Parents

It’s incredibly nice when grandparents want to, and are able to, make a financial contribution for college costs.  Parents want to honor that, but there are good ways and not-so-good ways for those contributions to be made.  Here are some guidelines.

Sometimes grandparents have some strong feelings on how they want to make their contribution.  They might not know the intricacies of the financial aid system and what the ramifications can be of doing it wrong.  For example, when made incorrectly, a $13,000 contribution can reduce financial aid by $9,100.  No grandparent would want that to happen!  Still, you want to honor the grandparents wishes, so it can be a delicate situation.

 The main thing to keep in mind is, “Will this help affect our eligibility for financial aid?”  To answer that, you need to know where you are likely to fall on the financial aid spectrum.  If your family is likely to get need-based aid, you want to be very careful with grandparent contributions.  If your family is clearly unlikely to get need-based aid, you can pretty much handle the grandparent help in any way they prefer.

If you are “maybe yes, maybe no” when it comes to need-based aid, you’ll want to lean to the side of being careful.  The best place to start is the EFC Calculator at null.  This will give you an estimate of your Expected Family Contribution, the minimum amount that the federal government (and colleges) expect you to be able to pay.  If that number is close to or less than the cost of the colleges on your list, you might be in the running for need-based aid, so be careful.

The timing and the amount of the gift are important.  It can be awkward to ask about these details when your parents are being so generous.  But the details matter.  Why?  The gift will count as “income” when it comes time to fill out financial aid forms.  If the grandparents give the money directly to the student, it will be “income” to the student.  That’s bad.  However, students can have income of roughly $6,000 and it will not impact the EFC, so if the gift is less than that amount, and the student does not have any other earnings, the grandparents can give the money directly to their grandchild.  But what if the gift is larger or the student has income from a job?

The better alternative would be to give the money to the parents.  Parent assets are counted at a relatively low rate in the EFC formula.  But you cannot stop there because now the timing of the gift becomes important.  In the best case scenario, the grandparents would make the gift before December 31 of the student’s junior year in high school.  That’s far in advance of college application season, but due to the way the EFC is calculated, it is the best way to avoid extra “penalties”.

Another approach is to open a grandparent-owned 529 account for the student.  This approach has some benefits in terms of financial aid but it also has one serious drawback.  When the money is withdrawn from the grandparent 529, presumably during the college years, it will count as income to the student in that year.  This could reduce aid by up to 50% of the amount of the distribution.

To avoid this and still use a 529, the parents could open the 529 as a parent-owned 529 and then the grandparents could make a deposit to the account.

When grandparents are making a very large contribution, they often wonder about using a trust.  Trusts are fine legal entities, but they will pretty much end any need-based aid hopes.  Run the null BEFORE that is set up so you know where you stand.

Grandparents are sometimes motivated by estate tax considerations.  2012 might be the end of a fantastic opportunity for moving money out of an estate, and setting aside a chunk for the college costs of grandchildren is one strategy to reduce the size of their estate.  Also, one option is direct payment of tuition to the college (not room and board, just tuition.)  Again, this will significantly hurt need-based aid, but if you won’t get it anyway it doesn’t matter.  Some grandparents like this option because it is a good estate planning tool and because there is no question how the money is being spent.

One other option that many grandparents choose is to set some money aside, keep it, but earmark it to help pay off student loans after graduation.  This approach does not impact financial aid at all.  However, it does open up the potentially uncomfortable question of what happens if the grandparent is not alive to give the money to the grandchild after graduation.  If something happens, you want to be sure those original wishes are honored.

As you can see, grandparent help quickly becomes a complicated situation.  We’ve only touched on some situations here and this is not a complete guide to all the possibilities.  We can help sort out the details of your family’s circumstances as part of your overall college funding plan.