Higher education is expensive.
During the 2023-24 school year, according to the College Board, the average estimated yearly budgets for full-time undergraduate students (including tuition and fees, housing and food, plus allowances for books and supplies, transportation and other personal expenses) varied: $19,860 for public two-year in-district students, $28,840 for public four-year in-state students, $46,730 for public four-year out-of-state students, and $60,420 for private nonprofit four-year students. According to Sallie Mae, trade school costs an average of $17,600 per year.
If you are a grandparent or other relative of a student, helping to pay for higher education can help alleviate the financial hardship for loved ones and boost the student’s chances of career success. Here’s how to help – but make sure you have checked your own finances before you figure out the best way to help the student.
There are basically three ways to help with higher education costs in a tax-efficient manner.
Pay Tuition Costs Directly to the Institution
Paying money directly to the institution ensures that the money will be used for the education purpose you intended.
Also, under federal law, tuition payments made directly to accredited institutions are not considered taxable gifts, so you don’t have to worry about the $18,000 annual federal gift tax exclusion, $36,000 for a married couple in 2024. The payment made to the school must only cover tuition. It may not be used for other educational expenses, like room and board or textbooks.
If you decide to pay the tuition this way, be sure to check with the college to make sure your payment will not adversely affect any aid, scholarship, or grant package.
Make an Outright Cash Gift
Writing a check outright to the student is another option. However, besides the fact that giving cash to a student does not always mean it will go to where you want it to go, there are two important drawbacks to this option.
The first is potential gift tax consequences. The United States’ annual federal gift tax exclusion as of 2024 allows you to gift up to $18,000 per person per year without being subject to the gift tax, up to the $13.61 million lifetime exemption. Gifts totaling $18,000 aren’t subject to the gift tax. Because of that, when you gift a single recipient $18,000 or less, you don’t need to file an IRS Form 709 — the United States Gift (and Generation-Skipping Transfer) Tax Return.
A second drawback is that a cash gift to a student will be considered untaxed income by FAFSA, the federal government financial aid application, which means it can affect financial aid.
An outright check can also be written to the parents. With this gift, you should also be aware of any potential gift tax consequences.
Fund a 529 Plan
A 529 plan, or qualified tuition program, is a state-sponsored investment plan that allows individuals to save money for a beneficiary’s education expenses in a tax-advantaged manner.
Contributions to a 529 plan grow tax-deferred, and withdrawals used for the beneficiary’s qualified education expenses are completely tax-free at the federal level. A 529 plan can be used to pay for college, K-through-12 tuition, apprenticeship programs, and even student loan repayments. Some families use 529 plans as an estate-planning vehicle since contributions are considered completed gifts to the beneficiary.
Up to $18,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion in 2024. That means married grandparents could contribute $36,000 in 2024. Depending on where you live, you may also qualify for a state tax benefit. Over 30 states offer either state income tax deductions or state tax credits for 529 plan contributions.
One of the advantages of 529 plans is that just about anyone can open one, regardless of income level. Parents, grandparents, friends, and even students themselves (if they are at least 18 years old) can open a 529 college savings plan to start an education fund. Each plan can only have one beneficiary at a time, but the beneficiary can be changed. A beneficiary can be anyone of any age who has a social security number or a Tax ID.
As the owner of policy, you maintain control over the money in a 529 plan. If you use distributions from your 529 plan to cover anything other than education costs, you will face a penalty. You will be able to withdraw your money from the account but will be responsible for income taxes on the earnings – federal, state, and county if applicable – as well as a 10% penalty fee.
The updated Free Application for Student Aid (FAFSA), which went into effect starting with the 2024-25 academic year, does not require students to report cash support manually. That means a grandparent-owned 529 plan will not have any impact on need-based financial-aid eligibility. Some have now referred to this as the “grandparent” loophole.
Colleges treat 529 plans differently for purposes of distributing their own financial aid. Generally, parent-owned and grandparent-owned 529 accounts are treated equally because colleges simply require a student to list all 529 plans for which they are named as the beneficiary.
Or Help Pay Off Those Student Loans
If your relative can get student loans, you can also help by paying off some of the debt. This will enable your relatives to avoid high-interest expenses and the cash-flow-draining cost of monthly payments. Also, since they are out of school, there are no financial forms to fill out anymore and you are helping them without any adverse effects on their ability to get the maximum amount of financial aid.
Conclusion: Study Hard
When it comes to preparing for over 18 years for college payments, the best you can do is to plan based upon the information available to you at the time but know that there is no guarantee that the rules in effect when you start saving for college will remain in effect when the time comes to pay for college.
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