Strange that at an elder law and estate planning firm, so many of our discussions with clients center around ways to pay for college? Not really. Funding a higher education these days is no small matter, and many grandparents are looking for ways to help their children shoulder that burden.
And college tuition is no small burden. Robert Powell reminded USA Today readers that the College Board had estimated the average cost for a four year public college at $20,700 a year, with $46,950 a year the number at four-year private schools, and that was a year and a half ago! At the rate those prices are inflating annually, if your grandchild is one year old now, the cost might reach $157,0000 for four years at an in-state public school and a whopping $355,0000 for private school.
“It isn’t easy”, as Tevya was fond of saying in Fiddler on the Roof. Even with the best of intentions, grandparents first need to make sure they have enough money to cover their own retirement and healthcare needs, then make sure their financial help doesn’t prevent grandkids from qualifying for financial aid.
Financial aid is tricky to navigate as well. Both the FAFSA and the CSS (the forms used to qualify for financial aid expect parents to put between 22% and 47% of their adjusted gross income towards paying for their child’s college (number of children and other factors are considered), but essentially the students themselves need to demonstrate they have minimal or no assets to use towards college costs.
Section 529 plans
These “qualified tuition plans”, sponsored by states or by educational institutions, are the most popular way for grandparents to help save for college. Indiana taxpayers are eligible for a state income tax credit of 20% for all contributions, up to $1,000 per year.
In Indiana, there are two options:
- Direct Savings Plan (offered directly through the state)
- Advisor 529 Plan – (sold through advisors)
An individual may contribute as much as $75,000 to a beneficiary’s 529 Plan in one lump sum, which means that a married set of grandparents could contribute as much as $150,000 all at once (to cover five years’ worth of contributions at once).. Earnings in the 529 account are free of federal income taxes, Investopedia explains, so long as they are used for qualified educational expenses, which might include not only tuition, but also fees, electronics, books, and room and board.
One new twist on 529s is that as per the recently enacted SECURE Act in the spending bill, 529 college funds may now go towards paying down student loans.
529 plans are not the only way grandparents can help grandkids fund college costs. Watch for next week’s blog post for a discussion of other options..
– by Ronnie of the Rebecca W. Geyer blog team