All I want for Christmas is … money for college. Okay, that’s not how the song goes, but perhaps it should be?
Giving money to help a grandchild pay for college might not have the same wow factor as the latest gadget or gizmo. But when it comes time to pay the bill, it will be much more meaningful.
The Increasing Cost of College
That’s because college is a lot more expensive than it was when many grandparents were putting their own children through school.
According to the CollegeBoard’s “Trends in College Pricing 2018” report, the average in-state tuition and fees at a public four-year institution is more than three times as high in inflation-adjusted dollars as it was 30 years ago. Private institutions are more than twice as high.
Meanwhile, real average wages (wages when accounting for inflation) have barely budged in decades, according to the Pew Research Center. No wonder so many families struggle to pay for college.
“If you take into account tuition, room and board, books and fees, you’re often looking at more than $25,000 a year at a public institution. And a lot more at a private institution,” says Tim Gorrell, executive director of the Ohio Tuition Trust Authority, which manages CollegeAdvantage, Ohio’s 529 Plan. “For many families, being able to save enough money for college is no longer possible. So grandparents can be really helpful if they have the means to do so.”
That typically means gifting the money to the grandchild’s parents, explains Jack Schacht, founder of the My College Planning Team, based in Naperville, Illinois. Giving money for college is a little more complicated than just writing a check for your grandchild. Rather, grandparents will want to ensure that the money is provided in a way that offers the biggest benefit when the bills are due.
“You want to be careful that the student doesn’t pile up a lot of money in their own savings account,” he explains. “While it’s nice for the student to see the money grow, it will raise their expected family contribution.”
Colleges will determine how much a family should pay—the “expected family contribution.” They take a close look at the value of both the parents’ and student’s assets. This includes money in non-retirement accounts. Parent assets reduce need-based aid by 5.64 percent of the asset’s value, but student assets are dinged at 20 percent.
“This is why we never want money held in a student’s name,” notes Schacht.
529 Savings Account
The exception is a 529 college savings account. Money in these accounts is assessed at 5.64 percent. It doesn’t matter if it’s a dependent student or a parent who owns the account.
Think of the 529 account like an IRA or 401(k). Money invested in the account grows tax free; withdrawals from the 529 are also tax-free when used to pay for qualified education expenses, which include tuition, room and board, books and supplies, and even computers.
529 plans offer other tax advantages, too. “Beginning in 2018, Ohio residents contributing to Ohio’s 529 Plan can take a deduction of up to $4,000 per beneficiary on their state taxes,” says Gorrell. “And, if you contribute more than $4,000, there’s unlimited carry-forward. So you never lose the deductibility of the rest of your contribution.”
In other words, if an Ohio resident contributes, say, $5,000 in 2018, they can deduct $4,000 on their 2018 state income tax and carry forward the remaining $1,000 as a deduction on their 2019 state income tax.
Grandparents can also contribute to a parent’s 529 account for which the grandchild is the beneficiary.
“This may be the simplest way to go,” says Gorrell, “Many 529s—including CollegeAdvantage—offer easy-to-use online portals for grandparents to make such contributions during the holidays.” Or any other time, for that matter.
Adds Gorrell: “A grandparent can go online and make a contribution directly from their bank account. It couldn’t be easier.”