Grandparents are increasingly in the picture helping grandchildren with the skyrocketing costs of college. That help can be unintentionally negative if it impacts a child’s eligibility for need-based aid. Here are some strategies to make sure your financial assistance doesn’t end up costing your grandchild:
Using a 529 Account: Who owns it and When Distributions are made
The 529 account is a popular tax savings account lets you put money away for your child's or grandchildren’s educational needs. Under the guidelines of the Free Application for Federal Student Aid (or FAFSA), 529 accounts in a parents or child name will count as assets and may reduce the amount of aid for which the student is eligible. The College Board’s CSS Profile for financial aid has similar guidelines.
The important thing in setting up a 529 account then is who owns the account. Typically, you the grandparent should own the account. Care must be exercised however in how distributions are made from grandparent-owned 529 accounts because distributions from a grandparent to a grandchild are considered “untaxed income” and can reduce aid. If the child is not planning on attending graduate school, distributions can be made in the junior or senior year without penalty under the new “Prior-Prior” rules.
Direct gifts to the student or to the school are simple, but have a catch – they are also considered “unearned income” and can reduce the aid. But with the new “Prior-Prior” rules, gifts in the junior or senior year can be made without impacting aid. For freshman or sophomore years, gifts can be made to the parents which will have a smaller impact on aid than a direct gift to the child.
Find Them a Job
In 2016 a student can shelter $6,300 in income from the federal aid calculation. Besides cash, experience in the workforce has its own benefit. Find out what they're interested in doing, and look for opportunities for internships or starting positions with the people you interact with on a regular basis. Your circle of friends and acquaintances can be of tremendous help for a first-time job-seeker.
Use a Trust
You can create an education trust for your grandchild. This can be money you directly control while you're alive, and give directly to the student or parents (see above), and be set aside after you're gone to support the students further education. Funds set up correctly in a trust for the parents or grandchild won’t negatively impact a child’s eligibility for need-based aid. While it won’t have the tax savings of a 529 account, you’ll have more flexibility on where the funds can be used. Funds in a 529 account, for example, can only be used without penalty for tuition, fees, books, as well as room and board. An education trust can be designed to cover any expenses you deem appropriate – off-campus housing, transportation costs, tutors, travel, and more. And the funds in trust don’t have to stop when the child’s education is done, for example, they could be used to help buy a house or get a new business started.