The Gift that Keeps on Giving: A College Education
According to a 2018 report by the Federal Reserve Bank of New York, some 44 million Americans have a combined student loan debt of more than $1.4 trillion. The average student debt is over $33,000, while roughly 2 percent of borrowers owe more than $100,000.
Given numbers like these, it’s little wonder that the cost of a college education and the magnitude of student debt have become hot (and contentious) topics among educators and politicians alike.
If you have grandchildren or adult children, perhaps you’ve considered helping them pay for their education. Doing so is one of the greatest gifts you can make: education lasts a lifetime and opens a world of opportunity. However, you must give serious thought to how you go about it.
How Can Grandparents Help With Education Costs? 
One way to help pay for your grandchildren’s education is to simply give them part or all of the money to cover tuition. The gift tax exclusion is currently $15,000 per person per year and $30,000 for a married couple. The latter amount can go a long way toward covering the cost of a year’s tuition at many colleges.
Of course, giving tuition money to your grandchildren directly carries considerable risk. Are they truly interested in using the money to get an education, or will they come to the sudden “revelation” that a gap year abroad, funded by your gift, might “better prepare them” for college? Or will they find some other way to spend the money, one that has nothing whatsoever to do with college?
Do Gift Taxes Apply to Financing a Student’s College Education?
A safer approach is to pay the college directly. In this case, the tuition payment is exempt from gift taxes, meaning you could also make a gift to cover other expenses such as room and board, books, and other fees.
The same $15,000/$30,000 gift tax exemption mentioned above still applies.
What Are 529 College Savings Plans?
Finally, you could contribute to a 529 college savings plan, which is offered on the state level. A 529 plan is a college savings account that is exempt from federal taxes.
529 plans were introduced in 1996 to help taxpayers set aside college expenses for a designated beneficiary. Named for Section 529 of the federal tax code, these plans often have tax benefits at the state level for in-state residents. (Obviously, this applies only in states that have an income tax.) If the maximum deduction is exceeded in a calendar year, the deduction can often roll over into later years.
It’s important to note that each state enforces a specific total contribution limit, which is typically between $235,000 and $520,000.
Some of these plans allow for the use of various investment options. Others, known as prepaid tuition plans, let you lock in at the current cost of tuition instead of the future cost. A 529 account is not owned by the grandchild—in most cases, one of the parents owns the account, so if your grandchild does not attend college when the time comes, he or she cannot access the money. Similarly, if your grandchild doesn’t want to attend a university covered by the 529 account, allowances can be made to use the funds elsewhere.
Determining Whether You Can Afford College Payments for Grandchildren
Before deciding whether to pay your grandchildren’s tuition using any of these strategies, you must first ask yourself one very important question: Can I afford it? Even if you think you can afford it now, there’s a possibility that five, ten, or fifteen years down the road you’ll need that money and regret having given it away.
We can help you determine whether you can indeed afford to help your grandchildren or adult children pay for college, and if so, the best strategy for your particular situation.
Get Expert Legal and Tax Planning Advice Today
Clifford M. Cohen has more than 35 years of experience and dedicates his practice to guiding aging individuals in the Maryland and D.C. area through all facets of estate planning and tax planning law. Contact us today at 202-895-2799 for a free case evaluation.
