Give your grandchildren the education they want—without the financial burden they don’t.
All grandparents want to see their grandchildren become the most successful versions of themselves. For many young people, that starts with getting a great college education. There’s just one (big) problem: The fastest path to fortune happens to cost one too.
The average price for annual tuition, fees, room, and board at a four-year public college was $20,770 in the 2017-18 academic year, according to the College Board’s Trends in College Pricing 2017 report. That’s up nearly $5,000 from 10 years ago. And for a four-year private college, the average price is $46,950—up more than $9,000 from 10 years ago.
In other words, your grandkids will likely have to erase a massive pile of debt when their undergrad days are done.
The good news? You can help make college more affordable for them. Here are five smart and simple ways to lessen their financial burden. Many strategies will warrant a discussion with a financial advisor, who can help you decide how to give any money based on your personal situation—but some strategies are free.
1. Set Up a 529 Plan
In 1996, Congress added “qualified tuition programs” to the Internal Revenue Code. You know them better as 529 plans, named for their numbered section in the lengthy tax law. The two kinds of 529s—prepaid tuition plans and college savings plans—were both crafted to help families save funds for future higher education costs. Their benefits are bountiful, says Bryan Kuderna, a certified financial planner with the Kuderna Financial Team in Shrewsbury, New Jersey.
When you fund a 529 plan for your grandchild, the earnings grow over time just like a Roth IRA and come out federal tax-free when they’re used for eligible college expenses like tuition, room and board, and textbooks, Kuderna says. Plus, there’s no age, income, or annual contribution limit, he says, adding that you should check with your financial advisor to find out if your state offers additional 529 tax deductions.
Your instinct may be to contribute to your grandchild’s existing 529 plan instead of starting your own. As long as it accepts third-party contributions, you can do this. But there are downsides. The biggest: You won’t be the account owner, so you can’t get that money back should you ever need it. Once you contribute, the money is no longer yours.
In addition, when you own the account, you can change beneficiaries whenever you want. “If one of your grandchildren gets a full-ride scholarship, you can just transfer the plan to someone else,” Kuderna says.
2. Start a Custodial Account Under UGMA or UTMA
The Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) are custodial accounts, which allow you to make irrevocable investments on behalf of a minor until he or she is old enough to unlock and use the assets, Kuderna explains. This usually happens at age 18 or 21, depending on your grandchild’s home state.
There aren’t any contribution limits to such custodial accounts, but you’ll have to consider the potential downsides before determining if they’re the right option for you.
“Unlike a trust, you can’t dictate the terms of how and when your grandchildren use the money,” Kuderna says. “So once they’re old enough, it’s 100 percent theirs. They can use it for whatever they want.”
Additionally, you’ll have to watch out for something called the “kiddie tax,” Kuderna says. If your grandchild’s unearned income from UGMA or UTMA accounts totals more than $2,100, some of that income will be taxed at his or her parent’s tax rate instead of the child’s lower rate, he says.
3. Use a Cash Value Life Insurance Policy
While 529 plans and custodial accounts are among the most useful college saving tools, they count against the parent’s and child’s income, respectively, and thus reduce the student’s financial aid eligibility. That’s not the case for the money in a life insurance plan, Kuderna says, which is why some families withdraw cash from whole, universal, or variable life insurance policies to pay for higher education.
The logic is sound: If you structure a life insurance policy with a minimal death benefit, it’ll generate a higher cash value, Kuderna says. “So in the future, the family can access that cash value tax-free. That way, when you pull it out, the income has no bearing on the child’s financial aid reporting.”
Another bonus? The funds in a 529 rise and fall with the stock market, “but the cash value inside a whole life insurance plan just grows at a slow, steady, and guaranteed rate,” Kuderna says. “That’s why I really like this option. There’s less risk.”
4. Pay Their Tuition as an Extremely Generous Gift
Of course, if your pockets are deep, you can foot your grandchild’s tuition yourself. Under current IRS rules, you can give an annual financial gift of up to $15,000 to any recipient without paying a federal gift tax. But there’s a special Gift Tax Education Exclusion for Tuition that says you can exceed that limit, pay as much as you want toward someone’s education, and still skirt the tax, Kuderna says.
There are a few stipulations: The exclusion only covers tuition, not other college expenses like room and board or textbooks. And you’ll have to make a direct payment to your grandchild’s school—see the qualifications here, or better yet, ask your financial advisor.
5. Use Your Time to Help Save (or Find) Some Free Money
If forking over cash isn’t a great option for you, consider giving another critical asset: your time—and look for special college savings programs that may be available to you or scholarships that may be available to your grandchild. Check out these resources:
- Your employer or retiree plan
- Any community, professional, or religious groups you’re part of
- Local businesses or organizations that may offer scholarships or grants
- Tips from the U.S. Department of Education
- College Board’s Scholarship Search