As a parent, you have a lot on your plate. Preparing for college costs is unlikely to be your top priority. However, with college education costs having skyrocketed over the past few decades and the application process becoming ever more competitive, it is never too early to begin thinking about your child’s college education.
To help prepare you for one of the most significant financial and educational undertakings that you will encounter, Pekin Hardy Strauss has partnered with Valle Educational Consultants to develop a roadmap called The College Planning Lifecycle. In this three-part article series, we will help you understand this lifecycle and provide you with strategies for managing the challenges it poses for families. The series is as follows:
- Stage 1: The Early Years
- Stage 2: The High School Years
- Stage 3: Grandparents Can Help, Too
Stage 3 – Grandparents Can Help, Too
How to Effectively Manage Gifts from Grandparents
In part three of this guide, we discuss some important considerations for grandparents who are looking to help with college funding for their grandchildren. As with any financial planning topic, there is no one-size-fits-all approach to managing college expenses, so we encourage you to contact us to discuss your unique situation and to develop an individualized plan for meeting this financial goal. In this article we explore college funding and estate planning strategies, as well as discuss how to lessen any impact funding may have on the financial aid process.
How to Help Fund College Costs
There are many ways grandparents can help fund college costs without giving funds directly to the student. It is important for grandparents, parents, and grandchildren to understand the appropriate options and choose which makes the most sense for their situation. In this third part of the College Lifecycle Planning guide, we discuss the most common ways that grandparents can help with college costs and the financial aid implications of each option.
Before reviewing means of saving and gifting, it’s important to understand how colleges think about grandparent assets in the financial aid process. The two primary forms that students and their families submit for financial aid consideration in college are the Free Application for Financial Student Aid (FAFSA) and the College Scholarship Service (CSS) Profile. The FAFSA only asks for assets listed in the parents’ and student’s names. It does not ask for assets saved by a grandparent in, for example, a 529 plan. If the student is applying to selective colleges that use the CSS Profile in addition to the FAFSA, assets sheltered in a grandparent’s name must be reported.
With this important distinction in mind, we now review the savings account and gifting and contribution options that are available to grandparents:
We addressed 529 plans in some detail in Article 1 of this series. While 529 plans are often set up and funded by parents, grandparents may also open and fund 529 plans for their grandchildren. Grandparents who wish to use a 529 plan to help fund their grandchildren’s educations may want to open an account in their own names as owners in order to maintain control over beneficiaries or so that they can gift funds to an account controlled by a parent. Grandparents who wish to gift funds may choose to make smaller ongoing contributions up to $15,000 per year and stay within IRS gift tax guidelines or may bundle five years of 529 plan contribution up to $75,000 as a single upfront contribution to one student’s 529 plan.
If a student doesn’t need money from their grandparents immediately, a good strategy may be to use the parents’ 529 funds for the first two years of college, drawing down parental assets, and then use grandparent funds during the junior and senior years of college. Toward the end of college any 529 distribution will not count against the student’s financial aid package calculation.
Paying Tuition Directly to the School
Some grandparents elect to make payments directly to the school on behalf of their grandchildren. This approach is advantageous in that it allows the grandparents to maintain control of their funds, the funds used toward tuition payments do not count against annual gift tax exclusions, and it’s a very simple way to contribute to a grandchild’s education funding. However, it is important to know that employing such a strategy could potentially cost the student money in their financial aid package. A grandparent’s financial gift can be counted as student income. Given that 20% of the student’s assets are considered on FAFSA (25% on CSS Profile) it is important to weigh all pros and cons of this strategy at least two years prior to the student’s filing year.
Provide a Direct Loan to Your Grandchild
The IRS allows individuals to make interest free loans up to $10,000. Grandparents may wish to use this strategy to help fund their grandchildren’s educations, as it would allow them to set their own repayment terms, and the loan could be converted to a gift in the future. However, such a gift could, in some cases, be considered taxable income to the grandchild if it is deemed to be debt forgiveness.
Set Up An Education Trust
Some grandparents may choose to set up a trust to help fund their grandchildren’s college educations as part of their estate planning. Grandparents who employ such a strategy should plan carefully to ensure that withdrawals from the trust can be made in accordance with college billing schedules. While many trusts are designed to allow a single withdrawal each year up to a certain dollar amount, colleges typically bill on a per semester or per quarter basis. And because scholarships and grants that offset total costs are posted to student accounts at varying times during the year, costs billed to a student are likely to vary by semester. Therefore, any trust that is set up to fund college costs should be carefully designed to meet this specific need.
Custodial accounts, which we addressed in Part 1 of this guide, represent a highly flexible way to fund college costs. However, grandparents who wish to set up or contribute to a grandchild’s custodial account should be aware of the fact that such accounts are considered assets of the student in the financial aid process and thus can have a significant impact on financial aid eligibility.
Helping to fund college education costs is a wonderful way for grandparents to share their wealth with their grandchildren, and as we’ve shown, there are many different strategies for doing so. However, it is important for grandparents to understand how each strategy might impact the student’s financial aid eligibility and to plan accordingly. Grandparents should also be aware of how any college funding strategy they pursue might affect their own tax situation and estate plan. With proper planning, grandparents can give their grandchildren the truly special gift of reducing the financial burden of college education.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) and Valle Educational Consultants (VEC), for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, there are no assurances that any predicted results will actually occur.
Valle Educational Consultants (VEC) is a Chicago-based college admissions advisory practice. Specialists in the college admissions process, they guide and empower families and their students based on each unique situation. VEC is dedicated to providing information in a supportive way, customized to each student’s needs as they navigate the admissions process.