What’s the Best Way to Help My Grandkids with Their College Education?

It’s definitely not our grandparents’ college education anymore. Just since 1987, long after today’s grandparents had graduated, the cost of higher education has grown at an astonishing rate. Back then, attending a public university cost about $1,500 - $3,200 in today’s dollars. Today the average cost of a college education has skyrocketed to more than $35,000, a nearly 300% increase!

Today, many grandparents look on with dismay as nearly 70% of college students leave college with an average student loan debt of $29,800. Not wanting to see their own grandchildren burdened through life, an increasing number of grandparents are leaving a living legacy by helping their grandchildren pay for their college education.

But, before writing a check, it’s essential to understand the ramifications of your contribution. You have several options for contributing to your grandchild’s education with varying impacts on your taxes and your grandchild’s financial aid eligibility. So, to ensure your contribution has the optimal impact for helping your grandchild through college, it would be important to study your options thoroughly.

Gifting the Money

According to IRS rules, you can give up to $15,000 a year to a grandchild without incurring a gift tax. Together with your spouse, you can jointly give up to $30,000. However, since a monetary gift to a student counts as untaxed income, it can reduce the student’s eligibility for financial aid. If your grandchild isn’t eligible for financial aid, it shouldn’t be a concern. Still, you should wait until after your grandchild completes Free Application for Federal Student Aid (FAFSA) before gifting any money.

Alternatively, you could make the gift to the grandchild’s parents because the income does not have to be reported on the FAFSA.

If you want to give an amount of money that exceeds the annual gift tax exclusion, you could pay the school directly for the cost of tuition. If you pay the school directly, it qualifies for a gift tax exclusion (does not apply to books or room and board). However, some colleges may treat it as cash support, which can reduce the student’s eligibility for financial aid.

Open a 529 College Savings Plans

If you have some time before your grandchild enters college, open a 529 college savings plan. These accounts allow your earnings to accumulate tax-free and, when used for qualified education expenses, they can be withdrawn tax-free. You can deposit up to $75,000 without incurring gift taxes if the contribution is treated as if you made them over a five-year period.

Because it is established in your name, it isn’t included in determining the family’s eligibility for financial aid. However, once the money is withdrawn to pay for college expenses, it is counted as student income, which could impact your grandchild’s eligibility for financial aid.

To get around that, you could wait to withdraw money until your grandchild is a college junior and has filed the FAFSA for the last time. You could help pay for your grandchild’s last two years of college. If you want to help cover expenses in earlier years, you could transfer the account to the parents. A parent-owned 529 plan only reduced aid eligibility by up to 5.64% of the asset value.

Pay off Your Grandchild’s Student Loan

What better graduation gift could your grandchild receive than to have their student loan debt paid off? However, if the amount exceeds $15,000 ($30,000 if filing jointly), you could incur a gift tax. If your grandchild has multiple loans, which is typical, you could time your gifts to qualify for the annual exclusion.

Helping your grandchild with college costs is a wonderful way to experience the fruits of your legacy. But, to have the optimal impact for you and your grandchild, it would be essential to have a conversation with your financial advisor.