If your grandkids are headed to college in the fall, you may be concerned about how they are going to pay for school without being indentured to the student loan system into their late 40’s. Compared to when you sent your own children to college, prices have more than doubled after adjusting for inflation. Studies show that the rising cost of higher education has deterred students from completing their degrees. But you may be able to help defray the costs for your grandchildren without negatively impacting your tax liability or their eligibility for financial aid.
Ways to Help Pay
1. Pay Directly
Paying your grandchild’s tuition directly is the simplest and most immediate way to help. Tuition payments are not considered taxable gifts, so you can contribute as much as you like without being taxed. Tuition payments are only exempt if payment is made directly to the college. If you wish to help with other expenses such as room and board, you can contribute up to $15,000 this year for single filers and $30,000 for joint filers (per student) without paying gift taxes. Keep in mind that direct gifts will be counted against your grandchild if he or she applies for the Free Application for Federal Student Aid (FAFSA), so this option is preferable only if your grandchild does not already qualify for financial aid.
2. Pay After the Fact
A second option is paying back your grandchild’s student loans after graduation. This way you can avoid affecting your their eligibility for financial aid while they are in school. Loan payments on another’s behalf are limited by the annual gift tax exclusion.
Another way to help without incurring a tax penalty is to make a withdrawal from your Roth IRA. This option is only recommended if you already have sufficient funds for your retirement. The usual 10 percent early withdrawal penalty (before age 59 ½) is waived if you are paying for educational expenses for yourself, your children or your grandchildren. Qualified expenses include tuition, fees, books, room and board. This contribution could, but won’t necessarily, affect the next year’s FAFSA application.
If your grandchildren are still several years away from attending college you may prefer to invest in a 529 Plan. Your grandchild does not need to attend school in the same state as your plan and the plan can be transferred to another grandchild if the intended grandchild does not attend college.
Contributions to a 529 Plan are limited to the annual gift tax exclusion, but earnings on investments grow tax-free, and withdrawals are not taxed if the money is used for qualified education expenses, including tuition, fees, and room and board. Georgia residents can deduct up to $2,000 a year (or $4,000 for joint filers) from their state income taxes for 529 contributions to their account or a family member’s account.
Georgia’s Path2College 529 savings plan allows you save up to $235,000 per beneficiary. Your 529 plan would not be counted as an asset on the FAFSA, but distributions would be counted the following year. However, if you switch ownership to the child’s parents, only up to 5.64 percent of the 529 plan’s value would be counted as an asset in the FAFSA formula.
Any of these options will help your grandchildren reduce the debt burden affiliated with achieving their educational and professional goals and can reduce any taxes your estate may owe. For help deciding which option is best for you, give us a call! 912-352-3999