529 Plans

How a Grandparent's Help With College Tuition Affects Financial Aid

Before cutting a check for a grandchild's college tuition, make sure you review the impact it can have on the student's financial aid.

Question: I read your column about how you can avoid the gift tax limits by paying a grandchild's tuition directly to the college. But wouldn't this affect the student's eligibility for financial aid?

Answer: Yes, paying your grandchild's tuition could have a big impact on financial aid in future years. That may not be an issue if you plan to pay your grandchild's tuition through the last few years of college. But it's important to keep in mind if you're only paying a portion of the cost or only helping out in the early years of college and your grandchild will be applying for aid to pay the rest.

Grandparents often pay tuition directly to a college because it helps move more money out of their estate without being subject to gift taxes. You usually need to file a gift tax return if you give more than $15,000 to any individual in 2018 (couples may give up to $30,000), but any money you pay directly to the college for your grandson's tuition isn't subject to those limits. However, money paid directly to the college must be reported as cash support on the student's federal financial aid forms and may reduce eligibility for need-based financial aid two years later, says Mark Kantrowitz, publisher of Savingforcollege.com.

Cash support is counted as untaxed student income in the financial aid calculations, and students are expected to contribute up to 50 cents for every dollar of income toward college bills (after an income-protection allowance of about $6,750 a year). Kantrowitz says some colleges will treat the payments as a "resource" because they are restricted to tuition, in which case the payments can reduce a student's eligibility for need-based aid dollar for dollar.

Another option for helping a grandchild with college bills that will have less of an impact on financial aid is to contribute to a 529 college-savings plan owned by the parents, says Kantrowitz. You can contribute up to five years' worth of the annual gift tax limit to a 529 plan—currently a total of $75,000—in a single year. You won't, however, be able to give your grandchild any more money for five years. The 529 money can be used tax-free for tuition, required fees and books, and room and board.

Withdrawals from 529s that are owned by the parents are not reported as income on the Free Application for Federal Student Aid (FAFSA). The money is considered a parental asset, and the impact on financial aid is much smaller than if the withdrawals were taken from a grandparent-owned 529. If the grandparent owns the 529, the assets aren't included in the financial aid calculations, but withdrawals are counted as student income on the FAFSA. See How a Grandparent's 529 Account Affects College Financial Aid for more information.

For more information about the financial aid calculations, see New Strategies to Get More Financial Aid.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
Want More Tax-Free Retirement Income? One Man’s Whole Life Decision
life insurance

Want More Tax-Free Retirement Income? One Man’s Whole Life Decision

Whole life insurance might not be something that’s on your retirement planning radar, but for this client, here’s how it served his need to control ta…
February 23, 2021
The Current Plan for $1,400 Checks
Coronavirus and Your Money

The Current Plan for $1,400 Checks

Here's what you need to know about the stimulus check plan currently being considered in Congress for President Biden's COVID-relief package.
February 18, 2021

Recommended

4 Ways Broke Grad Students Can Raise Their Income While Still in School
college

4 Ways Broke Grad Students Can Raise Their Income While Still in School

Grad students can lighten their financial loads by targeting specific opportunities as they complete their studies. Here are four places to start look…
February 10, 2021
Biden Extends Student Loan Relief, Is Loan Forgiveness Next?
Coronavirus and Your Money

Biden Extends Student Loan Relief, Is Loan Forgiveness Next?

On his first day as president, Joe Biden continued the suspension of student loan payments until October.
January 22, 2021
12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket
Coronavirus and Your Money

12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket

President Biden's "American Rescue Plan" includes several proposals to assist people financially harmed by the pandemic.
January 20, 2021
Will College Students Get a Second Stimulus Check? (Hint: It Depends!)
taxes

Will College Students Get a Second Stimulus Check? (Hint: It Depends!)

College students were shut out of the first round of stimulus payments, but they're hoping for a better deal with a second stimulus check.
December 28, 2020