It’s not unusual for grandparents to want to help pay the college costs of their grandchildren. Like everything else financial, a little thought as to how they help can make a difference. Here are 3 things to consider.
1. Outright Cash Gifts
One way for grandparents to help grandchildren with college costs is to make an outright gift of cash or securities. But there are drawbacks to this approach. A gift greater than the annual federal gift tax exclusion ($14,000 from an individual/$28,000 from a couple) might have gift tax consequences. Another drawback is that a cash gift to a student will be considered untaxed income by the federal aid application (FAFSA), which can impact financial aid eligibility.
Pay Tuition Directly to College
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 the $14,000 annual federal gift tax exclusion. But payments can only be made for tuition. Room and board, books, fees and other similar expenses don’t qualify. Another concern is that colleges will often reduce a student’s institutional financial aid by the amount of the grandparent’s payment. So check with the college to see how your payment will affect the student’s financial aid before using this technique.
3. 529 Plans
A 529 plan is a great way for grandparents to contribute to a grandchild’s college expenses. The money inside the 529 plan grows tax deferred. And, as long as withdrawals are used for education expenses of the beneficiary, no tax is paid on them. Under special rules unique to 529 plans, individuals can make a single one year contribution equivalent to 5 years of gift tax exclusion ($70,000 or $140,000 for a couple). One thing to keep in mind is that if the money in a 529 plan is used for anything other than education the earnings become taxable an subject to IRS penalty.