Paying for College

How to Help Grandchildren Pay for College

Follow these tax-saving strategies while gifting money to help fund their education.

With the fall semester beginning for college students, many grandparents may want to help their grandkids pay for education costs. Of course, the younger the grandkids are, the longer the money squirreled away for their education can grow, but there are ways to help older grandkids, too. Here are a few smart tax-saving strategies you can use.

Direct contributions. With the annual gift-tax exclusion, each grandparent can give up to $15,000 to each grandchild in 2019 free of gift taxes. A couple can give $30,000 to each grandchild without tapping into their lifetime gift-tax exclusions (which for 2019 is $11.4 million per person). Tuition paid directly to the college also avoids gift tax.

If you pay for tuition directly or give money to your grandkids, however, that money will impact financial aid. Depending on how the college or university classifies the money, it will be deemed as either cash support or a resource. “Neither of these situations are ideal,” says Mark Kantrowitz, publisher and vice president of research for SavingforCollege.com.

Cash support can reduce eligibility for financial aid by as much as half of the amount given. “Essentially, it’s treated the same as student income,” Kantrowitz says. But if you wait until the student’s sophomore year (or junior year for five-year students), the money won’t impact financial aid because the Free Application for Federal Student Aid (FAFSA) form only assesses income from two years prior. If it’s deemed a resource, your gift immediately reduces financial aid dollar for dollar.

Contributing to a 529 plan. If owned by the student or parent, a 529 college savings plan is treated as a parent asset on the FAFSA with a maximum impact of 5.64%. “With a 529 plan, the benefits are great, and the cost of investing is very little,” says Jim DiUlio, chair of the College Savings Plans Network. You can open and control a custodial 529, making your grandchild both beneficiary and account owner.

While contributing to a 529 plan that you own yourself could help reduce your state income tax, you could negatively impact your grandchild’s financial aid eligibility. “If the 529 plan is owned by anyone other than the student or the parent, distributions will be classified as cash support,” says Kathryn Flynn, content director for SavingforCollege.com. There are workarounds for this, however. If you already own a 529 plan, you can roll over the account assets to a parent- or student-owned 529, depending on your state’s laws. If you wait until after the FAFSA is filed to do the rollover, then it’s not reported as an asset and the distributions won’t impact aid eligibility.

You could also make use of a strategy known as “superfunding,” which allows you to give five times the annual gift-tax exclusion amount at once. For 2019, that means you could stash up to $75,000 into a 529 for each grandchild. “That’s a way to give a fairly large lump sum without running into gift-tax issues and with a low impact on financial aid,” says Kantrowitz. But the lump sum will be treated as if it were given over a five-year period, and if the grandparent dies in the five-year period, part of the contribution will be counted in the grandparent’s estate.

Paying student loan debt. You can’t pay student loan debt directly, but you could always gift money to cover the debt to your grandchildren. Again, because the FAFSA has a two-year lookback, grandparents should wait until after the grandchild’s sophomore year or after the grandchild graduates to help pay student loans.

Pending legislation would allow 529 money to be used to repay up to $10,000 of student loan debt per borrower. For now, money in a grandchild’s 529 plan used to pay off student loans would be a nonqualified distribution. Because taxes and penalties are assessed on the earnings portion of the distribution, there might not be any financial repercussions from the nonqualified distribution if the money was contributed recently, says Kantrowitz.

Most Popular

Top Bear Market Tips from 10 Financial Advisers
investing

Top Bear Market Tips from 10 Financial Advisers

When a bull market turns into a bear market, it can be hard to know what to do. Take comfort in the guidance of 10 financial professionals.
June 30, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 15 Best Stocks for the Rest of 2022
stocks to buy

The 15 Best Stocks for the Rest of 2022

The lesson of the past two years: Be ready for anything. Our 15 best stocks to buy for the rest of 2022 reflect several possible outcomes for the seco…
June 21, 2022

Recommended

How 13 Types of Retirement Income Get Taxed
retirement

How 13 Types of Retirement Income Get Taxed

When you're planning for retirement, it's fun to contemplate all the travel and rounds of golf ahead of you, but don't forget about taxes.
June 30, 2022
11 Education Tax Credits and Deductions for 2022
Tax Breaks

11 Education Tax Credits and Deductions for 2022

Whether you're saving for college, currently paying tuition, or dealing with student loan debt, there's probably an education tax break that can help …
June 30, 2022
Financial Advice from America’s Founding Fathers
credit & debt

Financial Advice from America’s Founding Fathers

What money-management guidance can we glean from the words — and experience — of Benjamin Franklin, Thomas Jefferson, Alexander Hamilton and others?
June 30, 2022
When Will Student Loans Be Forgiven?
Paying for College

When Will Student Loans Be Forgiven?

Millions of Americans are waiting for the Biden Administration’s next hint, which could come later this summer, at how he’ll address the student loan …
June 27, 2022