College has gotten so expensive, you might need a multigenerational payment plan to cover the costs.
For undergrads at a four-year private college, the sticker price — including tuition, fees, room and board — was $36,060 in 2006-2007 and jumped to $45,370 in 2016-2017, according to the College Board. It’s no wonder student loan debt has increased substantially over the years, too — from a total $51 billion nationwide in 2007 to a whopping $1.34 trillion in 2017, according to the Federal Reserve Bank of New York.
Grandparents to the rescue? Not quite. While 74 percent of high-net-worth grandparents say they are willing to help finance their grandchildren’s college education, only 39 percent are actually helping, according to Fidelity.
Part of that disconnect may be a simple lack of communication. Money is often considered taboo to discuss, even within families. Michele Clark, a certified financial planner based in the St. Louis metro area, often sees clients encounter this difficulty. Parents are unsure of how much grandparents have set aside and feel uncomfortable asking for specifics that are not volunteered. Grandparents meanwhile are hesitant to disclose details. “They want to save for their grandchildren, but they don’t want to discourage their own children from being financially self-sufficient,” Clark says. “It’s the rare family that would lay bare their entire financial picture in either direction.”
But awkwardness shouldn’t derail a student’s education. If you’re willing and able as a grandparent to help tackle the high cost of tuition, you can start to save for your grandchild’s college fund whether or not you speak with the parents about your plans.
You just want to be sure your good intentions don’t pave the way for a bigger college bill. Unfortunately, if you give the child money at the wrong time, it can count against her when calculating how much need-based aid she might get.
[See: How to Talk to Millennials About Money.]
The way it works is the student fills out the Free Application for Federal Student Aid, also called the FAFSA, providing key data about the family’s financial situation, including her income and assets and her parents’ income and assets. The Department of Education crunches those numbers to come up with the student’s expected family contribution. The EFC is then used to determine whether she qualifies for a Pell Grant and how much colleges may offer in federal or nonfederal aid, including subsidized Stafford and Perkins loans and work-study opportunities.
If given at the wrong time, money from grandparents could wind up counting as student income, which could reduce need-based aid by up to 50 percent, says Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.”
“That’s a big penalty,” she says. “What you want to do to avoid that is make sure the grandparents are strategic … so it won’t have any impact on financial aid.”
She recommends waiting to disperse savings to your grandchild until after the second FAFSA has been filed — typically during the child’s second year of college. Then, your contributions can still help cover costs for the second half of the student’s college tenure (assuming she graduates in four years), but won’t be counted when calculating the EFC.
[See: Dear Younger Me: 12 Financial Truths We Wish We Knew Earlier.]
Where is the best place to save that money in the meantime?
With a 529 college savings plan, grandparents hoping to help their grandkids pay for college can score a little tax break for their kindness. Your state may give you a tax credit or deduction for at least a portion of your contributions to this type of account. For example, Missouri residents contributing to their state’s 529 plan can deduct up to $8,000 in contributions, or $16,000 if married. With a state tax rate of 6 percent, that adds up to a $960 savings when you max out your contribution. “[The tax savings] is usually pretty minuscule, but it’s nice,” Clark says. “Something’s better than nothing.”
Currently, 34 states plus the District of Columbia offer such 529 benefits. Most states only offer this break to residents, so it’s beneficial for a grandparent to open the account himself rather than contribute to one owned by the parent, unless you all live in the same state. But five states — Arizona, Kansas, Missouri, Montana and Pennsylvania — let you deduct contributions to any state’s 529 plan. (You can find information about your own state using the U.S. News 529 Finder.)
On top of those potential tax savings on the front end, earnings on investments within a 529 grow tax-free. When the money is used for qualified educational expenses, such as college tuition, fees, room and board and textbooks, withdrawals are tax-free, too. On the downside, if you wind up needing the money for anything else, you’ll have to pay taxes plus a 10 percent penalty.
[See: 15 Financial Steps to Take Your First Year After Graduation.]
If you’re not sure whether your grandchild is committed to education, you might opt to save for him in a custodial account. These funds can be used for any reason — for better or worse. Definitely for worse: Since this account would be in your grandchild’s name, it’d be a sizable strike against him in terms of qualifying for need-based aid. Any student assets are weighed at 20 percent when calculating the EFC. So if a child has a $100,000 trust in his name, the family’s EFC would be $20,000 based on that alone. “The family may not be doing that well financially, but the trust is going to reduce the amount of possible aid that that child would get,” says Fred Amrein, author of “Financial Aid and Beyond: Secrets to College Affordability.” “So understanding what options [for college savings] they have and who should control it become an important part of the decision process for financial aid positioning.”
You can also tap your own Roth IRA for college funding. Contributions can be withdrawn for any reason at any time, as long as the account has been open for at least five years. Earnings can also be used to cover qualified education costs without incurring the 10 percent early withdrawal penalty, though if you are under age 59½, you would still have to pay taxes.
Of course, your Roth IRA is meant to fund your retirement. “Almost everyone has not saved enough for their own retirement, so why would you take money out of your own retirement accounts [to pay for college]?” Clark says. “Put retirement before college, of course.”
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How Grandparents Can Help Save for College originally appeared on usnews.com
