Pros, Cons of Helping Grandchildren With College Costs

According to Sallie Mae’s How America Pays For College 2015 report, contributions for college costs from relatives and friends increased 40 percent from 2014 to 2015 — the largest increase among all categories. Overall, these contributions averaged just $1,247. However, even that small amount could have a big effect on a grandparent on a fixed income due to retirement.

The number of people over age 50 with student loans has increased 130 percent in the last seven years. But many older borrowers are battling their own debt into retirement , so cosigning additional loans could create financial trouble for them. If one of your retirement goals is to help pay for your grandchildren’s education, consider the following pros and cons before you do.

[Check out five smart moves for grandparents helping save for college.]

Pro: You Have Other Options

Grandparents can take advantage of a few different funding options to assist their grandchildren. The one familiar to most consumers is a 529 college savings plan. These plans allow you to put money toward your grandchild’s education costs and let this investment grow tax free.

You can contribute to an existing 529 plan or start your own in your grandchild’s name. The downside to the latter option is that the federal aid calculation considers the funds the student’s asset, which weighs significantly in the need-based aid calculations. Instead, you could give the money directly to your child — not your grandchild. When given to a parent, this money is considered the parent’s untaxed income on the Free Application for Federal Student Aid, which is counted less significantly than in the student’s calculation.

Also, be aware of the gift tax consequences should you provide more than $14,000 to that beneficiary annually. Trying to get around those tax penalties by paying the funds directly to the university can backfire, as most schools verify how tuition is paid and can count such gifts as untaxed income, potentially lowering the student’s aid eligibility.

Before using these options, talk with both a tax professional and a financial aid professional to understand each choice’s impact fully.

Grandparents may also be able to help their grandchildren win scholarships. Your grandson or granddaughter may qualify for an award based on your military service, ancestry and more.

[Follow four steps to earn a cosigner release on a private loan.]

Con: Loan Options Are Limited

If unable to make a direct financial contribution via their savings, grandparents can help their grandchildren borrow student loans. Grandparents themselves are ineligible for federal loans unless they have legally adopted the child they’re borrowing for. However, they could cosign a private loan with their grandchild.

Private student loans do not offer the same benefits as federal student loans, which can allow borrowers to reduce, postpone or even eliminate their payments altogether, should they meet certain qualifications. Some lenders may provide similar options, but they are not entitlements and you may actually have to pay to take advantage of them.

By cosigning a student loan, you take on equal responsibility for that debt. Even if your grandchild agrees to handle the payments, you would still be on the hook if he or she does not. So, should something unforeseen happen to you or your grandchild, the remaining party would likely have to pay the remaining debt.

And it’s even been reported that some student borrowers face “auto-default,” meaning full repayment of the loan is required immediately, should their cosigner die or file for bankruptcy. If you’re in retirement and living on a fixed income, you should be sure you could manage that full debt before cosigning.

Pro: There are Ways to Lower Existing Payments

If you are already repaying federal student loans from your own schooling or your children’s, you may be able to choose from a number of different plans that could decrease the amount you pay on them each month. In particular, there are a few different plans that base your payments on your income and forgive your remaining debt after 20 or 25 years.

These income-driven plans could especially be of benefit when you’re in retirement. Retirees typically have less income, and that may qualify them for a much lower payment — one that could be as low as zero dollars per month. With that extra money, you could help fund a number of different retirement goals, from travel to helping with your grandchildren’s education. Note that if you’re paying Parent PLUS loans, they are only eligible for income-contingent repayment, and only if consolidated under the federal direct loan program.

[Learn if income-driven student loan plans may end up costing more.]

Con: Default Consequences Could Affect Income

Defaulting on your student loans comes with many consequences. The one that could hurt retired grandparents the most is the Social Security offset.

If you default on your federal student loans, the government can seize a portion of your Social Security payments to cover the amount you owe . This can be devastating if these payments are your only source of income. Private loans can also obtain this specific penalty through litigation, though defaulting on that debt comes with many other consequences as well .

Public Service Loan Forgiveness: Common Questions Answered

Understand the Consequences of Student Loan Default

4 Tips for Grandparents Helping Parents Save for College

Pros, Cons of Helping Grandchildren With College Costs originally appeared on usnews.com