No longer are student loans just an issue for the younger generation! From 2012 to 2017, the grand total of student loan borrowers over age 60 climbed by 20%. And right now, there are 2.4 million borrowers over the age of 62 carrying a total of $98 billion in student loan debt.
A general principle is to retire with no debt. Carrying student loan payments into retirement isn’t optimal. So, think about the steps you can take while your children and grandchildren are young to help them financially in their quest for higher education.
How Parents Can Save for College Expenses
The average cost of college tuition ranges anywhere from $11,631 for in-state public colleges to $43,775 for private schools. The good news is you can start saving today to help cover some or all of the expenses by the time you have a high school graduate. There are two main savings vehicles for college expenses: A 529 Plan or Educational Savings Account.
529 Plans are investment accounts that can be used to pay for qualified education expenses for a designated beneficiary. There are no contribution limits for 529 plans, and they can be used to pay for college education or K-12 tuition payments, apprenticeship programs, student loan repayments, and education-related expenses like books, meal plans and computers.
529 Plans do offer tax benefits. The money contributed to the account grows tax-free, and you will not be taxed when the money is withdrawn to pay for educational expenses. Keep in mind that non-qualified withdrawals for non-educational expenses are subject to income tax and an additional 10% penalty tax.
Several states offer 529 plans, and you can choose a plan outside of the state you reside in. Note the amount saved in a 529 Plan will be considered parental assets and impact the Expected Family Contribution calculation, potentially decreasing your child’s financial aid award.
Coverdell Educational Savings Accounts
Coverdell Educational Savings Accounts (ESAs) are trust or custodial accounts that allow you to save and grow your money for educational purposes. They are very similar to 529 Plans with two key differences. You can only contribute up to $2,000 per child per year to a Coverdell ESA. You can also choose the type of investment for your ESA like stocks, bonds, and mutual funds.
The investment options allow you to have more control over the potential rate of return as you work to reach your college savings goals. Similar to 529 plans, contributions to ESAs grow tax-free and are withdrawn tax-free for educational expenses. Remember the beneficiary of the ESA will have to pay taxes on any non-qualified withdrawals.
How Grandparents Can Save for College Expenses
There are different ways grandparents can pay for college for their grandchildren — to help secure their educational future. However, you need to be aware of all the pros and cons before you make a final decision on the best course of action.
You might be wondering if grandparents can get a tax deduction for paying for college. Unfortunately, grandparents are not eligible to claim the Lifetime Learning Credit or the refundable American Opportunity Tax Credit unless their grandchild is also their dependent.
529 plans are also a popular tool for grandparents helping their grandchildren pay for their higher education. But the trick is not to list the student’s name as the beneficiary. You can list yourself or spouse as the beneficiary, then change the beneficiary to your grandchild when they are a junior or senior in college to help cover expenses and repayment. Grandparents paying for college with a 529 account can take advantage of a tax deduction.
This will help when it comes time to file for financial aid. FAFSA doesn’t ask for information on grandparents’ assets, meaning it won’t impact the Expected Family Contribution calculation. However, the withdrawals from the account will be counted as student income on FAFSA when filing the next year and could potentially lower their financial aid award.
Alternatively, grandparents can pay for college by contributing to a parent-owned 529 plan as a third party. Grandparents can pay for college by contributing up to $17,000 per year or $34,000 for joint filers without triggering gift taxes. Parent-owned 529 plans are considered parental assets and are taxed at a lower rate.
Cash Value Life Insurance Policy
You could also consider getting a cash-value life insurance policy. It won’t be included in the Expected Family Contribution calculation. There are several withdrawal options including a withdrawal of cash value when you don’t intend on paying the money back. The death benefit on the policy will be reduced with this method of withdrawal.
Make sure you understand the tax implications of opening or withdrawing from a cash-value life insurance policy. This method of saving requires you to start early to give the policy plenty of time to accumulate money.
Uniform Gifts to Minors Act (UGMA) Account
Anyone can technically set up a UGMA account for a child. This is another way grandparents can pay for college. A UGMA is a custodial account that protects assets for the beneficiary.
In this type of account, the donor can appoint themselves, or another person or institution as the custodian. These plans aren’t specifically for education, but they could be used to pay for college costs, room and board, or books and supplies.
A custodian can then make investments. One great benefit is that UGMA accounts have no contribution or income limits. This means that anyone can make contributions to a UGMA account with after-tax dollars.
However, donors won’t receive an income tax deduction and transactions are irreversible. There are also no withdrawal limits, so money can be used at any time and for any reason. A main drawback is that this asset could affect financial aid eligibility.
If the amount is too high, the account could potentially disqualify your grandchild from receiving financial aid. To determine if this is a suitable way for you as a grandparent to pay for college, consult with a financial advisor about your financial situation.
Establishing a trust fund is one way for a grandparent to pay for college while still having control over how the money is spent.
A trust is an estate planning tool that should be handled by a financial advisor with experience. You’ll need to work together to decide on what type of trust will be created, an irrevocable trust or a revocable living trust. You can also set a trustee as either a parent or an independent third party.
Not only can you fund their education with cash, stocks, bonds, real estate, or other assets, but you can also protect those funds from future financial difficulties. However, trusts come with their own disadvantages. At the end of the day, you need to do what makes sense for your financial situation.
The Best Way for Grandparents to Pay for College
For many people who work with at Asset Preservation Wealth & Tax, helping their families is one of their main goals. Whether funding higher education or dividing up assets, you’ll want to work with a financial professional who can look holistically at your financial plan and offer customized solutions to help you achieve your goals.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.