We just read an article on the website of the New York Times that sounds a note of caution for retirees eager to help pay college expenses for their grandkids. Before you decide how best to help out those college-bound grandkids, you need to do a little homework – or else your help may end up creating unanticipated problems. Click here to read the New York Times analysis.
For decades in America a college degree has been considered essential to career success. But that degree comes at an increasingly burdensome cost. The New York Times calls the cost of college “a hobbling financial burden” to a growing number of families. How high is the price tag? According to the College Board, the average expenses at private colleges and universities now tops $40,000 annually, while in-state tuition at state colleges averages around $17,000 annually. At the 50 top-tier colleges and universities costs can exceed $60,000 per year.
As a result, says the Times, grandma and grandpa are increasingly stepping up to assist with college expenses. Fidelity Investments did a survey in which fully half of their investors who are grandparents are either saving now or plan to start saving to help grandchildren pay for higher education. Obviously this generosity is a good thing, and might make the difference in helping a grandchild avoid the weight of crushing student loans – but in the words of the New York Times, “there are some potholes to avoid for those who hope to maximize the value of their contributions and minimize the total cost for a family of sending a student to college.”
One of the most popular financial vehicles investors use to save for college, according to the article, are the 529 college savings plans offered by states and managed by mutual fund companies. Under the terms of these plans, investments earmarked for college expenses accumulate tax-free. In some states, contributions to 529 plans are themselves tax-deductible. Statistics cited in the Times article state that 529 plans presently hold more than $250 billion in investments, from about 12 million account owners.
The problem with 529 plans, says the New York Times, comes when a student applies for financial aid. Money given to a student from a 529 plan counts as income, and must be reported as such on financial aid forms such as the FAFSA. This in turn could reduce the amount of financial aid for which your grandchild might otherwise qualify.
There are several strategies outlined in the New York Times article that might be worth considering, depending on the financial situation of your grandchild’s immediate family. One idea is to postpone giving the gift from the 529 until the child’s junior year, which minimizes the impact on financial aid. Another suggestion is to consider giving the gift, not to the student, but to the parents – again because “the more money that is in a child’s name, the more it pares back the aid package,” states the Times.
In some cases having the grandparents pay the tuition money directly to the college is the best solution. Again, it depends on several factors. The New York Times piece includes links to calculators that can help you decide which route is best.
Are you in the process of deciding which route is the best one for you to follow in retirement? Let us assist you. Here at AgingOptions we bring many decades of retirement planning experience to bear in helping you create a unique, individualized plan – called a LifePlan – that maps out the road to a secure and rewarding retirement. Communicating your wishes to your loved ones is one part of the LifePlan, and so is determining which of many housing options seems right for you. We’ll help you make sure your need for medical care is met, and of course we’ll aid you in establishing a sound financial plan as well as a well-documented legal plan that protects you and your assets in the years ahead.
Want to learn more? Then visit the Upcoming Events page on this website and sign up for a free, information packed LifePlanning Seminar. You’ll find several convenient choices of dates, times and locations. We’ll look forward to meeting you and answering your questions at a LifePlanning Seminar in your area soon.
(originally reported at www.nytimes.com)