3 Key Ways You Can Help a Child or Grandchild Pay for College
Options such as 529 plans, education savings accounts and tax-free gifts can ensure you don’t carry a child’s student loan debt into your golden years.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
As college costs continue to rise, it’s becoming increasingly difficult for students to pay for it themselves. The total student loan debt in the United States has risen to a staggering $1.75 trillion. This has led many parents and grandparents to want to help carry a portion of their child’s or grandchild’s college debt. They shouldn’t jeopardize their own financial future by entering retirement with someone else’s student loan debt, though.
Even so, the number of adults over the age of 62 with student loan debt has reached a startling 2.4 million borrowers. If parents and grandparents plan on helping to pay for college, they need to plan ahead to stay debt-free in their golden years. There are many ways they can start planning now to help with college costs while still saving for their retirement.
529 plans offer tax advantages
529 plans are investment accounts that can be used to pay for education for a specific beneficiary. Choosing a 529 plan also comes with tax benefits. It will grow federal tax-free and will not be taxed when the money is taken out. It’s important to note that you can use a 529 plan from any state to help cover education expenses in any other state. However, depending on the state you live in, you may qualify for even more tax deductions with a 529 plan. There are seven states that provide a state income-tax break for any contributions to a 529 plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania. There are no contribution limits for 529 plans, but there are limits for the tax deductions. These plans can be used for more than just college tuition.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For example, they can help cover student loan repayments and college expenses such as books or meal plans. You can even use them to help pay for K-12 tuition costs. While a good option, 529 plans do come with a few disadvantages. If you are looking into financial aid for college, 529 plans can work against you. You can also run into higher fees with these plans. These downfalls could be why many are hesitant to use these plans for college.
Educational savings accounts are a little different than 529 plans
A Coverdell education savings account (ESA) is very similar to a 529 plan. The earnings in this account can grow tax-deferred, and withdrawals are tax-free when used for educational purposes, as they are in a 529 plan. However, the beneficiary will have to pay taxes on any distributions that exceed their qualified educational expenses. You can contribute only $2,000 per year, per beneficiary, so if you exceed that amount, the rest will be taxed. While very similar, there are a few differences between an ESA and a 529 plan. Contributors must earn less than $110,000 annually, they cannot contribute to the account after the child turns 18, and the money is automatically distributed when the beneficiary turns 30. An ESA may be a better option than a 529 plan if the contributor wants to give the account over to the beneficiary as they grow older.
Tax-free gifts are an easy way to go
Grandparents can also simply give cash directly to either the child or parents. To avoid the federal gift tax, you can make a tax-free cash gift of up to $16,000 per recipient in 2022. This means if you give away anything less than $16,000 to an individual, you and your beneficiary do not have to report that to the IRS. If you decide to go this route, make sure you discuss the exact tuition and any other college expenses with your grandchild or child, and then form a detailed plan on where exactly the money will go. This will help make sure that the money you are giving is going toward college expenses, such as tuition, rather than something else.
Help your family the smart way
No matter if you’re helping save for a family member’s college expenses or saving for retirement, consulting with a financial planner should be your first step. They can help you come up with the right plan for you to save for college, retirement and everything in between.
-
Where's the Best Place to Save for a House Down Payment?Learn how timing matters when it comes to choosing the right account.
-
We want our RMDs to fund a vacation with our kids and grandkids.An extended family vacation can be a fun and bonding experience if planned well. Here are tips from travel experts.
-
The Roth Conversion Bandwagon is Rolling: Should You Jump On?Roth conversions are all the rage, but what works well for one household can cause financial strain for another. This is what you should consider before moving ahead.
-
Should You Jump on the Roth Conversion Bandwagon? A Financial Adviser Weighs In
Roth conversions are all the rage, but what works well for one household can cause financial strain for another. This is what you should consider before moving ahead.
-
The 8 Stages of Retirement: An Expert Guide to Confidence, Flexibility and Fulfillment, From a Financial PlannerRetirement planning is less about hitting a "magic number" and more about an intentional journey — from understanding your relationship with money to preparing for your final legacy.
-
5 Mistakes to Avoid in the 5 Years Before You Retire, From a Financial PlannerWhen retirement is in reach, financial planning gets serious — and there's a heightened risk of making serious mistakes, too. Here are five common slipups.
-
I'm a Financial Planner: This Retirement Strategy Helps Plot a Stress-Free Path to Cash FlowDividing funds into a safety bucket, an income bucket and a growth bucket can help to cover immediate expenses, manage cash flow and promote growth.
-
Your Most Overlooked Retirement Investment: Luxuriating in Doing NothingWhen you take the time to rest and breathe, your brain starts to focus on what matters most in your new stage of life.
-
If the Markets Cause You Restless Nights, You Might Want to Consider This Safety NetIf you find market volatility too stressful, buying annuities that provide stability and protect your principal could help you rest easier. Here's what to consider.
-
When Markets Are Jumpy: A Financial Planner Explains How to Stay GroundedMarket turbulence makes even the most experienced investors nervous. Here are some tips for ignoring the panic and trusting your plan when things get volatile.
-
To Love, Honor and Make Financial Decisions as Equal PartnersEnsuring both partners are engaged in financial decisions isn't just about fairness — it's a risk-management strategy that protects against costly crises.
