Families can help students pay for college educations

Kern Business Journal
April 2014

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.

Many of my retirement planning clients have told me that they want to help their children and grandchildren pay for their college educations.

I caution these clients that they must first secure their own futures. No one will benefit if parents and grandparents give away their money and jeopardize their own retirement security.

But if sufficient assets exist, a cautious, smart plan should be developed for providing help. Money given foolishly could hurt a student’s ability to receive financial aid from other sources. It could also create a tax liability for the donor.

There are several strategies that can be used to help children and grandchildren pay for college. An accountant, financial planner or attorney can provide families with a personalized plan.

Outright Cash Gifts

Attractive in its “simplicity,” an outright gift of cash or securities to a child or grandchild may have its drawbacks. A gift of more than the annual federal gift tax exclusion amount – $14,000 for individuals and $28,000 for couples – will have tax implications for the donor. It also will be considered a student’s “asset” and could greatly reduce eligibility for financial aid.

529 Plans

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 or colleges – generally in-state and public colleges – participate in prepayment tuition plans.

A new 529 account can be opened, with the student named as the beneficiary, or a donor can contribute to an existing 529 account. 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. There are some implications for the disbursement of the money if the donor – a parent or grandparent – dies. Check with the financial institution to fully understand the benefits and requirements of the 529 plan.

Pay College Directly

Many donors opt to help their student 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 parents and grandparents should check with the college before cutting a direct payment check. Such a contribution may affect the student’s eligibility for other college financial aid. As an alternative, they may wish to help pay off student loans after the student graduates.

Scholarships

Parents and grandparents may have “affiliations” that open doors to financial assistance. “Legacy scholarships” from an 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.

Other Forms of Help

Not all help comes in the form of cold hard cash. Not every parent and grandparent can afford to contribute financially to a student’s college fund. But that doesn’t mean they can’t help. Spend time with your student. 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.