College Planning

Tax-Advantaged Ways for Grandparents to Help Pay for College

Grandparents who want to help grandchildren attend college have lots of options. But a few may be more beneficial for both the grandparents and the student - especially when it comes to financial aid.

A Few Tax-Beneficial Ways Grandparents Can Gift Money for College

Some grandparents want to be generous when it comes to all things grandchildren related. But when it comes to assisting your grandchild with the costs of higher education, that generosity may actually have an adverse effect on how much financial aid your grandchild is offered to cover the rest of his or her expenses.

When it comes to gifting money for college, be sure you understand both the tax treatment of your gifts and the effect they have on filing for financial aid. With these factors in mind, we've put together a few possibilities for gifting money for college and saving for your grandchild's education.

Start a 529 college savings plan.

A 529 college savings plan can be a safe way to avoid gift tax issues and set aside a sizable amount of money for your grandchild's education. Be sure to note the current annual gift tax exclusion amount. The account's earnings will be tax-free, and withdrawals will not be subject to taxation unless you choose to withdraw the money and use it for something other than qualifying educational expenses. Please note that qualified withdrawals may have a negative impact on the grandchild's ability to obtain financial aid if the grandparent and not the child or parent owns the account. You may also be able to claim your 529 contributions as a deduction on state tax forms, depending on what state you live in.

Pay your grandchild's tuition by making payments directly to the college.

Direct tuition payments (and tuition payments alone, NOT payments for other educational expenses such as room and board and meal plans) are not considered taxable gifts. However, such payments must be made directly to your grandchild's college or university to be exempt. And while these donations are tax exempt, you should note that, just as with 529 plans, these payments can affect your student's eligibility for future financial aid. Again, if your grandchild is dependent on financial aid to cover their educational expenses, it might be more considerate to divide your gift up over several semesters. If you still prefer to contribute one lump sum, you might consider waiting to do so until their senior year.

Assist your grandchild with student loan payments after the fact.

As of 2017, you are allowed to gift your grandchild up to $14,000 a year to help pay down his or her loans (or for any reason) without running into any gift tax issues.1 If your grandchild is married, you could also gift their spouse an additional $14,000. Be aware that your lifetime gifts to any one individual cannot exceed $5,490,000 million dollars (as of 2017) without running into gift tax issues.2

If you'd like to learn more about saving for college, or 529 College Savings Plans, there's a wealth of information about college planning available in the Protective Learning Center.

1. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes#5

2. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Whats-New-Estate-and-Gift-Tax

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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