Adding in the cost of college tuition, fees, and housing, this number can easily double. But paying for college shouldn’t be necessary to win the lottery. Careful and coordinated planning by parents and grandparents with the help of a trusted financial advisor can help reduce the burden on families and their children.
Before grandma or grandpa writes a check
Certainly, having the help of a family member will take some of the pressure off you. But before someone writes a check, you need to have a serious discussion about how best to help.
Providing aid incorrectly can be detrimental to a student’s chances of obtaining financial aid.
Consider these strategies that will help the student in a financial aid friendly way.
Consider paying off student loans after graduation
Financial aid is based on various formulas to calculate the Expected Family Contribution (EFC). Most of this is based on information provided on a student financial aid form about the assets and income of the parents and children.
The financial aid forms do not ask about the financial assets of another family member.
If you or a family member are in the fortunate position of having extra money, you may want to help. But providing a cash gift directly to the parent or student will result in an increase in reportable assets that will reduce the calculated need, increase the EFC, and in turn, reduce the amount of possible financial aid.
And if a helpful family member steps up and indicates that they will help, the financial aid office will also reconsider the student’s financial need. The money paid to the school on behalf of the student could be considered as any other external resource, such as a private scholarship that reduces the aid offered by the school.
A better way is to let the student qualify for maximum aid while they are still in school and then help by contributing to the repayment of the loan balances.
Family EFC too high?
For those who know their EFC is too high to qualify for help, there are still options for grandparents who can still help. These options at least offer you some tax savings.
Tip No. # 1: Pay for college directly
Since the aid will not be affected, simply pay the school directly. Each grandparent can donate up to the annual donation 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 No. # 2: set up a 529 savings plan
For grandparents who want to help with college costs, a qualified tuition plan offers an excellent option. The 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 length of time before the funds are needed. The funds grow tax-free and, if used for qualified expenses, can be withdrawn tax-free.
Grandparents can transfer large amounts of cash to these accounts without triggering gift tax. Each grandparent can effectively deposit up to five years of annual donations which at this time are $ 65,000. The assets in these accounts remain under the control of the grandparents and are not book assets for the student.
Tip No. # 3: give away appreciated assets
Assuming Grandpa has long-standing assets that have increased in value, one way to pay for college tuition and lower a potential tax bill is to gift these highly prized assets to someone at a lower tax bracket. This could be the child or the parents.
This saves the large capital gains tax bill that grandparents would likely incur if they sold the appreciated asset and used the proceeds to help pay for tuition or other expenses outright.
Tip No. # 4: establish a remaining charitable trust
For those who have a charitable bent and wish to help a student, grandparents can establish a trust.
A Charitable Rest Trust can be funded with highly valued assets that can then be converted into income-generating assets. The income that is generated can be used to help the student. Eventually the remaining assets can be gifted to the charity. This strategy helps grandparents avoid paying capital gains on assets and removes the asset from taxable estate. While not an issue this year (no inheritance taxes in 2010), this will change in 2011 without action from Congress.
For more tips and helpconsider using a qualified college aid planner.