Posted by: Kathy Ryding
A college education, even at a highly rated private institution, was once regarded as a relatively affordable route to lifelong prosperity, but in recent years it has become a hobbling financial burden for many families. As a result, older generations are often stepping up to help their families with college funding. According to a Fidelity Investments survey of its investors (a more affluent group than the average) more than half of grandparents “are saving or plan to start saving to help pay for college costs.” The desire for one generation to help another with college has become more urgent in recent years.
According to the College Board, private colleges averaged more than $40,000 in total expenses for the most recent academic year; state schools averaged around $17,000 for in-state students. More than 50 top-tier private colleges now charge more than $60,000 a year, including Columbia, Duke, and Stanford.
One of the best vehicles for multigenerational college funding is a 529 college savings plan. Offered by states and managed by large mutual fund companies, these plans allow investment for future educational expenses, and the proceeds accumulate tax-free. Many states also provide a tax write-off for at least a portion of a contribution. But there are some potholes to avoid for those who hope to maximize the value of their contributions and minimize the total cost for a family of sending a student to college.
Statistics are not available on the number of grandparents who have opened 529 plans. But it is clear they are widely popular. Today, they hold more than $250 billion in 12 million accounts, according to the College Savings Plans Network, an organization run by state treasurers. Last year, more than $25 billion poured into these plans.
Grandparents can set up these plans, naming grandchildren as beneficiaries. If the grandchildren decide not to go to college, the money can be kept in the accounts or used for another educational opportunity. Since the children do not control the account — the owners do — the assets are not in their names. That means if grandparents need to withdraw the assets for themselves, they can do so, although they must pay a penalty and income taxes if the assets are not used for educational purposes.
While 529 plans are the prime vehicles of choice for many grandparents, they can complicate a child’s chances of qualifying for financial aid. The stumbling block comes when students receive money from the 529 plan. That will appear as income in the student’s name, which must be reported on the FAFSA, the form that most colleges require for financial aid when a student applies and every year he or she is in school.
To avoid a potential reduction in aid, grandparents could postpone sending 529 proceeds until the last two years of college. Another strategy is for grandparents to give money directly to the parents. The reason it is important to avoid putting money in the students’ names in the early years of college is that 20% of a student’s assets are “assessed” in the federal formula, compared to only 5.64% of parental income and nonretirement assets. The more money that is in a child’s name, the more it pares back the aid package.
Sending money directly to the grandchild could increase the family’s expected contribution. But the situation is much different if the family is unlikely to receive financial aid. Then, 529 proceeds and direct gifts from grandparents are possible options. While direct giving is often a viable option for wealthy families, it will pay for someone fortunate enough to be in that situation to consider a more sophisticated financial planning strategy.
Questions to consider include: Are estate issues a concern? Can securities be given to reap a tax advantage through stock or bond sales? It is also helpful to check with a state’s 529 program first when considering a dedicated account. States have a number of investment options, including prepaid tuition plans for state and private colleges. No matter which option is chosen for a grandchild, the parents will greatly appreciate the help.
Our firm is dedicated to helping families and their loved ones work through issues and implement sound legal planning to address them. If we can help in any way, please don’t hesitate to contact our office at (630) 221-1755.