Grandparents who lend a helping hand with college costs may reduce the financial aid available to a grandchild. Learn the pros and cons of popular giving strategies.
Grandparents can help pay college costs in a number of different ways, but some of the giving strategies can reduce the amount of need-based financial aid available to their grandchildren.
As much as one-third of grandparents are saving for college through a 529 college savings plan, according to the website FinAid. Contributions of up to $13,000 a year can be made to a 529 without incurring gift taxes and a grandparent’s plan does not count as an asset on the student’s financial aid application. Here’s the catch.
Distributions from a grandparent’s 529 plan are counted as untaxed income when a student files for financial aid in the subsequent year, according to FinAid. The income can reduce a student’s eligibility for need-based financial aid by as much one-half of the income received. Cash gifts to a student and gifts made directly to the college can also hurt need-based eligibility, FinAid said.
What other choices do grandparents have? Grandparents can offer to help students repay loans once they are finished with college, easing the debt burden while avoiding financial aid concerns, Adam Zoll, an assistant editor at Morningstar.com, said in a recent article. “This strategy might be particularly useful for students with subsidized loans, which don't begin to accrue interest until after graduation,” Zoll said.
One in five retirees is helping a grandchild with college costs, according to a Millionaire Corner survey conducted in April, and they tend to pay one-fourth or less of the bill. About 16 percent say they have had to cut back in other areas of their budget to help a grandchild with college costs, and more than 38 percent express “major financial concerns” about college costs for their grandchild. Perhaps these retirees should heed the advice of experts who urge seniors to consider their own financial needs first.
“If there's any question about whether you've saved enough for your own retirement, you're better off letting your grandkids and their parents fund college on their own,” Zoll said. After all, they'll have plenty of opportunities to borrow money for college if they need to, but no financial institution will loan you money for your retirement.”