3 Strategies for Grandparents Who Are Helping to Pay for College
By Michael Morey
Financial Advisor, RJFS
The average yearly cost of a 4 year, in-state, public college education including tuition, fees, room and board is nearly $22,000.1
To add insult to injury, the annual rate of inflation for college tuition is around 8%.2 If we use the “Rule of 72” this means that ten years from now, the cost for a college education will nearly double. For many parents with young children, that statistic can seem terrifying, and the ability for most parents to pay out-of pocket for a child’s education, or even with savings, is simply unrealistic.
Luckily, many grandparents are stepping in to help cover the costs for their grandchildrens’ education.
As the baby boomer generation ages, many of them who went to college themselves and have now become grandparents are beginning to gift what is anticipated to be trillions of dollars over the next several decades.
Aside from the satisfaction of helping to pay for a grandchild’s education, there are benefits available to help the boomer generation pass on their wealth, including some ways to avoid gift and estate taxes.
Here are 3 strategies to help Grandparents pay towards their grandchildrens’ college education:
1. Make A Cash Gift
If you’re like most grandparents, you enjoy giving your grandkids a cash gift for special occasions like birthdays or holidays. However when it comes to cash gifts intended specifically for college, there are some important factors to keep in mind. For example, any cash gift above $15,000 for individuals or $30,000 for married couples could be eligible for the Federal gift tax.
Another factor to keep in mind is that a gift directly to a student could be considered as untaxed income and affects the student’s eligibility for financial aid. However, gifts made directly to parents of the student are not required to be reported as income and would not affect the child’s eligibility for financial aid.
- QUICK TIP: A cash gift after the child graduates college is also another option in which the child can then use the money to pay off any student loans.
2. Pay The College Directly
Perhaps the easiest way for grandparents to help pay for college is to simply pay the tuition directly to the college. Paying tuition to a college, no matter the amount, is not considered a taxable gift. However, this only covers tuition payments. Expenses such as room, board and books do not qualify for the gift-tax exclusion.
Paying tuition directly to the college also ensures that your money goes towards your grandchild’s education as you intended, and perhaps not for a late-night fast food run or spring break trip. Paying tuition directly not only removes the money from your estate, but it also allows you to make a tax-free gift each year of up to $15,000 or $30,000 for joint gifts.
- QUICK TIP: It is important to check beforehand if paying for tuition directly will reduce your grandchild’s eligibility for financial aid. Many institutions will reduce the child’s financial aid amount by the amount of the tuition payment made. If this is the case, consider making a cash gift to the grandchild after graduation to help them pay off any student loans.
3. Fund A 529 College Savings Plan
529 College savings plans are one of the most popular college-savings strategies, and an excellent way for grandparents to help contribute to a college education while also reducing their estate. These plans are flexible, and unlike other savings plans such as a Coverdell, 529 Plans do not have restrictions on income levels in order to be eligible to contribute. Lifetime contribution limits are typically $350,000, which grow tax deferred, and the plan offers tax-free withdrawals when used for qualified expenses.
One benefit of 529 plans is that individuals, including grandparents, can make a lump-sum gift of up to $75,000 (or $150,000 for married couples) and still avoid the federal gift tax. Keep in mind when doing this that no additional payments can be made to the plan by the individual for the next five-year period.
Grandparents can open a 529 plan for a grandchild themselves or contribute to an existing plan. Smaller contributions can be made at any time and make great birthday or holiday gifts. The owner of the 529 account retains control of the funds for the life of the account, which helps to prohibit the beneficiary from using the funds for non-intended purposes.
- QUICK TIP: Another benefit of a 529 plan is if a grandchild ends up not needing or using the funds in the plan, the owner has the ability to change the beneficiary of the account to another family member, and for the purpose of this article, perhaps a different grandchild.
Plan for your future, today. A Well Planned Life starts with Morey & Quinn Wealth Partners.
To learn more about the strategies available to help pay for a grandchild’s college expenses and create a plan that’s most appropriate for you, visit with the Morey & Quinn Wealth Partners or call 402-502-9900. Our team of financial planners in Omaha, Nebraska offers a no-obligation exploration session. Let’s plan ahead for what matters most to you.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
Toll Free: 877.541.6593
11225 Davenport St, Suite 109
Omaha, NE 68154
1 Source: Educationdata.org
2 Source: Forefield
Any opinions are those of Michael Morey, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.
Tax laws and provisions may change at any time. Death of the contributor prior to the end of the five-year period may result in a portion of the contribution to be included in the contributor’s estate. Please consult a qualified tax professional to discuss tax matters.
Tax-free withdrawals may be made for qualified education expenses. Otherwise, the deferred earnings portion may be subject to taxes and a 10% penalty. Please consult a qualified tax professional to discuss tax matters.
Certain changes in beneficiary may result in a taxable event.
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