We often get questions about how grandparents can help pay for college. Here are three suggestions.
College savings plans
Grandparents can set up 529 accounts for their grandchildren in addition to any plans set up by the parents. Grandparents can also make contributions to Coverdell Education Savings Accounts.
However, the total contributions per child cannot exceed $2,000 no matter who is making the contributions. Be sure to coordinate gifts with parents and other grandparents.
Outright cash gifts
Each grandparent can make a cash gift every year to each of their grandchildren up to $14,000 (for 2014), without being subject to gift tax or generation-skipping tax.
The drawback of cash gifts directly to the grandchild is that the gift is considered untaxed income to the student in the federal government aid application (FAFSA) and may reduce the financial aid available to the student. This drawback can be avoided by making the gift to the parent instead of the grandchild, as the gift to the parent is not considered income for FAFSA purposes.
Another drawback of a direct gift to the grandchild is that the grandparent has no guarantee that the grandchild will use the funds for college expenses.
Pay tuition directly
Payments made by grandparents directly to the college are not considered gifts for federal gift tax purposes. Only payments made for tuition are exempt from the gift tax. Grandparents could pay the tuition to the college and also make a $14,000 gift to the grandchild without being subject to the federal gift tax or the generation-skipping tax.
Grandparents should check with the college before making direct tuition payments to ensure that the payments do not reduce the grandchild’s financial aid from the college.
For more information on the topics discussed in this article, please contact the author. For information specific to your situation, please contact your tax professional.Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.