The Bakersfield Californian
June 3, 2011
Financial help and encouragement from my family helped me get through college and established in a career as a financial planner.
With the cost of attending college soaring today, students are depending more and more on their families for financial aid. Government financial aid programs of the past are decreasing, while cash-starved state governments are increasing tuition and fees at public universities across the nation. Even government-backed student loans are harder to obtain.
Many of my boomer clients, who are setting up plans to stretch their retirement savings, have told me that they now want to help their grandchildren pay for their college educations.
“I do see grandparents playing a greater role in helping with things like college education, extra tutoring, extra educational costs,” Amy Goyer, an AARP family expert, told The Dallas Morning News recently. “Part of it is because of the economy. When parents are more strapped and are having a harder time anyway, the older generation is a little bit more financially settled. They have a little bit more financial security, so they are helping to fill the gaps.”
I stress with my clients who want to help their college-bound grandchildren that they must first secure their own futures. No one will benefit if the grandparents give away their money and jeopardize their retirements. A few false steps and grandparents can become a burden on their children and grandchildren.
If grandparents have sufficient assets and they want to financially help their grandchildren, they must develop a cautious, smart plan for providing help. Money given foolishly can hurt a grandchild’s ability to get financial aid from other sources. It also can create a tax liability for the grandparents.
There are several strategies that can be used by grandparents to help their grandchildren pay for college. An accountant, financial planner or attorney can give grandparents advice on which strategy will fit their specific circumstances.
Outright cash gifts
Attractive in its “simplicity,” an outright gift of cash or securities to a grandchild may have its drawbacks. A gift of more than the annual federal gift tax exclusion amount — $13,000 for individuals and $26,000 for couples — will have tax implications for the grandparents. It also will be considered an “asset” of the student and could greatly reduce eligibility for financial aid.
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual investment-type accounts managed by financial institutions. Prepaid tuition plans allow prepayment of tuition at “today’s prices.” A limited number of colleges — generally in-state and public colleges — participate in prepayment tuition plans.
Grandparents can open a 529 account and name their grandchild as beneficiary, or they can contribute to an existing 529 account. There are several ways grandparents can contribute. There are some implications for the disbursement of the money if a grandparent dies. Grandparents should check with the financial institution to fully understand the benefits and requirements of the 529 plan.
A 529 plan may be an excellent way for grandparents to contribute to their grandchild’s college education because contributions grow tax deferred and withdrawals used for qualified educational expenses are tax free at the federal level and at the state level in many states.
Pay college directly
Many grandparents opt to help their grandchildren by paying the college directly. Under federal law, tuition payments made directly to a college are not considered “taxable gifts.” This does not apply to room, board, books, fees, equipment, etc.
But grandparents should check with the college before cutting their direct payment check. Such a contribution may affect the grandchild’s eligibility for other college financial aid. As an alternative, grandparents may wish to help pay off student loans after the grandchild graduates.
Grandparents’ affiliations may open the door to financial assistance. “Legacy scholarships” from grandpa’s or grandma’s alma mater may exist. Fraternal organizations, labor unions, retirement associations, military organizations and ancestry or ethnicity groups may offer scholarship funds to members and their families. Grandparents should share their resumes and family backgrounds with their grandchildren. There are two benefits: Possible scholarship opportunities might be revealed. And the child will also learn more about his family.
Other forms of help
Not all help comes in the form of cold hard cash. Not every grandparent can afford to contribute financially to a grandchild’s college fund. But that doesn’t mean they can’t help. Spend time with your grandchild. Help him or her study. Participate in volunteer activities together. This lifelong involvement can help a child make good grades, qualify for grants and awards, and gain admission to top-ranked universities.
The bonds between grandparents and their grandchildren are strong. The desire to help can feel overwhelming. But with the advice of an attorney, accountant or financial planner, grandparents can develop a strategy that will protect their assets while benefiting their college-bound grandchildren.