What is the Best Way to Help My Grandchild Pay for College?

September 2022 Update: The FAFSA Simplification Act—passed in December 2020 and scheduled to be rolled out over the next two years—introduces changes that will impact some of the advice offered here. Read about the coming changes in our article FAFSA Changes Are on the Way. Of special note is the change in how funds received from grandparents or a grandparent-owned 529 plan will be treated on the FAFSA.

With college tuition as high as it is today, many of our clients are wondering how they can best contribute toward their grandchildren’s education expenses. As you can imagine, the best way depends on many factors. The financial plan of all three generations (grandparents, adult children, and the grandchild attending college) and the grandchild’s school of choice (and acceptance) should all be considered.

If your grandchildren are young and you are wondering where to start, there are many options. If you would like to discuss this with us, please let us know. We’ve found that this subject really warrants talking through your unique situation and circumstances. Here are some ideas to get your wheels turning.

• One option is to add the annual exclusion gift amount, $15,000 per person in 2019, to a 529 Plan owned by you for the benefit of the grandchild. (Or, front-load with up to five years of annual exclusion gifts, or $75,000 in 2019). When they are juniors in high school, if there is a potential for the student to qualify for need-based financial aid, begin to think about whether it’s advantageous to transition this 529 Plan to the parents or delay paying education expenses from the 529 Plan.*
• Another option is to make contributions to a 529 Plan owned by the parent. Most 529 Plans allow this type of third-party deposit. Your contributions are considered a gift to the beneficiary, so you are still limited to the annual exclusion gift or front-loading with the 5-year rule.
• You can make annual exclusion gifts directly to your children, which allows them extra cash flow and greater capacity to save for their children’s college.
• If you have a potentially taxable estate (or an estate in excess of $11.4M per person or $22.8M per married couple, in 2019) and you are not concerned about impacting need-based financial aid, then this next strategy is worth consideration. In lieu of funding a 529 Plan, this would allow you to further reduce the size of your estate.
  • You could discuss with an attorney the option of setting up a grantor trust which is irrevocable for each grandchild. This means the trust income is taxed to you as grantor and no separate tax return is required for the trust. You can direct your annual exclusion gifts to an Irrevocable Trust for the benefit of the grandchild. The provisions in this trust can allow the grandchild distributions for education and other means of support.
  • In addition to funding this trust, grandparents could pay for tuition directly to the institution, thus reducing the taxable estate further. These direct tuition payments are not limited to the annual exclusion gift amount, so you could be spending down the estate by about $20,000-$65,000 a year, depending on the cost of the school. If the grandparent passes before the grandchild finishes college, this trust is there to complete this goal.
  • Note, most trusts for which a student is a beneficiary are to be reported as assets when completing financial aid applications.*

If your grandchild is in high school or you would like to wait until the grandchildren are closer to college-age, then a 529 Plan is probably not the best savings vehicle. If need-based financial aid is a consideration*, you could wait until the grandchild completes their first financial aid application (typically in fall of their senior year of high school) to better understand what aid might look like for them.

• If they are not receiving any need-based aid, you can help pay their expenses from your cash flow, savings, or retirement accounts. If tuition is paid directly to the institution, the amount paid does not count towards your annual exclusion gift amount.
• If they are receiving need-based aid and they are on the 4-year plan, you can wait until their junior year to help pay from your cash flow or accounts. And, if they accumulated any debt those first two years, you could help them pay it off via annual gifting in the years following.
• If they are receiving need-based aid, you can also gift your annual exclusion gifts to the parents each year, who aren’t required to report gifts as unearned income on the federal application for need-based aid. Technically, if not spent before the next FAFSA application, this could increase their reportable assets.*
• You could help with non-cash gifts such as purchasing school supplies, laptop, furnishings for the dorm, or a car. (You will still want to abide by the annual exclusion gift amount per person, or ask your accountant to file a gift tax return.)

We hope this gives you more guidance on your options as a grandparent in how you can assist in helping your grandchildren pay for college if you are able. Careful coordination with the student, parents, school, and financial planner are recommended. Please reach out to schedule a meeting with us at Bragg if you would like to walk through the various options which suit your family best.

*See Financial Aid 101 for a deep dive into the Free Application for Federal Student Aid, or FAFSA

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here