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5 Smart Ways to Help Your Grandchildren Pay for College
In a previous article, we discussed 529 plans as a way to help contribute toward college tuition. In this article, we provide some food for thought before you help pay for your loved one’s educational costs.
5 Things to consider before cutting a check:
- Can you afford to help. It’s always great to help family when possible, but before you do so, you should take a good look at your financial situation and determine what resources you will need—not just in the near future, but in the distant future—and how this generous gift could impact you in the long run.
- Medicaid eligibility. If you think there may be a need for you to apply for Medicaid in the future or if you are considering creating a Medicaid asset protection plan with an elder law attorney, then you should speak with a qualified elder law attorney—especially before making any large gifts to family members, even if it is to help pay for your grandchildren’s education. Making a gift may prevent you to from being eligible for Medicaid.
- Pay the college tuition directly to the institution. Some grandparents cut a check every semester to their grandchild to help pay for school. This could be a mistake as there is no guarantee that the money will actually be applied toward the tuition. Make sure the money actually goes to the school by paying the institution directly, and confirm that the college has received the payments.
- Avoid any kind of gift tax ramifications. Cutting a check directly to your grandchild is a gift that could result in your need to file a gift tax return for the year in which you made the gift. Likewise, that gift could reduce your lifetime federal estate and gift tax exemption amount (which is $5,450,000 in 2016), and subject you to a federal generation-skipping transfer tax. You can theoretically make a $50,000 contribution payment directly to the college institution and still be able to make a $14,000 gift to the grandchild without incurring any kind of annual gift tax. However, if you give the grandchild $50,000 and then the grandchild pays the tuition, then you would likely have to file a gift tax return for that year, even though the payment went toward your grandchild’s college education. Also, the $50,000 gift will reduce your federal lifetime estate and gift tax exclusion (which is currently $5,450,000). To avoid confusion, when you cut a check to the school, ensure that it is only for tuition. If you give money to the school for room and board, that may impact the gift tax exclusion.
- Make sure you know whether your grandchild is relying on federal student aid and how your assistance might impact their aid. Paying your grandchild’s tuition could lessen the amount of need-based financial aid that they receive. Some schools treat direct tuition payments as cash support, and that support has to be reported on the Free Application for Federal Student Aid (FAFSA). Your assistance could ultimately have a net effect of harming them by reducing their financial aid. There may be other routes to help them aside from paying for their tuition, such as possibly paying for other choice items they may need.
Paying for your grandchild’s education can be immensely gratifying, however if you rush to help then you may create some unintended consequences for you and your grandchild. Contact us with questions or comments.
Eric J. Einhart
Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530
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