As a grandparent, the bond between you and your grandchild is a deeply loving and nurturing one. Grandparents are famous for imparting valuable life lessons to their grandchildren, as well as spoiling them with gifts and loving attention. Although ice cream and birthday checks are wonderful gestures sure to please, as your grandchildren grow older, you can give a far more valuable gift, one that will pave the way for your grandchild’s bright future. As college costs continue to rise, many grandparents are stepping in to help pay for tuition bills, a generous gift as well as an investment in their loved one’s future. Contributing to a grandchild’s college costs can make a huge difference for parents struggling to foot the bill, and students trying to avoid crushing loan debt. That said, it is a gift you need to give intelligently in order to maximize its positive impact and avoid any negative effects. This paper lays out the pros and cons of helping to pay for your grandchild’s college and strategies for how to go about it. There are many ways to help, even beyond paying tuition bills.
Paying for higher education for your grandchild has many obvious benefits. Firstly, it is one of the greatest gifts you can give your loved one. By helping to pay for their college, you are helping to prepare them for future success. Paying for college is truly a gift that keeps on giving, as it will benefit your grandchild throughout their life as they pursue a career and/or graduate school. Aside from these practical benefits, you are giving your grandchild the gift of knowledge and all the other enriching experiences that come from interacting with new people and exploring new subjects at college. Lifelong friends, community service, professional networking and internship experiences are just a few of the ways in which your gift will benefit your grandchild in a lasting way.
Secondly, from a purely financial viewpoint, you are doing a great service to your grandchild and their parents. The average cost of a four-‐year degree from a public university tops $100,000 nowadays, and the cost of most private colleges is over $200,000, as reported by About.com’s Financing Your Child’s Education. Parents must begin saving for college as soon as (or even before) their child is born, and many will still fall short of the actual costs. As a result, students themselves are bearing more of the expense. According to the Chronicle of Higher Education, 60% of students borrow annually to pay for college. A College Board study during the 2014-15 academic year found that 61% of students at public four-‐year colleges graduated with student loan debt, borrowing an average of $28,100. The average debt for the two thirds of students at private colleges who borrowed to pay for tuition was $31,400. In this context, your contributions will not only ease the financial strain on your son or daughter’s family, but also reduce the amount of debt your grandchild will have to take on.
Finally, helping to pay for college has practical benefits for you as well in the form of tax breaks and exemptions. Paying tuition bills directly to the institution exempts you from gift tax and making gifts to your grandchildren through a 529 account (as described below) can help you reduce the impact of estate taxes.
Despite the numerous advantages of paying for your grandchild’s college, there are some drawbacks that must be considered in order to make a responsible decision. One of the major issues with paying for your grandchild’s college is that fact that you are facing another major expense—retirement.
Financial advisors urge parents to prioritize retirement saving over saving for their children’s college, and the advice is no different for grandparents. You need to put your own well-‐being first when deciding how much to contribute to your grandchild’s education. With life expectancy increasing, you must first ensure you have enough tucked away to support your current lifestyle before you consider making a financial commitment to your grandchildren.
The other potentially harmful drawback of this well-‐intentioned gift is that your tuition payments and other financial contributions may lead to your grandchild receiving reduced financial aid. However, if you are strategic about the way you give, it does not have to be included in your grandchild’s financial aid profile.
Ways to Pay
There are three common ways that grandparents pay for college costs: direct tuition payments, 529 college savings plans, and trusts. Each option has pros and cons that must be considered. Meeting with a financial advisor is the best way to make sure you are paying in a way that maximizes the benefits to you and your grandchild, while minimizing potential costs. Here is some basic information to help you begin to weigh the various options.
Direct Tuition Payments
- Payments made directly to an educational institution are exempt from the gift tax (tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return).
- Your money immediately reduces the amount of tuition your grandchild and their parents have to pay.
- Contributions made in one academic year will likely lead to a reduction in your grandchild’s financial aid for the subsequent
529 College Savings Plan*
- Money in 529 plan accounts are not counted as part of your estate, and therefore, are not subject to estate tax. You may gift up to $14,000 to the beneficiary each year. If you are married you may jointly gift up to $28,000.
- You can invest money through this plan and any gains are tax free for qualified
- Contributions may be state tax deductible, depending on your
- Disbursements taken out to pay for college tuition are exempt from taxes and
- Funds may be switched to a different beneficiary.
- Disbursements made to pay for tuition in one academic year will likely lead to a reduction in your grandchild’s financial aid for the subsequent
- If too much money is put into the account and needs to be taken out for use other than college tuition payments, there is a 10% penalty and the disbursements are subject to
- A dynasty trust or “pot trust” can name all grandchildren as well as future children as
- Most trust funds get reported as beneficiary funds and may impact financial Seek tax advice from a qualified legal or tax advisor.
- If a trust is not carefully written, the beneficiary will be able to use the money for whatever they want to, and it might not necessarily go towards higher education
Other Ways to Help
The common approach of contributing in some way to tuition costs while the student is still in school has the significant drawback of reducing financial aid. Therefore, some grandparents are putting off their gifts in order to avoid this negative effect. One way to do this is to wait until your grandchild is in their last year before you start assisting them with tuition costs. This way they will graduate before your money has any impact on financial aid. Similarly, many grandparents wait until their grandchildren have graduated and then help them pay off student loans, rather than paying for tuition directly. Both of these tactics can be effective if you want to help pay for college without hurting financial aid.
Another way you can help reduce college costs for your grandchild besides paying tuition is to provide your grandchild with information that may help them get a scholarship. You can do this by giving them a resume that summarizes all of your affiliations, including past and present employers, unions, military service, memberships, hobbies and activities, in addition to details concerning religion, race and ethnicity. Companies and organizations you are or have been affiliated with may give out scholarships, and your relationship with the organization would give your grandchild a leg up.
Similarly, depending on your cultural heritage, your grandchild may be eligible for scholarships based on racial, ethnic, religious, or linguistic background.
* Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This material was prepared for use by Shepherd Financial Partners.