4 Things Grandparents Should Know About Paying for College
My experience tells me that many grandparents want to help fund college education for their grandchildren, particularly if they already have enough money to ensure a comfortable retirement income for themselves.
My experience also tells me that to help fund these education goals, most grandparents gravitate to the popular 529 plan*, a savings vehicle where earnings grow tax-deferred and distributions are tax-free as long as they are used for qualified post-secondary education.
While 529 plans do have attractive characteristics, grandparents should be sure they truly understand the domino effect of their savings decisions.
Here are four things grandparents should know about paying for college with 529 plans:
- Whose asset is it? Grandparent-owned 529 plans are not counted as student or parent assets when the time comes to fill out the Free Applications for Federal Student Aid (FAFSA). So, from a financial aid point of view, grandparent-owned plans are a good thing as it would not reduce aid eligibility for the student, like a parent owned plan might.
- Whose income is it? Any money actually spent from the plan, on behalf of the student, must be counted as part of the student’s income the following year. So that income would be added to the FASFA, which may weigh heavily against them for financial aid.
- Whose management? Most people are familiar with the investment driven 529 plan where you chose an investment portfolio. However, there are also prepaid tuition plans that allow families to save for the cost of college by purchasing tomorrow's tuition at today's prices. So, no matter how much tuition increases over the years, you can lock in current rates. Consider how you want your gifts managed.
- Control and accessibility. Grandparent-owned 529 plans are still the grandparent’s asset. So if the grandparent or spouse needs nursing care and applies for Medicaid, the grandparent or spouse could be forced to spend down these 529 assets on nursing care.
If you decide to assist your grandchildren, be sure to consider all the ramifications before making your gifts. And know that it’s important to involve the parents in the decision-making process. Your goal to help will have impacts on their financial aid application.
If this all sounds like a lot to consider, that’s okay. Call us. We will help you prioritize your goals and objectives to be sure you have a plan in place that aligns your personal values, vision and wealth.*Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.