Kiplinger: Navigating Grandparent-Funded College Education
Are you facing pressure from family to contribute to a grandchild’s college fund? It’s a common dilemma, especially with today’s soaring tuition costs. Kiplinger’s financial experts offer guidance on how to navigate this tricky situation without jeopardizing your own financial future.
The Rising Cost of College
It’s hardly a secret that obtaining a college degree is an expensive prospect. The average cost of college today is $38,270 per student per year, including books, supplies, and living expenses, according to the Education Data Initiative. The average borrower with federal student loans today owes $39,547. Shockingly, the full annual cost of attending a top school can exceed $90,000. It’s understandable that your grandchild wants to avoid graduating with burdensome debt.
A $90,000 Tuition – Is it Reasonable?
You might be a well-off retiree, but that doesn’t automatically mean you should write a large check for a $90,000-a-year school. Before considering a significant contribution, it’s crucial to assess whether it will compromise your own financial security.
Protecting Your Retirement
Mike McCracken, president and founder of Wealth Guide Financial, emphasizes, “Having $3.2 million at age 75 is a great position, but that doesn’t mean you should automatically write a big check for a $90,000-a-year school tuition.” Consider potential future expenses like home repairs, medical bills, and long-term care. Your financial plan needs to accommodate these possibilities.
Brett Bernstein, CFP, CEO and Co-Founder of XML Financial Group, agrees. “The first thing the grandparents need to do is build a financial plan to ensure that they can maintain their current lifestyle and see how much they can financially help their grandchildren,” he says. “Once they have an understanding of the actual number they can contribute, then they have to decide how much of that they want to gift.”
Documenting Your Contributions
If you decide to help, meticulous documentation is key. McCracken suggests, “Have your estate-planning attorney draft a simple amendment to your revocable living trust stating that the amount you paid for college will be subtracted from your child’s or grandchild’s eventual inheritance.” Alternatively, consider an interest-only loan to maintain transparency and fairness among all heirs.
Tax Implications and Financial Aid
Unfortunately, there’s no direct tax break for gifting money to a grandchild for college. While 529 plans offer tax-free growth, contributions aren’t deductible. Paying tuition directly to the school is generally the most tax-efficient route, as it doesn’t count against your annual gift tax exclusion. Be aware that direct gifts to grandchildren could reduce their financial aid eligibility.
Setting Boundaries and Having a Conversation
Beyond the financial aspects, open communication is vital. McCracken recommends setting clear boundaries and having an honest family conversation. You can say something like, “We love you and want to help, but we also must protect our own retirement and want to keep our inheritance planning even among the heirs.”
Helping the next generation is rewarding, but never at the cost of your own financial peace of mind.
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Maurie Backman is a freelance contributor to Kiplinger.