What is the most impactful way to be financially generous to your grandchildren? One valuable way is to invest in their college educations, especially as the cost of college continues to grow. Here are five important tips to keep in mind as you consider how to offer this support:
1. An excellent way to save for college is through a 529 plan. Grandparents can set up an account and, in the majority of states, also receive a tax deduction or credit for contributions.
2. It is important to understand college financial aid rules, as grandparents can actually hinder their grandchildren’s chance of receiving financial aid in certain circumstances.
A student’s opportunity to receive need-based financial aid is not jeopardized if the money stays in the grandparents’ accounts. This applies whether savings are held in a 529 plan or other investment vehicles. However, when grandparents withdraw money to help their grandchild with college costs, parents must report this outside money as the child’s untaxed income on financial aid forms and the child’s income tax return. This income can reduce aid eligibility by as much as half of the sum withdrawn from the college account.
Grandparents can safely help with college costs after the financial aid applications are filed for the student’s junior year in college. Since financial aid forms use two-year-old tax records, any money given at this time won’t be included when a parent files for aid for senior year.
3. If grandparents create a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account for a grandchild, it will be treated as the child’s asset for financial aid purposes. If financial aid is a possibility, it’s best to avoid keeping significant money in a child’s account of this kind.
4. A trust fund may backfire if its intent is to protect student assets from financial aid formulas. Trust funds, which are usually set up for the benefit of the child, will be considered an asset of the child even if he or she doesn’t currently have access to the money. A trust that can’t be drawn down by an individual can put a family in a real financial bind. If the beneficiary has restricted access to the principal, the trust assets will continue to reduce aid for the child’s entire time in college.
5. Until recently, paying off college loans with money from a 529 plan was not considered an eligible expense. That changed with the passage of the SECURE Act at the end of 2019. Grandparents can help pay off a child’s student debt with savings from a 529 plan without triggering any taxes or the 10% penalty for non-authorized uses.
For guidance on incorporating personal gifting goals into your financial plan, consider connecting with a CFP® professional in your area.
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