With the rising cost of college, many grandparents feel that helping their grandkids over the cost is a good idea. After all, the average tuition price public institutions rose by 4 percent in the 2019-2020 school year alone, and private colleges went up by 3 percent. In-state public tuition hit $10,116 while private colleges cost $36,801 annually. But, even with the cost rising, should grandparents contribute to their grandchild’s college? If you want to figure out if it’s a good idea, here’s what you need to know.
Can You Afford to Contribute?
First and foremost, grandparents shouldn’t save money for a grandchild’s education if they will end up in a financial bind. Unless you are maximizing your retirement savings (or, if you’re retired, have more than enough to sustain you), it’s better to focus on your needs. Otherwise, a financial gift for your grandkid could create a hardship in your end.
The Impact of Your Gift
How a grandparent saves for a grandchild’s college costs can come with certain financial implications. If you stash the money in a regular savings account, you’ll have to pay taxes on the interest. Plus, it won’t grow as quickly.
But it does give you a ton of flexibility, as you aren’t limited on how the money is used. You can also use that money to pay your grandchild’s tuition costs directly to the school. No matter the size of that payment, it won’t be subject to the gift tax for your grandchild, thanks to an IRS exception for qualifying educational costs. However, it might qualify as income for your grandkid, and that might not be ideal.
If you are considering opening a 529 plan, then there are potential drawbacks that you need to examine. While the money can grow tax-free, your gift can impact your grandchild’s FAFSA.
As with a direct tuition payment, the money can count as direct income for your grandkid. That comes penalty when it comes to financial aid. Up to 50 percent of a student’s income is considered available for college costs on the FAFSA, impacting their degree of need.
As a result, they might receive less in free financial aid, essentially undermining the value of your contribution. In some cases, this is a benefit, as it reduces a need for student loans. But, in others, it could also limit their eligibility for need-based grants or scholarships.
You can get around this income issue a bit. Instead of opening a 529 on your own or paying tuition directly, consider contributing to one owned by your grandchild’s parents. The aid eligibility reduction tends to be smaller with parent-owned accounts.
Is Saving for Your Grandkid’s College a Good Idea?
While your heart may be in the right place, you need to make sure that saving for your grandchild’s college makes financial sense for both of you. Consider whether you can actually afford it and examine the potential implications of your gift. That way, you can make a smart choice that doesn’t come with unforeseen consequences.
Do you plan to save for your grandkids’ college? Why or why not? Share your thoughts in the comments below.
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