Many grandparents dream of being able to write a check for a grandchild’s college tuition. But is it a realistic dream? Even those grandparents who are financially able to pay for college should proceed with caution. Many factors should be considered before grandparents decide to pay for college for grandchildren.
Grandparents and Financial Stress
Financial advisers agree that most grandparents need to consider their own financial security before paying for college for grandchildren.
The average retiree could put his or her own monetary situation in jeopardy by picking up the tab for even one grandchild. A study by Boston College estimates that under the most optimistic scenario, around 45% of seniors are in danger of being unable to maintain their standard of living during retirement. This best-case scenario requires that workers wait until 65 to retire, then annuitize their assets and take advantage of a reverse mortgage. With a less favorable scenario — retiring at 63, no conversion of assets into annuities and no reverse mortgage — the percentage of retirees on shaky ground jumps to about 66%. Since the less favorable scenario is the one that most retirees fit, clearly most grandparents need to look to their own financial futures first.
The Cost of College: High and Climbing
How much the gift of a college education will cost depends upon the age of your grandchild and when he or she is expected to enter college.
If you have a newborn grandchild, that child’s college education is expected to cost $100,000 in a public school and twice that in a private. If you have a grandchild almost ready to enter college, expect the cost to be at least $10,000 a year, or twice that much for a private school. These are not small numbers.
Paying for College If the Money Is There
Clearly many grandparents, no matter how much they love the grandkids, can’t pay the freight for their college educations. But what about those who can without compromising their own fiscal security? For those, the gift of a college education can be the best gift they can give.
College educations still pay off in terms of high earnings, almost doubling the earning power of high school diplomas, and that’s without considering the value of advanced degrees.
Furthermore, college educations are a productive investment. Many other gifts bequeath no lasting value to a grandchild’s life, and some actually drain financial resources. Consider the grandparent who helps a grandchild buy a more expensive house than he or she could otherwise afford. The taxes, insurance, utilities and upkeep will necessarily verge on the unaffordable. In addition, in the case of a home purchased in an upscale neighborhood, there may be pressure to keep up with the neighbors in spending.
These problems don't occur when the investment is in education.
Best Ways to Contribute
For those grandparents who can afford to do so, one of the best ways of putting aside money for grandchildren's college educations is through a 529 college-savings plan. This plan has the following advantages:
- Contributions are tax-deductible in about half the states.
- Money can be used tax-free for college expenses.
- Grandparents may get a break on their state income tax by making contributions to a 529 plan.
- Contributions to a 529 plan are not subject to the usual gift limits.
- Money can be moved out of your estate to reduce estate taxes.
- Funds can be switched to a different beneficiary.
- Funds can be reclaimed by paying a 10 percent penalty, although there may be some tax consequences as well.
- Money in a 529 account is not usually figured into a college's financial aid computations.
One caveat: Although money in a 529 is not considered by colleges, any disbursements during one academic year could affect the financial aid package the following year.
Another way to contribute is to pay tuition directly to the college, which keeps the contribution from being subject to the limit on gift-giving which would apply if money were given directly to the grandchild.
Grandparents should be especially cautious about co-signing student loans for their grandchildren. The government can garnish Social Student benefits to pay back a student loan that is made through a federal agency.
Some Non-Financial Factors
Perhaps you have always planned to help a grandchild pay for college, but when the time arrives, you aren't sure it's the right thing to do. Perhaps the grandchild has a history of bad grades or lacks appropriate study habits.
No grandparent should feel obligated to pay for college in such circumstances, unless there has been a solemn, no-strings-attached pledge to do so.
Grandparents who have more than one grandchild should strive to be equitable in any contributions lest they be found guilty of favoring one grandchild over another. It's my belief, however, that equitable doesn't always mean equal, especially if one grandchild has a greater need than another. Clear communication about what you are willing and able to do will go a long way toward preserving family harmony.
Send Love, Not Money
For a small portion of grandparents, footing the bill for college is both a loving and a smart thing to do. For the rest of us, care packages at exam time and a lot of love will have to do.