Grandparents Can Help Fund College Expenses
Early in my career as a fee-only financial planner, my mentor Sheryl Garrett, founder of the hourly planner Garrett Planning Network, told me of a new way for parents, or grandparents to fund college while motivating the student to work hard and get good grades. Unfortunately, our children were already out of college.
Sheryl advised me, “Tell them if they graduate as an A student, you’ll pay off their student loans, if they’re graduating as a B student, tell them you’ll pay off 75% of their loans and if they’re a C student that you’ll pay off 50% of their loans,” she emphasized. Then she addressed the remainder, “If they graduate as a D student or drop out, tell them it’s their loans and they’ll have to deal with it,” she said. I loved this idea and have passed it along including right here.
There are other ways for grandparents, my particular peer group, that can help their grandchildren and their parents cover the cost of a college education. That cost that has increased greatly over time. The latest report from the College Board pegs the private college average cost as a little over $48,500 a year for tuition and room and board (in 2018 dollars) with public schools coming in around $21,300 for the same costs.
Gifting tuition amounts directly to the college circumvents the annual gifting limit of $15,000 from one individual to another without having to file Form 709, the gift tax return. No tax is due if gifts to an individual exceed the limit, but a total of exceeded gifts are kept by the IRS on a per person basis up to their current $11.8 million-dollar limit. Remember, a married couple can gift $30,000 a year to each grandchild without any form filing. Grandparents paying off student loans are treated as a gift.
Loans direct to parents (or grandchild) to help fund grandchild college expenses is another technique used on occasion to pay for college costs. This strategy also avoids listing the loan proceeds as income on college aid forms. Loan forgiveness can be instituted later, but larger loans must bear a reasonable interest rate and there is no tax advantage or deduction available to the grandparent lender.
Finally, the limited amount ($2,000) Coverdell Education Savings Accounts and the ever-popular state or private 529 college savings plans, and prepaid tuition programs, offer more traditional ways to fund college. Unfortunately, both plans limit financial aid unless the proceeds are used after the last financial aid application is filed in the junior year.
As you should see by now, college saving, and funding is complicated if grandparents want to help but avoid hurting financial aid chances in future years. Careful reading of the rules and how they apply will be useful in seeing that grandchildren are afforded the best education possible with the least amount of impact on their financial future and those of their parents.