Funding a higher education these days is no small matter, and many grandparents are looking for ways to provide direct help to grandchildren or at least help their children shoulder that burden. Last week’s blog post discussed 529 qualified tuition plans, which allow Indiana grandparents to contribute $75,000 ($150,000 for a married couple) in a lump sum.
Whatever the form of financial help chosen, our attorneys at Geyer Law remind grandparents that it’s important to first make sure of two things:
- The grandparents have ample resources to cover their own retirement and healthcare needs
- Their financial help doesn’t prevent grandkids from qualifying for financial aid (while parents are expected to put between 22% and 47% of their adjusted gross income towards paying for their child’s college, essentially the students themselves need to demonstrate they have minimal or no assets to use towards college costs).
There are multiple options for helping a grandchild pay for college:
Contributing to a 529 owned by the parents
If grandparents contribute to a 529 account that parents have already established, the assets will count but will be assessed at the lower parent rate. (Parental income is a much bigger factor in determining who receives financial aid than savings. The number of students in college is usually a significant factor, too.)
Uniform Gift to Minors Act (UGMA), a Uniform Transfers to Minors Act (UTMA) or a Coverdell Education Savings Account (ESA).
These accounts usually offer more investment options than 529 plans but they involve turning over control of the account to the student when they reach a specific age. The funds will be considered student assets on financial aid forms.
Direct payment of a grandchild’s college tuition
From the grandparents’ standpoint, paying tuition directly to a grandchild’s college moves money out of their estate without gift taxes. On the other hand, these dollars are counted as cash support on the student’s financial aid forms; however, gifts made directly to educational institutions may be made in any amount as they are not subject to the annual gift tax exclusion of $15,000.
Lending money to the parents
If parents borrow money from grandparents to pay for college, the debt won’t hurt financial aid chances. The loan, however, has to represent a legitimate lending arrangement and the grandparents need to charge interest. Once the parents are done paying for college, the grandparents do have the option of forgiving the loan.
Grandparents who want to help (and statistically, half the grandparents in the U.S. do) need to understand the options for making the most of their gifts. “Moderating” sit-down family meetings (both the in-person and phone conference type) to discuss options for funding grandchildren’s education has most definitely become an important part of our work at Rebecca W. Geyer & Associates.
– by Ronnie of the Rebecca W. Geyer blog team