Want a Great Holiday Gift for Your Grandkid? How About Helping Them Pay for College!
While it’s traditional for most holiday gifts to be a surprise, this is one instance where you’ll definitely want to sit down with everybody first and coordinate.
Recently, we conducted a nationwide survey asking grandparents how much money they spent on holiday gifts for their grandchildren. On average, we found that grandparents spent around $218 per grandchild, with clothing, toys, and gift cards as the most popular types of gifts purchased.
But for grandparents who are financially secure, there might be a better type of gift they can give for the holiday season. If their grandkids are planning to attend college, they could help them pay for it!
It’s a gift that’ll keep on giving.
A college education these days is pretty dang expensive. According to Jack Schacht, founder of MyCollegePlanningTeam.com (@CollegePlanTeam), the average cost of an in-state public college is $24,610 while the average cost for a private college is $49,320, per CollegeData.com. He also notes that tuition is the “second largest expense most families will ever tackle, as tuition continues to increase at twice the rate of inflation.”
So it’s no surprise that many students have to take out tens of thousands of dollars in loans in order to pay for their college education, a situation that’s caused the nation’s total student load to balloon to almost 1.4 trillion!
“No wonder so many grands want to help their grandchildren out,” observed Schacht, citing a survey from Fidelity Investments which found that “more than half of American grandparents are either helping to fund their grandkids’ tuition or planning to do so down the road.”
But Schacht also warns that it’s not as simple as simply writing your grandkids a big check and calling it a day. “A monetary gift to your grandchild may result in a tax event on your end or interfere with financial aid eligibility on theirs,” he said. “In order to avoid such financial perils and pitfalls, grandparents need to do some research and planning.”
Don’t let this gift be a surprise.
It’s fairly normal when giving holiday gifts to keep their contents a secret. After all, it’s the only way you’ll get that fantastic look of surprise and delight when they open it!
But when you’re giving this particular gift, Schacht recommends that you do the exact opposite. Before you do anything, you should sit down with your children and your grandchild and tell them about your plan.
Why? Well, if you don’t coordinate your gift, it could end up biting you in the behind, big time. Here are two examples he provided that illustrate why coordination is so key:
“According to IRS guidelines on gift exclusions, you can give up to $15,000 a year to your child or grandchild without paying gift tax. However, that monetary gift to your grandchild will count as untaxed income, which may reduce his or her aid eligibility on their FAFSA (Free Application for Federal Student Aid).
“Ditto if you want to pay your grandchild’s college tuition directly. The IRS may not count it as a gift from you, but depending on the college, your payment may negatively impact your student’s eligibility for aid.”
Schacht pointed out that this won’t be a problem if your grandchild isn’t eligible for need-based aid in the first place. So how do you know if they’re eligible or not?
This is one of the tricky parts. According to Schacht, “You may not know unless you first determine your EFC (Expected Family Contribution) which is determined by family income and who in the family earns the income. It is also determined by assets, who owns those assets, and in which accounts the assets are held.”
Clearly, there’s a lot more to this process than there is to buying your grandkids a couple loot crates in Fortnite. (And if you don’t understand what that reference means … to be honest we don’t really know what it means either, so you’re in good company.)
Start by looking into a 529 savings plan.
When you give your grandkid some pocket money, the transaction is pretty simple. You take the money from your wallet and place it in their hand. That’s it.
But contributing to their college is a little bit more complicated. Enter 529 savings plans. These are tax-advantaged, state-sponsored investment accounts that can be used to pay for the beneficiary’s future education costs, including room and board, tuition, and mandatory fees.
The plans also carry tax benefits, like tax breaks on contributions and no taxes on withdrawals used to pay for education costs. However, it’s worth noting that these benefits vary from state to state. If you want to learn about 529 savings plans or 529 prepaid tuition plans, check out this Investor Bulletin from the SEC.
According to Schacht, 529 savings plans owned by a grandparent come with many advantages, including the fact that they aren’t factored into the student’s FAFSA, which should help them qualify for additional aid.
But that doesn’t mean these plans are perfect. “However—and it’s a big however—once funds are withdrawn to pay for tuition, distribution is considered income on your student’s FAFSA for the next two years,” cautioned Schacht.
“Once again, eligibility for financial aid may suffer. As a result, some experts suggest holding off making contributions from your 529 plan until students are college juniors and have filed their last FAFSA.”
“Even once you decide to pursue a 529 plan,” he added, “there is still plenty to learn and consider.”
But don’t forget you have other options beyond 529s.
Don’t stop your research with 529 plans. While they are very popular, they are hardly the only game in town when it comes to funding a college education. Schacht laid out some of the competition:
“You can also consider a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. These typically offer more investment options than 529 plans but involve turning control of the account over to the student when they reach a specific age.
“Another big problem with these accounts,” he added, “is that they are assessed as a child asset on the FAFSA and those assets are assessed at a much higher rate than those held by a parent. In addition, there are Coverdell Education Savings Accounts (ESAs), which offer a whole different set of pros and cons.”
Make sure you look into all of these accounts before you make your final decision. A little research up front will pay out big time once your grandchild finally heads off to school.
In summary: You’ll need to do your homework.
“Helping your grandchild fund their college education is truly a gift that will last a lifetime,” said Schacht. “But in order to make the most of it, you need to do your homework.”
This is advice that applies to pretty much any financial decision, large or small. Going in blind or simply choosing the first option you see could lead to major problems down the line. None of us liked doing homework in school—we bet your grandkids don’t—but we also know that much of that homework was incredibly valuable.
“Talk to your grandchild and/or their parents about their goals and plans. Do your research as a family. And by all means, take advantage of the many resources and experts that are available to you,” said Schact. “Together, you can ace this!”
If you enjoyed this article, check out these related posts from OppLoans:
- 10 College Majors That Will Get You Paid
- How to Pay for College: A Student Loan and Scholarships Primer
- The Pros and Cons (and Scams) of Trade School
- Can Paying Off Your Student Loans Hurt Your Credit Score?
|Jack Schacht is the founder of MyCollegePlanningTeam.com (@CollegePlanTeam), a Naperville, Illinois based organization that brings together experts from both the academic and financial services communities who work in coordination to help families find the right college for the right price. Contact him at (630) 871-3300 or MyCollegePlanningTeam@gmail.com.|