College has gotten a lot more expensive since you went to school. Many grandparents are in interested in helping their grandchildren afford a university education without going into major debt. There are several options for college funds for grandchildren.

College Costs Have Soared

According to Education Data Initiative, college tuition has increased 747.8% since 1963, and that’s after adjusting for currency inflation. The average cost of a year of college in the U.S. is $35,551. That’s $142,204 for a four-year degree. However, due to student loan interest and lost income, Education Data Initiative says that the total cost of a bachelor’s degree can exceed $500,000.

These are the costs now. If your grandchildren won’t be attending college for several years, their college expenses will likely be higher.

Student Loan Debt Impacts Life Decisions

Many college graduates as saddled with debt, and the consequences can be severe. According to a report from the National Association of Realtors, 29% of student loan debt holders say it’s impacted their decision to buy a home, 35% say it’s impacted their decision to take a vacation, and 14% say it’s impacted their decision to start a family.

Many people still believe that a higher education is the best way to get ahead in life. However, the harsh reality is that massive student loan debt can also drag people down. College students often need help paying for their tuition and related expenses, and grandparents can be a welcome source of financial assistance.

Federal Student Aid and Other Financial Aid

Many students qualify for Federal Student Aid. If your grandchildren need help paying for college, they should fill out the Free Application for Federal Student Aid (FAFSA) to see what they are eligible for. If they receive a grant, such as the Pell Grant, the funds do not have to be repaid. However, if they receive a student loan, the money does need to be repaid with interest.

Students can also apply for scholarships from various organizations. Like grants, scholarships do not need to be repaid. Many scholarships are based on academic merit or excellence in athletics, music, or something else. Each organization establishes its own requirements, so applying for scholarships can be time-consuming, but it can also be worthwhile.

As a grandparent, you can help your grandchildren pay for college by making sure they complete their FAFSA and scholarship applications on time. This is a great way to support your grandchild’s education even if you don’t have money that you can contribute to college funds.

529 Plans

Another way to help your grandchildren pay for college expenses is to set up or contribute to an account specifically designed for this purpose. Each of these accounts has pros and cons, so you’ll need to think carefully before using one, and it’s smart to consult with financial advisor.

One option is the 529 Plan. According to the U.S. Securities and Exchange Commission, a 529 Plan is a tax-advantaged savings account that encourages people to save for future education costs. These plans can be attractive because of the tax advantages, but they can also have fees, expenses and risks.

There are two types of 529 plans.

  • Prepaid Tuition Plans allow you to purchase units or credits ahead of time. Not all schools participate, but many public colleges and universities do. This type of plan can work out well if you know where the person plans to attend college. However, if they end up attending a non-participating school, the plan may not be as good a deal. Additionally, these plans are not guaranteed by the federal government, and you could lose money if the plan’s sponsor has a financial shortfall.
  • Education Savings Plans involve an investment account that can be used to pay for qualified education expenses at any college or university. Some investments may be insured by the FDIC, but the investments that are put into mutual funds and ETFs are not federally guaranteed.

Coverdell Education Savings Accounts

Another type of account designed for college savings is the Coverdell education savings account (Coverdell ESA).

According to the IRS, this is a trust or custodial account that is used for the sole purpose of paying qualified education expenses for the beneficiary, who must be under the age of 18 or a special needs beneficiary when the account is established.

These plans are designed for lower-income families. There is an income limit for participating families, and the total annual contribution limit for a beneficiary is currently capped at $2,000. According to the Investment Company Institute, the contributions are not tax deductible, but there are tax benefits because the investments can grow tax-free until they are withdrawn, and the withdrawals are typically tax-free as long as they’re used on qualified education expenses and don’t exceed these expenses.

Qualified Education Expenses

If your grandchildren use a 529 Plan or Coverdell ESA, they’ll need to know what they can spend the funds on.

For 529 Education Savings Plans, qualified higher education expenses include tuition, mandatory fees and room and board. The Prepaid Tuition Plans typically only help toward tuition and mandatory fees.

For Coverdell ESAs, the Investment Company Institute says that qualified education expenses can include tuition, fees, books, supplies and equipment. Room and board may also qualify.

Cash Gifts and Federal Income Tax Rules

As a grandparent, you may want to help your grandchildren pay for college by giving them a cash gift. However, if you go this route, it’s important to understand the relevant federal income tax rules.

Cash gifts above a certain amount may be subject to tax. The IRS says that the annual exclusion per recipient is $16,000 in 2022 and $17,000 in 2023. The IRS also says that the donor is usually responsible for paying the gift tax.

There is an annual gift tax exclusion for tuition costs, but if you want to qualify for this exclusion, you have to make sure you’re following the IRS rules. According to the Balance, among other requirements, the payment must be for tuition only, and it must be made directly to the educational institution.

If you are planning to make a large cash gift to your grandchild to help pay for school, you may want to discuss your plan with an accountant or tax advisor first so you don’t end up owing federal income taxes unexpectedly. You should also consider whether any state tax rules apply.

Creating a Trust for Your Grandchildren

You can also create a trust for your grandchild.

A trust is a common tool used in estate planning. You can create your own rules and requirements for how and when the funds can be used. For example, you can have the money release at certain ages, or you can say that the funds can be used for certain purposes, such as college tuition or a down payment on a house.

A trust may be a good option for grandparents who aren’t sure whether their grandchildren will want to go to college or take another path in life. It’s also a way to continue to help your grandchildren even after you have passed away.

There are different types of trust, including revocable and irrevocable trusts. An estate planning expert can help you set up a trust that fulfills your wishes.

Helping Your Grandchildren Pay for College

It’s great that you want to provide college funds for your grandchildren. Given the high rising cost of tuition, there’s a good chance they’ll need all the help they can get! This article provides an overview of your options. As always, consult with a financial advisor or accountant for specific advice for your unique situation.

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