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Investor’s column: Here’s what grandparents should know about helping pay for college

Ron DeSantis announces plan to create “equal opportunity scholarships”

Florida Governor Ron DeSantis announces a plan to create "equal opportunity scholarships" to relieve the wait list for student tax credit scholarships at a press conference near Tamiami on Friday, Feb. 15, 2019.
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Florida Governor Ron DeSantis announces a plan to create "equal opportunity scholarships" to relieve the wait list for student tax credit scholarships at a press conference near Tamiami on Friday, Feb. 15, 2019.

As a general rule, college tuition rates have increased at roughly twice the rate of inflation.

According to Collegeboard.com, the average annual cost for public college tuition, fees and room and board averaged $36,420 last school year, and some private schools can cost more than twice as much.

As a result of these high costs, I have seen many more clients who want to help contribute to their grandchildren’s education.

Here’s an overview of what parents can expect and how grandparents can help with minimal impact on aid eligibility.

It’s always greatly appreciated when grandparents can help with college costs, but they need to be careful so as not to harm the grandchild’s ability to qualify for financial aid. In general, a grandparent’s gift can jeopardize need-based aid but not merit scholarships.

When determining a student’s access to financial aid, the grandparent’s contribution will be treated as the child’s untaxed income. A student’s untaxed income will decrease their aid by 50 percent of the contribution. The grandparent’s wealth is not a factor in need-based calculations as long as the money remains titled in their name.

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Gardner Sherrill is an independent Wealth Advisor with Sherrill Wealth Management in Bradenton.

The best place to begin is to have the parents calculate their Expected Family Contribution (EFC). The EFC is a formula designed to calculate what a family would be required to pay for one year of their child’s education. The formula takes into consideration the parent’s income, assets, number of family members and marital status. The EFC calculator can be found at collegeboard.org.

Once you have the family’s EFC, search for your prospective college’s net price calculator. Each school is required to post a net calculator on its website. When using this calculator, you might find that the price of your college is different from the sticker price. The net price will provide information as to what the family will need to pay after scholarships, grants and aid are subtracted out.

If you find that your grandchild is eligible for need-based aid, then you want to be careful as to how you provide your assistance. If they are not eligible for need-based aid, then you can provide assistance in any way you choose without jeopardizing merit-based aid.

A grandparent can give up to $15,000 a year to a child or grandchild without paying gift taxes. A gift to the child is better than a gift to the grandchild when aid is a factor as it would not count toward the student’s untaxed income.

Here are five easy ways college students can save money during the school year.

Grandparents who are married and file jointly can give up to $30,000. Furthermore, you can avoid gift tax rules altogether by making payments directly to the educational institution. This gift tax exemption can also be applied to medical institutions as desired to help defray medical costs for family members.

Another tax-advantaged way for a grandparent to help is through a 529 savings plan. A 529 plan that isn’t owned by a parent or student does not count toward the family’s EFC. However, distributions from the 529 plan will count as income to the student.

The distribution will reduce their access to aid by as much as half the distributed amount. This compares to a parent-owned 529 plan that does count toward the family’s EFC but only reduces eligibility by as much as 5.64 percent of the asset value.

Since the calculations for aid are based on tax returns from two years prior, it often makes sense for grandparents to use the 529 proceeds in the last two years of college to avoid having the distributions from being used in aid calculations.

Before he was twelve hours old, newborn Thomas "Banks" Cashbaugh had saved more than $1,500 dollars for his college education. He did so thanks to a gift from the Path2College529 Plan, and being the first "529 Day Baby" at Piedmont Columbus Regional.

College planning has become one of the greatest expenses next to retirement planning for most families. Grandparents who have an interest in helping can use this period as a great time to interact with their families and further educate them on their estate plans.

Conversations can include instructions in case of incapacity or death as well as passing on family stories and values.

I wish you happy planning.

Gardner Sherrill is an independent wealth advisor with Sherrill Wealth Management in Bradenton. To learn more, visit sherrillwealth.com.

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