Adding in the cost of college tuition, fees and housing and this number can easily double. But paying for college shouldn’t require winning the lottery. Careful coordinated planning by parents and grandparents with the help of a trusted financial adviser can help to reduce the burden on families and their kids.
Before Grandma or Grandpa Writes a Check
Having the help of a relative certainly will take off some of the pressure. But before anyone writes a check, you should have a serious discussion about how best to help.
Providing help in the wrong way can be harmful to the student’s chances for getting financial aid.
Consider these strategies that will help the student in a financial-aid friendly way.
Consider Paying for Student Loans After Graduation
Financial aid is based on various formulas to calculate the Expected Family Contribution (EFC). Most of this is based on the information provided on a student financial aid form about parental and child assets and income.
The financial aid forms do not ask about financial assets of other relatives.
If you or a relative are in the fortunate position of having extra cash, you may be inclined to help. But providing a gift of cash directly to the parents or the student will result in an increase of reportable assets which will reduce the calculated need, increase the EFC and, in turn, reduce the amount of possible financial aid.
And if a helpful relative steps up and indicates that they will help, then the financial aid office will also reconsider the financial need of the student. Money paid to the school on behalf of the student could be considered to be like any other outside resource such as a private scholarship which reduces the aid offered by the school.
A better way is to let the student qualify for the maximum aid while still in school and then helping out by contributing toward paying off the loan balances.
Family EFC Too High?
For those who know that their EFC is too high to qualify for aid, there are still options for grandparents who are still able to help out. These options at least offer some tax savings to them.
Tip #1: Pay the College Directly
Since aid is not going to be affected, then simply pay the school directly. Each grandparent can give up to the annual gift limit ($13,000 in 2010) to each student. This will help reduce the taxable estate of the grandparent and is an exempt gift to the student.
Tip #2: Establish a 529 Savings Plan
For grandparents who want to help out with college costs, a qualified tuition plan offers a great choice. Money set aside in these plans can be used for eligible expenses like tuition, fees, books and equipment.
These accounts offer a variety of investment options that can be tailored to the time frame before funds are needed. The funds grow without any taxes and if used for qualified expenses can be withdrawn tax free.
Grandparents can transfer large amounts of cash into these accounts without triggering gift tax. Each grandparent can effectively deposit up to five years of annual gifts which right now is $65,000. The assets in these accounts remain in the control of the grandparent and are not countable assets for the student.
Tip #3: Gift Appreciated Assets
Assuming that the grandparent has long-held assets that have increased in value, one way to pay for college tuition and lower a potential tax bill is to gift these highly appreciated assets to someone in a lower tax bracket. This could be the child or the parents.
This saves on the large capital gains tax bill that the grandparents would likely incur if they were to sell the appreciated asset and use the proceeds to help pay for tuition or other expenses directly.
Tip #4: Set Up a Charitable Remainder Trust
For those who are both charitably inclined as well as desiring to help out a student, the grandparents can establish a trust.
A Charitable Remainder Trust can be funded with highly appreciated assets which can then be converted into income-producing assets. The income that is generated can be used for helping the student. Eventually, the remaining assets can then be gifted to the charity. This strategy helps grandparents avoid paying capital gains on the assets and removes the asset from the taxable estate. While not an issue this year (no estate tax in 2010), this will change in 2011 with no congressional action.
For more tips and help, consider using a qualified college aid planner.
