COLLEGE SAVINGS 101

Savingforcollege.com

Annual College Savings Survey results: All that you can leave behind
http://www.savingforcollege.com/articles/all-that-you-can-leave-behind

Posted: 2014-03-21

by Kathryn Flynn

As college costs in America rise faster than the rate of inflation and total student loan debt surpasses $1 trillion, more relatives are exploring the idea of helping pay tuition for grandchildren, nieces and nephews. Grandparents are taking particular interest and made up 16% of the respondents of our Annual College Savings Survey. As their own children struggle through a slow economy and job market, they realize that the need for a college education is more important than ever. Helping to pay for a grandchild’s tuition can be a wonderful gift, but only if you have the available assets and understand the best ways to use them.

Best Options for Grandparents

  • Give cash.
    Handing over a stuffed envelope for a birthday or holiday would be much appreciated and is a simple way to help pay for future or current college costs. However, keep in mind that you will have to file a gift tax return if you are planning on giving more than $14,000 this year.
  • Pay the university directly.
    If you are concerned where the cash will end up and want to avoid the gift tax, you can send a check directly to the university your grandchild attends or will attend. However, this can have a negative affect on their financial aid eligibility so you may want to hold off until their senior year.
  • Write a check to the parents.
    If the student is applying for financial aid, it is recommended that you give the money to the parents. Only 5.6% of parental assets will count toward your Expected Family Contribution (EFC), compared to 20% of a student’s assets.
  • Help pay down loans.
    Another way to avoid effects on financial aid is to wait until the child’s final year at school and help pay back their loans. Students are not required to, and often not able to pay interest on unsubsidized loans while they are in school. However, any unpaid interest will be capitalized and result in a larger loan balance than if the interest was paid as it accrued. The sooner a grandparent can pitch in, the better.
  • Put those RMDs to work.
    If you are at least 70 ˝ years old and haven’t put aside any money for a grandchild’s education, one idea is to use your Required Minimum Distributions (RMDs). RMDs are the minimum amount that you must withdraw from an IRA when you reach the age of 70 ˝. If you are living comfortably in retirement this could be a great opportunity to help with the costs of college.
  • Contribute to a 529 College Savings Plan.
    If you have young grandchildren and time to save, it might be wise to open a tax-favorable college savings account such as a 529 plan. Annual contributions between $14,000 and $70,000 can be treated as they were made over a 5 calendar-year period for gift tax purposes. This allows you to utilize as much as $70,000 in annual exclusions and will also get the money out of your estate faster than If you made contributions each year.

    Over time, you may even be able to save more with a 529 plan than with a traditional investment because earnings grow tax-free and withdrawals used for school are not taxed. Some states even offer tax deductions and tax credits. Grandparents should also note that contributions to a 529 plan are considered a completed gift to the beneficiary, which can reduce estate taxes.

Next Steps

Our Annual College Savings Survey revealed several misconceptions about 529 plans among grandparents. Many are unsure how savings in a 529 account affect financial aid eligibility, and more than half are worried that children can make withdrawals without their permission. As mentioned above, if the funds are allocated properly the effect on financial aid can be minimized. As for withdrawals, grandparents can rest assured that the money will be used toward their intended purpose. One of the unique benefits of a 529 plan is that although the assets are removed from the estate, the account owner (not the beneficiary) retains control.

According to the Survey, 40 percent of grandparents would likely hire a financial advisor to help select the best savings vehicle. A licensed financial advisor can clear up confusion regarding 529 plans and offer personal guidance to help make the most of your financial legacy to your grandchildren. If you are comfortable doing your own research, Savingforcollege.com features an entire section dedicated to keeping grandparents informed and up-to-date on the best options. Our Founder, Joe Hurley, discusses more savings tips for grandparents in this Fox Business News video.

Are you a grandparent considering helping to pay for your grandchildren’s college education? What savings vehicles are you using?If not, what is holding you back?



Don't miss the other posts in this series!

As college costs in America rise faster than the rate of inflation and total student loan debt surpasses $1 trillion, more relatives are exploring the idea of helping pay tuition for grandchildren, nieces and nephews. Grandparents are taking particular interest and made up 16% of the respondents of our Annual College Savings Survey. As their own children struggle through a slow economy and job market, they realize that the need for a college education is more important than ever. Helping to pay for a grandchild’s tuition can be a wonderful gift, but only if you have the available assets and understand the best ways to use them.

Best Options for Grandparents

  • Give cash.
    Handing over a stuffed envelope for a birthday or holiday would be much appreciated and is a simple way to help pay for future or current college costs. However, keep in mind that you will have to file a gift tax return if you are planning on giving more than $14,000 this year.
  • Pay the university directly.
    If you are concerned where the cash will end up and want to avoid the gift tax, you can send a check directly to the university your grandchild attends or will attend. However, this can have a negative affect on their financial aid eligibility so you may want to hold off until their senior year.
  • Write a check to the parents.
    If the student is applying for financial aid, it is recommended that you give the money to the parents. Only 5.6% of parental assets will count toward your Expected Family Contribution (EFC), compared to 20% of a student’s assets.
  • Help pay down loans.
    Another way to avoid effects on financial aid is to wait until the child’s final year at school and help pay back their loans. Students are not required to, and often not able to pay interest on unsubsidized loans while they are in school. However, any unpaid interest will be capitalized and result in a larger loan balance than if the interest was paid as it accrued. The sooner a grandparent can pitch in, the better.
  • Put those RMDs to work.
    If you are at least 70 ˝ years old and haven’t put aside any money for a grandchild’s education, one idea is to use your Required Minimum Distributions (RMDs). RMDs are the minimum amount that you must withdraw from an IRA when you reach the age of 70 ˝. If you are living comfortably in retirement this could be a great opportunity to help with the costs of college.
  • Contribute to a 529 College Savings Plan.
    If you have young grandchildren and time to save, it might be wise to open a tax-favorable college savings account such as a 529 plan. Annual contributions between $14,000 and $70,000 can be treated as they were made over a 5 calendar-year period for gift tax purposes. This allows you to utilize as much as $70,000 in annual exclusions and will also get the money out of your estate faster than If you made contributions each year.

    Over time, you may even be able to save more with a 529 plan than with a traditional investment because earnings grow tax-free and withdrawals used for school are not taxed. Some states even offer tax deductions and tax credits. Grandparents should also note that contributions to a 529 plan are considered a completed gift to the beneficiary, which can reduce estate taxes.

Next Steps

Our Annual College Savings Survey revealed several misconceptions about 529 plans among grandparents. Many are unsure how savings in a 529 account affect financial aid eligibility, and more than half are worried that children can make withdrawals without their permission. As mentioned above, if the funds are allocated properly the effect on financial aid can be minimized. As for withdrawals, grandparents can rest assured that the money will be used toward their intended purpose. One of the unique benefits of a 529 plan is that although the assets are removed from the estate, the account owner (not the beneficiary) retains control.

According to the Survey, 40 percent of grandparents would likely hire a financial advisor to help select the best savings vehicle. A licensed financial advisor can clear up confusion regarding 529 plans and offer personal guidance to help make the most of your financial legacy to your grandchildren. If you are comfortable doing your own research, Savingforcollege.com features an entire section dedicated to keeping grandparents informed and up-to-date on the best options. Our Founder, Joe Hurley, discusses more savings tips for grandparents in this Fox Business News video.

Are you a grandparent considering helping to pay for your grandchildren’s college education? What savings vehicles are you using?If not, what is holding you back?



Don't miss the other posts in this series!

 

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