If you are among those fortunate individuals whose parents want to help pay for their grandchild’s education, it’s worth figuring out the best way for them to do so in order to avoid the law of unintended consequences. In the college world, unintended consequences include losing financial aid as a result of a grandparent’s gift.
First, you need to know how grandparent (or other extended family) assets are treated by the aid formulas. Good news: Grandparent-owned 529 or other savings accounts do not need to be reported as assets on either the FAFSA or CSS PROFILE. Bad news: Once that money gets spent, it is treated as student income which needs to be reported on next year’s FAFSA or CSS PROFILE. This could lead to an increase in your EFC and a reduction in any need-based aid that your student is receiving, because student income is assessed at 50% in the aid formulas. So Grandma’s $10,000 tuition payment could cost the student $5,000 in lost aid.
What’s a generous grandparent to do? Several possibilities:
- Grandparents who want to have their own 529 plan accounts—whether for the tax advantages, to maintain control of the funds, or for whatever reason—should coordinate use of those funds with parents. Grandparent 529 plans are great for the last year of college. Why? Because you won’t fill out a FAFSA form the next year, so your student’s income in their last year of school doesn’t matter.
- Grandparents can also gift money that parents can put in parent-owned 529 accounts. These funds then get the favorable parental asset treatment, assessed at 5.65%.
- Grandparents who want to pay for more of the cost of college, net of aid received, can also gift money to the student after graduation that the student can use to repay their own student loans. Each grandparent can gift an inflation-adjusted $14,000 annually to the student (or recent college graduate), either to the grandchild or directly to the lender to pay off the loan.
Extremely generous grandparents should know this: Tuition payments made directly to a college are exempt from gift tax, no matter the amount, as long as the payments go directly to the educational institution. Note that only tuition payments count; money given for room, board, books and other fees would be subject to the annual exclusion or lifetime exemption.