For many grandparents, there’s a deep desire to help their grandchildren achieve their educational dreams. As college tuition costs continue to rise, the prospect of contributing to a child’s education can feel like an exciting and meaningful way to support the family. However, it’s essential for grandparents to navigate this financial involvement carefully, ensuring that they contribute without overstepping or interfering with parental financial goals.
Kevin Canterbury, a Scottsdale-based financial advisor and Managing Director & Founder of Redstone Capital Management, LLC, has worked with many families to help them create strategies for generational wealth, including college savings. Through his experience, he has guided families on how grandparents can assist with educational expenses in ways that align with everyone’s financial objectives, while avoiding potential conflicts.
When considering how to help with college funding, grandparents should take into account not only the immediate financial impact but also the long-term effect of their contributions. Striking the right balance is key to ensuring that the financial support is meaningful, beneficial, and, most importantly, respectful of family dynamics.
The Role of Grandparents in College Funding
While the primary responsibility for saving for college generally lies with the parents, grandparents can still play a pivotal role in easing the financial burden. Offering to help with college funding can be a generous gesture, but it’s crucial for grandparents to communicate with their children about how best to contribute. This collaboration ensures that everyone is on the same page about the financial impact and avoids any unintended strain on the family dynamic.
One of the primary ways grandparents can contribute is by providing funds directly into a college savings account, such as a 529 plan. This approach is not only effective, but it also offers tax advantages. Many grandparents prefer this option because it allows them to assist without significantly affecting the parents’ savings strategy. However, before setting up any account or contributing to existing savings, grandparents should understand how their contributions might impact financial aid or eligibility for other assistance programs.
Understanding the 529 Plan
The 529 college savings plan is one of the most popular vehicles for college funding. These state-sponsored plans allow families to invest in a tax-advantaged savings account that can be used for qualified educational expenses, such as tuition, room and board, and textbooks. One of the significant benefits of a 529 plan is that contributions grow tax-deferred, and when the funds are withdrawn to pay for college-related expenses, they are typically tax-free. This makes the 529 plan an attractive option for grandparents who want to help their grandchildren with college costs.
There are two types of 529 plans: the prepaid tuition plan and the education savings plan. The prepaid plan allows families to prepay for future tuition at today’s rates, while the education savings plan is more flexible, allowing families to invest in a variety of investment options, such as mutual funds and ETFs, to grow the account over time.
Grandparents can contribute directly to an existing 529 plan set up by the parents, or they can establish a new 529 plan in the child’s name. One of the advantages of the 529 plan is that the donor—whether parents or grandparents—retains control over the account, even though it’s in the child’s name. This means that grandparents can ensure the funds are used for their intended purpose, whether that’s for tuition or other educational expenses.
However, it’s important for grandparents to be aware that contributions to a 529 plan could affect the student’s financial aid eligibility. Since the 529 plan is considered an asset, it can impact the amount of aid the student receives. Typically, assets in the student’s name have a larger impact on financial aid than those in the parent’s name. Grandparents can avoid this issue by contributing directly to the 529 plan after the student is already enrolled in college. This way, the funds won’t count as part of the student’s assets when determining financial aid eligibility.
Custodial Accounts: A Flexible Option
Another option for grandparents is to contribute to a custodial account, which is typically a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. These accounts allow grandparents to gift assets to minors while maintaining control of the assets until the child reaches the age of majority, which varies by state. While custodial accounts do not offer the same tax advantages as 529 plans, they provide greater flexibility.
Unlike 529 plans, custodial accounts can be used for any purpose, not just educational expenses. This means that grandparents can contribute to a custodial account and give the child more freedom in how the funds are used, whether it’s for education, a car, or other needs. This flexibility is appealing for some grandparents, as it allows them to provide financial assistance that is not strictly tied to education.
However, custodial accounts also come with certain risks. Once the child reaches the age of majority, they gain full control of the account and can use the funds as they wish, which may not always align with the grandparents’ original intentions. Additionally, custodial accounts can affect the child’s financial aid eligibility, as the assets in the account are considered the child’s assets, and they are factored into financial aid calculations.
Grandparents should be mindful of how much they contribute to custodial accounts, as these contributions could impact their grandchild’s eligibility for future financial aid or even their eligibility for tax credits. These accounts can be a great way to help, but they do require a higher level of trust in the child’s ability to handle the funds once they come of age.
Balancing Support with Respect for Parental Goals
It’s essential for grandparents to discuss their plans for contributing to college savings with the parents of the child. While grandparents may have the best intentions, it’s important not to undermine or complicate the financial goals of the parents. By having an open discussion, grandparents can understand the parents’ perspective and align their contributions in a way that complements the family’s overall financial plan.
For example, if the parents are already making significant progress on their college savings, the grandparents might choose to contribute in a way that won’t interfere with existing strategies. They might offer to cover specific expenses, such as books, travel, or extra-curricular activities, rather than making large contributions to a savings account. This ensures that their contributions don’t overshadow or disrupt the parents’ long-term financial plans.
In some cases, grandparents might want to explore options like gifting appreciated assets or helping with tuition payments directly to the educational institution. This can be a way to provide assistance without affecting the overall family financial plan, especially if the grandparents are trying to limit their taxable estate or are concerned about the implications of large financial gifts.
Communication and the Importance of Flexibility
When it comes to supporting grandchildren’s education, communication is key. By discussing financial goals, expectations, and boundaries with the parents, grandparents can ensure that their contributions are both helpful and aligned with family objectives. Being flexible and willing to adapt to the family’s evolving needs will ensure that the financial help provided is appreciated, respectful, and effective.
College savings can be a meaningful way for grandparents to create a lasting legacy. Whether through 529 plans, custodial accounts, or other methods, helping grandchildren with education costs can open doors to opportunities and remove some of the financial burden that many families face. However, as with any financial planning decision, it’s essential that grandparents understand the tax implications, how their contributions may impact financial aid, and how to best work with parents to ensure that their help is in line with the broader family goals.
By approaching this with thoughtful consideration and open communication, grandparents can contribute in a way that supports their grandchildren’s education while fostering a positive family dynamic and setting everyone up for long-term success.
