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.
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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.
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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 sophom*ore 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 sophom*ore year or after the grandchild graduates to help pay student loans.
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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.
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FeaturesPaying For College
FAQs
Pay Tuition Directly to the College
Under federal law, tuition payments made directly to a college aren't considered taxable gifts, no matter how large the payment. So grandparents don't have to worry about exceeding the annual federal gift tax exemption. But payments can only be made for tuition.
Can a grandparent pay for college without tax implications? ›
Pay Tuition Directly to the College
Under federal law, tuition payments made directly to a college aren't considered taxable gifts, no matter how large the payment. So grandparents don't have to worry about exceeding the annual federal gift tax exemption. But payments can only be made for tuition.
What is the grandparent loophole 529? ›
The FAFSA Simplification Act brings a lucrative “grandparent loophole” that allows you to contribute generously to a 529 plan without jeopardizing your grandchild's eligibility for financial aid. This opens up a wealth of strategic opportunities for families.
What is the best college fund for grandchildren? ›
529 plans are one of the best ways for grandparents to save for college because while contributions to a 529 plan are not deductible at the federal level, over 30 states offer a tax deduction or credit for contributions.
What percent of grandparents pay for college? ›
The reality is today more than half of students rely on grandparents for assistance. According to the 2014 Fidelity Investments report, 53 percent of grandparents were helping or planning to help pay for their grandchildren's college costs. Their reported median contribution was $25,000.
How much money can a grandparent give a grandchild tax-free? ›
Can grandparents give money to grandchildren tax-free? Yes, this is indeed possible. Perhaps the simplest approach to gifting is to give the grandchild an outright gift. You may give each grandchild up to $16,000 a year (in 2022) without having to report the gifts.
Can a grandparent start a college fund for a grandchild? ›
There are a number of valuable ways that grandparents can use a 529 college savings plan to help with a grandchild's higher education goals. While the grandparent can set up their own 529, they can also contribute to a 529 plan owned by a parent of the grandchild, Roberts says.
Does FAFSA look at grandparents 529? ›
On the 2024-25 FAFSA, students are no longer required to report cash gifts from a grandparent or contributions from a grandparent-owned 529 savings plan. Because of this, grandparents can now use a 529 plan to fund a grandchild's education without impacting their financial aid eligibility.
Is it better for a grandparent or parent to own a 529 plan? ›
Is it better for a grandparent or parent to own a 529 plan? Many advisors will push people to have the parent own the 529 plan because recent rules have grandparent contributions hurting total financial aid eligibility.
How much can a grandparent contribute to a 529 plan annually? ›
A 529 plan gives both parents and grandparents the option to contribute to a child's education fund. They have no annual contribution limit and an individual can contribute up to $17,000 per year while avoiding gift tax rules, or $34,000 per couple.
It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.
What is the best account to start for a grandchild? ›
Youth or Children's Savings Account
They often offer enhanced interest rates, lower monthly fees, and limited minimum balance requirements. Youth banking provides an excellent opportunity to teach your grandchild valuable lessons about money management, savings, and responsible financial behavior from an early age.
How can grandparents help grandchildren financially? ›
Instead of just giving them pocket money, you could use chores to allow them to earn it. You could also consider putting this money aside for them, helping them save up for a larger purchase. You can also give your grandchildren a visual representation of their savings, even if they're very young.
Is college tuition for grandchildren tax deductible? ›
Only the person claiming the student's dependency (usually the parent) can claim a tuition credit (there is no deduction). But that person can claim the money paid by any other person (what you, the grandparent paid) in calculating the credit.
How to ask grandparents to help pay for college? ›
Grandparents can open a 529 account and name a grandchild as beneficiary (only one person can be listed as account owner, though), or they can contribute to an already existing 529 account. Grandparents can contribute a lump sum to a grandchild's 529 account, or they can contribute smaller, regular amounts.
Does paying for college room and board count as a gift? ›
Because parents are deemed to have an obligation of support for their children, so, most payments for college expenses would not constitute gifts for gift tax purposes.
Can a grandparent contribute to a 529 plan and claim a federal tax deduction? ›
Grandparents can contribute to 529 plans with the aim of potentially reducing the size of their estate — and their tax bill — while retaining control over the money in the account. Working with a trusted financial professional can help here.
Do gifts from grandparents count as income for FAFSA? ›
The recent overhaul aims to make the financial aid process more equitable and reflective of a student's true financial need. Under the new FAFSA guidelines, money contributed by grandparents for a grandchild's education will not be factored into the calculation of a student's financial aid eligibility.
How will having a grandparent 529 affect financial aid eligibility? ›
The Basics
In most cases, a grandparent owning and using a 529 account for a grandchild will not affect the grandchild's eligibility for need-based financial aid.
Does the gift tax exclusion apply to grandchildren? ›
While tax-free annual exclusion gifts and medical and educational payments are typically made to children and grandchildren, the same tax rules apply to gifts and payment for the benefit of other people, including children-in-law and grandchildren-in-law, parents, friends and other family members.
