How Grandparents Can Help with College Costs
As the cost of a college education continues to climb, many grandparents are stepping in to help. Helping to pay for a grandchild’s college education can bring great personal satisfaction and is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. So what are the best ways to accomplish this goal?
Outright cash gifts
A common way to help with college costs is to make an outright gift of cash or securities. But this method has drawbacks. If you gift the money directly to your grandchild, he or she might spend it on something other than college. Another drawback to outright gifts is that a gift becomes an asset of the student, and the federal government treats student assets more harshly than parent assets for financial aid purposes. Students must contribute 20% of their assets each year toward college costs, compared to 5.6% for parent assets.
A 529 plan can be an excellent way for grandparents to contribute to a grandchild’s college education, while simultaneously paring down their own estate. Contributions to a 529 plan grow tax deferred, and withdrawals used for the beneficiary’s qualified education expenses are completely tax free at the federal level (and at the state level too).
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Pay the college directly
Another excellent way for grandparents to help their grandchildren with college costs is to pay the college directly. Under federal law, tuition payments made directly to a college aren’t considered taxable gifts, no matter how large the payment. Aside from the obvious tax advantage, paying tuition directly to the college ensures that your money will be used for education, plus it removes the money from your estate. If your contribution will adversely affect your grandchild’s financial aid package, another option is to give the money to your grandchild after graduation to help him or her pay off student loans.
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