Are you going to help your grandchildren pay for college?
Besides saving for their own retirements, many of our clients ask us to devise plans to help them finance their grandchildren’s educations.
This is hardly surprising, as a full 62 percent of people over the age of 50 already provide at least some level of financial support to a younger family member.
If you are in the position to help your grandkids pay for college, you need to do it right. Here are 4 ideas that should go a long way toward making the process smoother:
1) Start a 529 College Savings Plan
A 529 plan helps families pay for the cost of higher education. Some of the best features are:
- You have the ability to change beneficiaries (when one kid graduates)
- The earnings on the investments grow free from federal income tax
- Over 30 states offer a full or partial tax deduction
- The beneficiary can pretty much only use the money for college expenses
- There are no income limits, and very generous contribution limits
- They are portable: Money saved in one state can be used to pay for college in another state
2) Use a Prepaid Tuition Agreement
Some 85% of grandparent-to-grandchild gifting is for education. If you make the contribution directly to the college or university your grandchild plans to attend, it won’t count against the gift tax. And if they change their mind or transfer to another school? You get your money back.
3) Funnel the Financial Assistance Through the Parents
If you simply give the money to your grandchildren, it can be considered income and could impact their ability to receive financial aid. Plus, even the most disciplined young people might be prone to squandering a large chunk of money on vacations and concert tickets.
A way around this is to give the funds to the parents with the intention of helping pay for college expenses. Under the current tax law, the gift tax exemption is $14,000 per person each year.
4) Offer to Pay Off Their Student Loans
Probably one of the easiest things to do would be to simply promise to help pay off your grandchild’s student loans after they graduate. Some advantages are:
- It won’t impact their financial aid eligibility
- It’s a great incentive for he or she to finish college
- They will still be able to deduct some loan interest from their own tax return
College is expensive, but the gift of education is priceless. What better way to show your love and affection than to help fund your grandchild’s education?