Helping out your grandchildren with costs of higher education may be a worthwhile thing to do – if you can afford it, that is, without damaging your own retirement security. But if you do decide to offer financial aid, you need to be strategic, or your generosity could end up making matters worse.
That’s the insight we gained from this very recent article that appeared on the Personal Finance website of US News. The article is simply titled, “How Grandparents Can Help Save for College,” but it’s the subtitle of the article that contains an important caution: “Don’t let your financial assistance harm your grandchild’s eligibility for need-based financial aid.” Too much giving on your part, especially if it comes at the wrong time, can backfire.
The impulse on the part of well-meaning grandparents to give educational funds to grandkids is understandable, and laudable. Most of us, whether we have loved ones in college or not, are aware of the sticker shock awaiting students and their parents when the college bills start to arrive. The College Board reports that a decade ago the annual cost for an undergrad at a four-year private college, including tuition, fees, room and board, was $36,060 – but today that cost has jumped to $45,370, a 26 percent hike in a decade. “It’s no wonder,” writes US News, “that student loan debt has increased substantially over the years, too – from a total of $51 billion nationwide in 2007 to a whopping $1.34 trillion in 2017, according to the Federal Reserve Bank of New York.”
That’s a staggering amount of debt, affecting about 44 million borrowers. Last year the average graduate had a debt burden of more than $37,000.
So, asks US News, are more and more grandparents stepping into the breach to help share the financial load? Some are, but most are not. The article points out that about three-fourths of high-net-worth grandparents say they are willing to help finance their grandchildren’s college education, but, according to Fidelity, fewer than 40 percent actually do. Why is there such a disconnect between good intentions and stingy reality? One financial planner quoted in the article suggests that a simple lack of communication, coupled with the fact that financial discussions are taboo in many families, may be the biggest problem. “Parents are unsure of how much grandparents have set aside,” says US News, “and feel uncomfortable asking for specifics that are not volunteered. Grandparents meanwhile are hesitant to disclose details.” Grandparents, even generous ones, may want to encourage grandkids in financial self-sufficiency, so they can be hesitant to step in too deeply too soon with offers of help. All these conflicting impulses combined with our natural bent toward financial privacy keep many families from having an honest conversation about college costs.
Nevertheless, says US News, “if you’re willing and able as a grandparent to help tackle the high cost of tuition, you can start to save for your grandchild’s college fund whether or not you speak with the parents about your plans. You just want to be sure your good intentions don’t pave the way for a bigger college bill. Unfortunately, if you give the child money at the wrong time, it can count against her when calculating how much need-based aid she might get.” That’s because money from grandparents will probably count as student income when your grandchild completes his or her FAFSA form (the Free Application for Federal Student Aid), and if it does it could slash available need-based financial aid by up to half. This in turn has the potential to adversely impact Pell Grants, Stafford loans, Perkins loans and work-study opportunities.
The US News article recommends two specific strategies for well-intentioned grandparents. First, you might want to consider giving your grandchild money after he or she has filed the second FAFSA form during their second year of college. If you wait, your gift won’t be counted as income, and you’ll be able to help with the final two years of schooling. The second suggestion is to set aside education funds in a 529 college savings plan, named after the relevant section of the IRS Code. (In Washington this is called the GET Plan, or Guaranteed Education Tuition, and you can get details at their website here.) These savings plans, available in 34 states, allow tax breaks for educational savings both on the front end when funds are deposited and on the back end when they are withdrawn, provided they’re used for their intended purpose.
One caution that is mentioned in the US News article – but not with strong enough emphasis in our opinion – is that it’s almost always a bad idea for seniors to tap into retirement funds to help a family member with college costs. Few retirees have saved enough, and in spite of your good intentions, the odds are you’re going to need that money one day. It will be better to advise your grandchild to opt for lower-cost education options and help them find other ways to economize than to put your own retirement security at risk.
Retirement security, of course, is our special focus here at AgingOptions. That’s why we have pioneered a uniquely comprehensive approach to retirement planning which we call LifePlanning – so named because it truly is a plan for every aspect of your life in retirement. A LifePlan encompasses financial and legal preparation, along with plans to help you choose the best medical coverage, and a strategy that lets you (and not someone acting on your behalf) determine which housing choice is right for you. We also involve your family members in your LifePlan, to ensure that they understand your wishes and will honor them as you age.
Find out more about this dramatically new approach to retirement planning by attending a free LifePlanning Seminar in your area. All the currently scheduled seminars are listed here on our website, where you can also register online for the seminar of your choice. (Of course, feel free to contact us during the week for assistance by phone.) It will be our privilege to help guide you into the retirement you’ve always hoped for!
(originally reported at https://money.usnews.com)