Planning For Your Grandchild’s College Tuition

Just because you did financially well does not mean you’re obligated to share your wealth. But still, many grandparents see the financial strain of rising housing costs, soaring tuition fees, and perplexing cost-of-living expenses. And that brings the need to help out with their grandchild’s college tuition.

Grandparents who made wise financial decisions are in a good spot. They’ve likely accumulated fantastic equity through real estate investments and have less costs than the younger generations. Their mortgage might even be paid off, cars fully owned, and the house decorated to their liking. 

With proper planning, you can leave a legacy of learning that gives them the opportunity to pursue the career of their dreams. 

How To Plan For Your Grandchild’s College Tuition

Students across North America are struggling to simultaneously save for a home and college. Mix in world crises with inflation, it’s a recipe for diaster. The typical college or university education can wrack up a bill of anywhere between $3,500-$98,000.

Many factors can change this amount like the degree your grandchild is pursuing, which institute they enroll in, and whether they live on campus. Giving the gift of education is a lifelong benefit, and if you’re in a position to help them, you have options for how you do it. 

Pay Tuition Directly

Grandparents can pay a portion or all of the tuition directly to the school, and the money usually is not subject to gift tax or included toward the yearly exclusion threshold. This permits grandparents to make significant contributions to their grandchildren’s education without incurring gift tax penalties. However, this only applies to tuition fees and not to books, supplies, or room and board costs.

The con to this route is that if you’re only covering a portion of the tuition and your grandchild depends on financial aid for the rest, it could affect their eligibility. 

Loan the Money

There are two approaches to assisting your grandchild in paying for college or university. One option is to cosign a private loan with your grandchild to get a cheaper interest rate. However, this exposes you as the responsible party for the debt if your grandchild defaults or does not keep up with their payments. Debt collectors may pursue you as a result, putting your retirement funds at risk.

Another alternative is for the grandparent to loan the cash to the grandchild to cover educational expenses. This will not impact the grandchild’s financial aid eligibility and will ensure that the grandchild’s education is paid for even if the grandparent’s circumstances change.

The loan must have an interest rate that is at least equivalent to the Internal Revenue Service’s (IRS) minimum rate, known as the Applicable Federal Rate, to avoid being considered a gift (AFR). These rates are usually relatively low, and they are far lower than the rates on government student loans.

Pay Off your Grandchild’s College Tuition Loans After Graduation

Grandparents may also offer to pay off a grandchild’s education loans once they’ve graduated from college. This will not affect a grandchild’s eligibility for financial aid, and it will encourage the grandchild to complete their education.

In addition, the student loan interest paid by the grandchild can be deducted from the grandparent’s taxable income up to a maximum of $2,500 each year.

Education Trust

A grandparent can set up an irrevocable trust for the benefit of a grandchild that orders the assets to be spent towards the grandchild’s education. The grandchild can’t decide they want to use it for a downpayment on a home instead without your approval. 

The best part about the trust is that you can express your wishes in the trust documentation. The trustees have a fiduciary responsibility to run the trust according to its provisions. This stays in place, even after the grandparent has passed away.

When the grandchild’s schooling is completed, the monies in the trust may be utilized for other purposes as directed by the grandparent(s). In addition, the trust’s assets may be protected against creditors and divorce if they remain in the trust.

Gifting

Americans and Canadians have a different approach for gifting. In the U.S., you can be subject to a federal gift tax if you give more than $15,000 (or $30,000 per year for a joint couple). In Canada, as long as your child isn’t a minor, this is no limit to the gift amount and no tax applied. 

Since many education paths can exceed that amount, another route may be better for you. Not only this, but money as a gift can’t be reversed. If you give your grandchild money with the intention of them using it for post-secondary education, they can still change their mind and spend it recklessly. A better method may be repaying their student loans. This can also give them an incentive to graduate.

Help With Scholarships and Grants

When it comes to financial assistance and scholarships, many students and their families succumb to a sense of overwhelm. 

Money for college, like money for retirement, shouldn’t come from a single source. A 529 plan will provide you $2,500, while a work-study programme will give you $2,000 each. Ideally, you’ll be able to help your grandchild figure out how to pay off their student loans in full or at least have a small balance.

As an older and wiser adult, it may be worth taking aside an afternoon to help your grandchild map out their financial plan for college tuition.

Hire a Financial Planner to help you with your grandchild’s college tuition

The best asset you can have on your side is knowledge. While mapping out your financial plan for your grandchild’s college tuition, a financial advisor can give you ideas that will benefit both the recipient and your tax bill. 

The sooner you go to your financial planner, the better. You don’t have to wait until your grandchild has started showing an interest in post-secondary education to start saving. With compound interest options, time is on your hands if you start planning from birth.