By Brian Safdari.
It’s wonderful when grandparents want to help out, whether it’s with summer camp, music lessons or college tuition. But if clients who are grandparents feel they have the resources to help out with college expenses and are offering their support, there are ways to optimize their contributions without jeopardizing financial aid.
Grandparents tend to be reactive, offering their grandkids money when they have it to give out. Their generosity is heart-warming. When it comes to paying for college, though, a little bit of strategy goes a long way.
We want to go into college planning with the mindset that we’re making the most of other people’s money in the form of grants, scholarships and financial aid, whether they’re need-based, merit-based or institutional. These are funds that, unlike loans, don’t have to be paid back.
Planning for financial aid has to begin well in advance of a student’s senior year in high school, and certainly before they’re packing up for their first semester. The information used to determine financial aid eligibility is from two years prior to the academic year, so it’s important for parents and grandparents to get on the same page when the student is in 11th or even 10th grade. The better the communication, the better the outcome.
The first thing for parents and grandparents to understand is the cost of attendance, not just tuition, fees and books but also housing costs, transportation costs and personal expenses. You could be looking at $30,000 to $50,000 a year at a state school, and $50,000 to $100,000 at a private school – times four! It’s often an eye-opening number.
Conversations about money can be awkward, but this is the time for openness. How much are Grandpa and Grandma willing to invest? $5,000? $10,000? For just one year, or all four years?
This is where it can get tricky, and damage financial aid eligibility.
Let’s say after submitting the FAFSA and obtaining the student aid index (SAI) – which tells the parents how much of the bill they will be responsible for – the grandparents cut a check to the school for the balance. That’s great for Year One.
But what happens the next year is that the school will see that the student has access to outside resources. It will affect the school’s need formula and they may reduce the amount of financial aid the student is eligible for.
So Rule No. 1 is: Don’t pay the school directly.
Rule No. 2 is: A 529 college savings plan is not a one-size-fits-all solution.
529 plans can be very helpful. They allow parents to set aside after-tax dollars that can grow year after year and probably provide a state tax deduction. The money grows tax-free and, when it’s used for qualified educational expenses, the withdrawals are tax-free. The best time to start a 529 is when the child is very young to give it time to grow.
Anyone, including grandparents, can hold a 529 on behalf of a student. In a recent rule change, a grandparent’s 529 doesn’t have to be reported on the FAFSA as an asset for the purposes of financial aid. And if a student is planning to attend a state school that relies only the FAFSA, that’s a real benefit.
But if the child is headed to one of the CSS Profile schools, which tend to be the public ivies and private institutions, the grandparent’s 529 gets thrown back into the mix.
When a grandparent tells their financial adviser they want to save for a grandchild’s education, the adviser will typically default them into a 529. It may be a better idea to call in or refer them to a college planning specialist who can help determine if the 529 is the right option.
Rule No. 3 is: It’s not always a bad idea to borrow.
Borrowing is a way for grandparents to contribute to college expenses while maintaining their grandchild’s financial aid eligibility. If the students and parents take out a government student loan to cover whatever financial aid doesn’t, it preserves the student’s need profile, and grandparents can then contribute by helping the student or parents pay back the loan, subject to federal gift limitations ($19,000 per individual and $38,000 per couple).
You have to be careful with loans. There are different kinds of loans with different terms and conditions. Government loans tend to have slightly lower interest rates, which are fixed, and have some potential for loan forgiveness. Try to avoid borrowing private loans recommended by the college.
Much has been written about the wealth transfer from the Baby Boomer generation to subsequent generations. A grandparent could do worse than to transfer the wealth of a college education to their grandchild.
Brian Safdari, who founded College Planning Experts in 2004, is a Certified College Planning Specialist™. He and his team have assisted more than 7,500 students nationwide on their college journey using their exclusive My College Fit System and financial planning tools. For more information, call 818-201-4847 or visit collegeplanningexperts.com.
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