Helping Your Grandkids Pay for College
Jul 4, 2024
2 min read
For many teenagers and young adults, the path to a rewarding future includes college. But college can be expensive, and young people often take out student loans to pay for it. This means that in the years when they are building their careers and starting their families, they are saddled with a significant amount of debt.
Grandparents can help their grandchildren avoid going deep into debt by helping them pay for college. If you’re in a solid financial situation, you may want to fund a 529 plan your grandchild can use to cover some of the costs of higher education. Or, you may want to provide money as gifts. Here are the ways grandparents can help pay for college.
Grandparents and 529 Plans
Putting away money in 529 plans is a popular option, as these plans offer tax benefits and advantages when students use them for college expenses.
There used to be a caveat for grandparent-funded 529 plans. When students withdrew money, the amount was counted as untaxed student income and assessed at 50%. Counting this money as income could impact how much financial aid the grandchild would receive going forward.
For example, a student who used $20,000 from a grandparent-funded 529 would have to report $10,000 as income. Typically, the higher a student’s income, the less financial aid they are eligible for.
That’s no longer the case under the new Free Application for Federal Student Aid (FAFSA) Simplification Act. The new law simplifies the FAFSA application process. The application has about 20 questions now, compared to more than 100 previously. It also changes some of the financial aid formulas to more accurately represent the student’s financial situation.
Grandparents Paying for College With Gifts
What if you want to support your grandchild with a cash gift instead of a 529 fund? The new FAFSA form doesn’t ask about cash gifts from grandparents. So, giving your grandchild money to help pay for college won’t impact their eligibility for federal financial aid.
You can give someone up to $18,000 per year without paying taxes on the gift. And it’s $18,000 per giver, so if you’re married, you and your spouse could gift up to $36,000 per year to a grandchild. Some grandparents gift this money by paying off student loans after the student graduates. Not only does this ensure the money is used for education expenses, but it may also provide motivation for the student to complete their degree. Most student loans include a grace period before interest begins accruing and there is typically no prepayment penalty.
You may also be able to make tuition payments directly to a school without paying taxes, though this could reduce the financial aid that your grandchild receives from the school.
Paying for College With a Grandparent Trust
If you specify in a trust that the money must be used for college, your wishes need to be followed. There may also be some tax benefits. However, once you put money into a trust, you can’t get it back. Plus, it can be expensive to set up a trust and trusts are considered an asset of the student, which may impact financial aid.
When Money From Grandparents Might Impact Financial Aid
When you’re considering whether grandparents can pay for college, there’s another factor to keep in mind. In addition to the FAFSA, many private colleges and universities use an online application called the CSS Profile to decide on the financial aid packages they award.
The CSS Profile varies for each college, but typically students will report their 529 accounts, including those funded by grandparents, as well as assets and gifts.
If you know your grandchild plans to apply to private colleges, you may want to talk to a financial planner about the best ways to help them save.
One of the Best Gifts You Can Give
A more affordable education is one of the greatest gifts you could give to a grandchild. Figuring out the best way to make that happen can be complicated, so talk with a Farm Bureau agent or financial advisor who can help you create a plan that meets your family’s goals.