With August only days away, the new school year is on the horizon. Despite losing some of their own investments, grandparents still want to help their grandchildren with college expenses. According to Money Magazine, 65% of grandparents plan to do just that. It’s important to choose the best ways to give. Otherwise, it could hurt a student’s chance of financial aid.

Cutting a Check

Be careful when simply giving money by check to the grandchild. This money would be considered part of the student’s income and must be reported on the Free Application for Federal Student Aid (FAFSA). The same can be said for any checks sent directly to the school or college. A possible way to avoid this is by giving the check to the child’s parents. That way it would be considered a parental asset.

Tip: Avoid taxes by keeping yearly contributions under the gift-tax exclusion of $13,000.

529 Accounts
Grandparents have two options with a 529 college savings plan. They can add up to $13,000 yearly or a lump sum of $65,000 per child using a special five-year election. Unlike a check, 529 accounts don’t count against federal aid. Depending on the state, a possible benefit for grandparents lies in a state tax write-off.

Tip: Distributions from 529 plans are considered income, so don’t use the funds until a student’s senior year.

After College Gifts

Some grandparents offer to pay for a grandchild’s student loans after graduation. This option won’t affect aid eligibility and will hopefully encourage a student to finish college. A possible negative is if the grandparent passes away before graduation. The student will then be responsible for repaying the loans.

Tip: Remember that $13,000 limit? Try to keep the yearly payoff of loans at $13,000 or below to avoid owing the IRS.

 
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The certified college planners at Marca Life Planning can provide further advice for your college planning. Contact us at 800-489-3933.