Grandparents Financing College

Some grandparents are lucky enough to have the financial ability to help grandchildren with college costs. This can be a good way to pass on wealth without estate planning, creating trusts, and estate taxes.

What is the best way for grandparents to help grandchildren with college expenses? Not all help turns out to be help.

529 Plans – Many know about the advantage of 529 plans that are managed investments for college expenses down the road. Contributions to 529 plans are taxed deferred and withdrawals from these plans by the student are tax free at the federally level, often at the state level, too. Funds from a 529 can be used at any accredited college, even abroad, and grandparents can open their own 529 or contribute to one that already exists.
BUT – Once money is in a 529 Plan, it is locked. If you need it for emergencies, even years before your grandchild needs it for college, you will be penalized and then pay taxes on it. Such funds will also be assessed as assets should you be considered for Medicaid eligibility for medical care or for a nursing home. Unfortunately, too, any withdrawals from such an account by a student is counted as untaxed income when applying for federal financial aid eligibility.
Solution – Make the parent the owner of the 529. Your grandchild, when applying for aid, needs only to list 529 Plans of which they are the beneficiaries.

Cash Gifts – Anyone can give cash gifts of up to $14,000 annually ($28,000 if both persons in a marriage give) under tax exclusion law. This can go a long way toward college expenses.
BUT – If the cash is given to the next generation (grandchildren), it is taxed (the GST tax). Also any cash gift to a student is considered untaxed income which affects their federal financial aid; it may impact the student’s ability to get aid.
Solution – Gift monies to the parents of the college student.

Pay College Tuition Directly – When grandparents pay their grandchild’s college directly, the money is still tax exempt, even if the payment is over $14,000 (or $28,000 from both grandparents). In fact, the annual tax exempt gift of $14,000 ($28,000) can be given on top of the college payment and be tax exempt. Paying directly can also assure the grandparents the money is being used only for education.
BUT – The money you pay to a college can only be used for tuition payment, not for room, board, fees, books, etc. Also, some colleges figure in this money when awarding financial aid in the form of scholarships or grants beyond federal financial aid, making the cost of college for your grandchild higher.
Solution – Gift your grandchild after graduation to help pay off any student loans.

Gifts from grandparents can have pluses and minuses. College is expensive and students need financial help, but grandparents should make plans for gifts carefully to make sure the help they intend is really helpful.

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