Paying For College: A Gift That Keeps On Giving: Helpful Strategies For Grandparents To Lend A Hand
Adding in the cost of college tuition, fees, and housing, this number can easily double. But paying for college shouldn’t require winning the lottery. Careful and coordinated planning by parents and grandparents with the help of a trusted financial adviser can help reduce the burden on families and their children.
Before grandma or grandpa write a check
Enlisting the help of a relative will certainly take some of the pressure off. But before someone writes a check, they should have a serious discussion about how best to help.
Giving aid the wrong way can be detrimental to a student’s chances of getting financial aid.
Consider these strategies that will help the student in a financial aid friendly way.
Consider paying off student loans after graduation
Financial aid is based on various formulas to calculate the Expected Family Contribution (EFC). Most of this is based on information provided on a student financial aid form about the assets and income of the parents and children.
Financial aid forms do not ask about the financial assets of other family members.
If you or a relative are in the fortunate position of having extra money, you may be inclined to help. But providing a cash gift directly to the parent or student will result in an increase in reportable assets that will reduce calculated need, increase the EFC, and in turn reduce the amount of potential financial aid.
And if a helpful relative steps up and indicates that they will help, then the financial aid office will also reconsider the student’s financial need. Money paid to the school on behalf of the student could be considered just like any other outside resource, such as a private scholarship that reduces the aid the school offers.
A better way is to let the student qualify for maximum aid while still in school and then help by contributing to the loan balances.
Family EFC too high?
For those who know their EFC is too high to qualify for help, there are still options for grandparents who can still help. These options at least offer them some tax savings.
Tip #1: Pay directly to the university
Since aid will not be affected, simply pay the school directly. Each grandparent may give up to the annual gift limit ($13,000 in 2010) to each student. This will help reduce the grandparents’ taxable estate and is an exempt gift to the student.
Tip #2: Establish a 529 Savings Plan
For grandparents who want to help with college costs, a qualified tuition plan offers a great option. The money set aside in these plans can be used for eligible expenses such as tuition, fees, books, and equipment.
These accounts offer a variety of investment options that can be tailored to the time frame before the funds are needed. Funds grow tax-free and, if used for qualified expenses, can be withdrawn tax-free.
Grandparents can transfer large amounts of cash into these accounts without triggering gift tax. Each grandparent can effectively deposit up to five years of annual gifts which are currently $65,000. Assets in these accounts remain in the control of the grandparents and are not counting assets for the student.
Tip #3: Give the Gift of Appreciated Goods
Assuming Grandpa has long-standing assets that have increased in value, one way to pay for college tuition and reduce a potential tax bill is to gift these highly prized assets to someone in a lower tax bracket. This could be the child or the parents.
This saves the large capital gains tax bill the grandparents would likely incur if they sold the appreciated asset and used the proceeds to help pay tuition or other expenses directly.
Tip #4: Establish a Charitable Remainder Trust
For those who are charitably inclined and want to help a student, grandparents can set up a trust.
A remaining charitable trust can be funded with highly prized assets that can then be converted into income-producing assets. The income that is generated can be used to help the student. Eventually, the remaining assets can be given away to the charity. This strategy helps grandparents avoid paying capital gains on the assets and removes the asset from the taxable estate. While not an issue this year (no estate tax in 2010), this will change in 2011 without any action from Congress.
For more tips and helpconsider using a qualified college aid planner.