Did you know that the average college tuition is just over $25,000/year for a public school, and right around $50,000 for a private school? Over the last several decades, the cost of tuition has gone up by almost 163% (since 1988), and there’s no sign that these rising tuition costs will slow down at any point. Many families in the Cedar Rapids area are struggling to save the necessary funds to send their kids to school, which means the next several generations of college grads are going to finish their 4-year degree with 4 years of heavy student loans – not exactly a great way to start their career!
As college tuition continues to be a problem for soon-to-be college students, grandparents are starting to step in to help. It takes a village to raise children, and this same concept is now being applied to helping them get through college as close to debt-free as possible. If you’re a grandparent who wants to help their grandkids start life on solid financial footing by helping pay for the cost of tuition, you’re not alone! Unfortunately, figuring out the best way to contribute while being respectful to your kids and fitting college savings into your financial plan can be tricky.
The first step you should take is to talk to your kids (and grandkids) about your willingness to help. Personal finances can be a touch subject among family members, and you want to make sure your contributions are:
Your adult children may already have a savings plan in place to help fund your grandchildren’s college tuition, and they may have good ideas on how your contributions can “plug in” to what they’re already doing. Alternatively, you may find that there’s some embarrassment or worry if they haven’t saved for your grandchildren’s college tuition yet. You’ll need to be open to meet them wherever they are, and stay flexible to help in any way that’s welcome and needed.
If your adult children already have a 529 plan, or other savings vehicle, set up specifically for college savings, ask how you can help contribute to the account. This is the easiest way to help fund your grandchildren’s college education if that’s a financial goal of yours. If these accounts haven’t been set up, you have a few additional options to consider.
Start a 529 Plan For Your Grandchild
As a grandparent, you can help to open a 529 plan in your grandchild’s name and be the “owner” of the account until they turn 18. Funding this 529 plan would be no different than if their parents had opened the account. However, any withdrawals they take from the account during college to pay for qualifying education costs would count as student income and impact their financial aid eligibility.
Start Putting Money Aside in Savings
Not ready to fully fund your grandchild’s college education? Consider putting some funds aside in a savings account earmarked for helping your grandchildren with smaller college costs, like textbooks, a new laptop, or room and board. Giving your grandchildren funds specifically for college costs throughout their years in school can help them skip the need for taking out loans for anything beyond traditional tuition. You can give your grandkids up to $15,000 each year without you having to file a gift tax return.
Depending on what state you’re in, you may be able to deduct contributions to a 529 plan that you’ve opened in your grandchild’s name or are contributing to a 529 plan owned by your adult children for your grandchildren. This largely depends on whether or not the 529 plan that’s been opened is in your state of residence or not. The Iowa 529 plan gives you access to ultra-cheap Vanguard funds, and there is a tax incentive for contributors. However, some states offer a tax break even if the 529 plan is technically out-of-state. Make sure to check with your financial planner or CPA to learn more.
The support you give as a grandparent doesn’t always have to be giving them cash or helping to cover tuition! Offering to help your grandkids find internships or jobs in fields that interest them, visiting and taking them out to dinner, buying them a few week’s worth of groceries, or making sure you’re able to help check off their “needs” (like new socks or a pricey winter coat you know they won’t buy for themselves) as birthday or holiday gifts can be a huge help.
Although wanting to contribute to your grandchild’s college costs is a thoughtful and generous financial goal, you need to make sure you can do so without losing track of your personal financial goals. A financial planner can help you incorporate saving for specific college costs your grandchildren will run into while still helping you move toward retiring comfortably and leaving a legacy you’re proud of.