Only a few of my readers that I am aware of currently have grandchildren, but a number of them wish they did. I fall into the latter category. One grandparent I know says, “If I had known how much fun grandchildren are, I would have started with them first!”
One common thought among grandparents is, “How can I help pay for their college education?” Same thoughts as parents have, but perhaps not with the same level of dread. There was an excellent article in a recent edition of the Wall Street Journal that discusses various options a grandparent has. Click this link to read the original article, and then read my two cents worth here below on each of the options presented in the article:
- 529 Account: This is the best way now, especially if the grandchildren are nearing college age, or at least over 8 years old. Parents can contribute $15,000 per year per grandparent and per grandchild, and they can frontload 5 years of contributions if they want, although this may not be desirable due to investment market vagaries. This means a grandmother and grandfather together can contribute $30,000 per year or $150,000 if they want to frontload 5 years of contributions without triggering Gift Tax issues. I advise not frontloading all 5 years because it is better to invest the contributions over time rather than all at once because you don’t know if you are contributing during a good buying opportunity or not. Most 529 Accounts are invested in target-age funds based on the child’s age and years until they need the money.
- Direct Payment of Tuition: A grandparent can pay all or part of the grandstudent’s tuition directly. This means the grandparent writes a check directly to the college. The problem with this is that many colleges now want to be paid by credit card all at once, so how mechanically can a grandparent pay for a portion of the tuition? Probably someone will need to contact the college to work out the mechanics, which likely vary from college to college. Another issue to consider: The grandparent really should not write the check to the parent, because of gifting limits. A check directly to the college does not count as a gift, but a check payable to the child or the child’s parent counts as a gift, so there could be issues if the total including the tuition plus other gifts that grandparent gives to any one person exceeds $15,000. For instance, let’s say the grandchild graduates from high school and the grandparent gives them a car for graduation, and then the grandparent writes the grandchild a check for their first semester’s tuition. In this case, the grandparent is generous but not wise because both gifts combined within the same calendar year could easily exceed $15,000.
- Fixed-Index Universal Life Insurance Policy: This may be the most intriguing option but only if the grandchild is less than 8 years old, because the contribution requires 10 years of aging for the tax benefits to kick in. The grandparent owns the policy but the grandchild is insured, so the cost of insurance is minimal. After being in place for 10 years, withdrawals to pay for tuition are considered loans against the cash value and aren’t taxable and aren’t considered assets that count against a child’s ability to get financial aid on the FAFSA. As in many other endeavors, it pays to plan ahead, and so the best option works if the planning and investing occur 10 years or more before the money is needed.
These suggestions for grandparents do not contradict with anything that the child or the child’s parents are trying to accomplish to obtain financial aid or to pay for college. My further advice is to make sure the college choice fits with the budget, and to be realistic about what the child wants to achieve with their college experience. With college as expensive as it is now, make sure that you really understand what you are getting into if you choose to go into serious debt to go to your dream school when you might be better served to go to a more cost advantageous place. And, as always. please ask me to help you if you have serious questions about any of this.