Grandparents’ Guide to Saving for College - Part 1
With student debt at an all high time and college costs continuing to escalate, funding college expenses is not just on the minds of parents—it’s on the minds of grandparents as well.
72% of grandparents recently surveyed would like to contribute financially to their grandchildren's education. That's nearly 3 out of every 4 grandparents! If you are a grandparent, odds are you fall into this camp too.
While grandparents have access to the same tax advantaged savings vehicles parents do, there are unique considerations they need to take into account when crafting a savings strategy.
This post is part of a two-part series that addresses these considerations. This first post covers four critical questions grandparents should ask themselves as they define their savings goal.
Question #1: How much control do I want over the assets?
The level of control a grandparent has over assets earmarked for college varies by savings strategy. Some prefer to maintain ownership and upkeep of the assets while others prefer to delegate this responsibility to their children.
If control is a priority, a 529 plan can be a good option as it allows the grandparent to control the account for the benefit of the grandchild. Assets in a 529 plans also have the unique advantage of being excluded from the account owner's estate for tax proposes.
Another option is to simply pay tuition to the institution directly once the grandchild attends school. If tuition is paid directly, it is exempt from gift taxes which can be advantageous.
Question #2: Do I want the use of these assets to be flexible?
Savings vehicles designed for education expenses often have the disadvantage of restricting the use of the funds. As an example, a distribution from a 529 plan that is not used for qualified education expenses incurs a 10% penalty and income taxes on any earnings.
A grandparent may want the use of the assets to be flexible. Perhaps they would like to earmark the assets for a grandchild’s college expenses, but are open to the assets being used for the parent’s retirement if this is the greater need.
If flexibility is a priority, there are other options worth exploring in lieu of the typical education savings vehicles.
As one example, a Roth IRA owned by the parents can be used to save for college expenses if the parents are eligible to receive contributions. Distributions used for qualified education expenses are exempt from the early withdrawal penalty. Any earnings distributed from the account are taxable, but receive favorable capital gains tax rate at the federal level.
The key benefit to a strategy like this one is that the assets can serve multiple purposes. If they are not needed for college, they could be redirected to the parents’ retirement.
Question #3: Have I communicated my plans to my child?
This question might seem like a given, but it is actually not that uncommon for both parents and grandparents to save for college without coordinating efforts.
It is best to openly disclose savings plans to the parents of the grandchild. This allows the parents to adjust their financial goals appropriately and ensure there is no overlap. This is especially the case if a 529 plan is involved since distributions can be subject to penalty if not used appropriately.
Question #4: Does my grandchild plan to qualify for financial aid?
For many attending college, financial aid is a critical component of funding expenses. If this is the case for the grandchild, grandparents will want to be aware of how their contributions impact the student’s financial aid. This topic is somewhat complex and will be covered separately in Part 2 of this series.
These four questions are a great starting point for any grandparent developing a savings strategy for college. As with many financial planning issues, there is no one-size-fits-all solution. A financial advisor can help prioritize objectives and sort through the many strategies available.
Stay tuned for Part 2 as we take a deeper dive into what grandparents need to know about the financial aid process.