids with their college expenses seems like a blessing, it can easily turn into a curse for the whole family if not done intelligently.

While helping the grandkids with their college expenses seems like a blessing, it can easily turn into a curse for the whole family if not done intelligently.

Here are some general guidelines for aiding in your loved ones’ future education:

Set Up a 529 Plan

Generally, this is the most common strategy. In this plan, contributions are made after taxes are deducted, but the money then grows tax free and is not taxed when distributed (if used for qualified secondary education expenses). The annual contribution limit varies by state, anywhere from $100,000 to $350,000. The account holder maintains control of the account after it is set up, until the beneficiary applies for college; this helps the elders in their estate planning because they can more easily transfer assets.

Realize the 529 Implications

The 529 plan sounds great, right? Be aware that there are financial aid stipulations.

“If the grandparent owns the 529 account, this account is treated as a student asset and is assessed accordingly,” wrote Forbes contributor Robert Farrington. “Furthermore, for the FAFSA, the income from the 529 account is assessed as student income at 50 percent. That seriously reduces the aid formula.”

To solve this dilemma, Farrington recommends transferring the 529 account into the student’s parent’s name before the student applies for aid. At that point, the account is considered a parent asset and is assessed at about 5 percent.

But not so fast — many states prohibit the transfer of a 529 account unless the account owner dies or there is a court order, so do your research first. If this is the case in your state, simply allow the parent to retain control and gift the money into it.

Understand the Gift Tax

Speaking of “gifting,” under the 2015 Internal Revenue Service rules, one grandparent cannot give more than $14,000 to a single individual each year. This is known as the “gift tax exclusion.” There is, however, a special exception to the rule regarding contribution to a 529 plan. That is, five years of the gift tax exclusion may be contributed all at once if paid directly into a 529 plan — meaning each grandparent could give a one-time gift of $70,000 to the account.

Know the Future Effects

Regardless of what a grandparent contributes and how, it could impact future financial aid.

“Financial aid is calculated on a formula called Expected Family Contribution, which takes into consideration both the student’s and parents’ assets. If gifts are given by grandparents incorrectly, it could reduce potential financial aid and make college a lot more expensive,” Farrington explained.

For instance, a grandparent could circumvent all the above options and pay money directly to the grandchild’s school, but that would potentially hurt the student’s future financial aid qualifications because the college’s financial aid office would have to report that money as “other income.”

Helping your family with educational expenses is a lovely gesture. Don’t let the red tape involved scare you off; simply think ahead about the best long-term option for the family as a whole and everyone will benefit.

 

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