Was this article helpful?

Close

10 easy ways grandparents can help pay for college

Kathryn FlynnBy: Kathryn Flynn | 
View as:  Full Article | Pages

Many grandparents want to leave an educational legacy by helping fund a grandchild's college education. Grandparents recognize the value of education, and want to see their children graduate without excessive student loan debt.

Here are 10 different ways a grandparent can help pay for college, and the pros and cons of each:

1. Pay tuition directly to your grandchild’s school

Pros:

  • Under a special tax-code exemption, the amount of tuition a grandparent pays the school will not be subject to gift tax.
  • It’s a simple way to pay for your grandchild’s college.

Cons:

  • There will be negative effects on the student’s financial aid eligibility. Financial aid formulas may treat the direct payment as a dollar-for-dollar reduction in aid eligibility for the following year. Or, the tuition payment will be treated as student income on the FAFSA, which will reduce aid eligibility by 50% of the amount paid (so a $10,000 tuition payment will reduce eligibility by $5,000).
  • The gift-tax exclusion only applies to tuition and does not include books, supplies and room and board.

2. Offer your grandchild a loan

Pros:

  • You can give an interest-free loan up to $10,000. Loan amounts greater than $10,000 will be subject to a minimum IRS-set interest rate, but these rates are typically very low.
  • You can set the terms- for example, allow interest to accrue until graduation, require interest-only payments for a specified amount of time or eventually convert the loan to a gift.

Cons:

  • Interest on the loan will be taxable to you, but not deductible by your grandchild.
  • If you forgive the loan in your will your grandchild may end up owing income tax on the debt forgiveness.
  • Holidays may become awkward if your grandchild refuses to repay the loan.

3. Pay off your grandchild’s student loans after they graduate

Pros:

  • There will be no effect on the grandchild’s financial aid eligibility.
  • Your grandchild will have an incentive to graduate.
  • He or she will be able to deduct student loan interest of up to $2,500 on their tax return without having to itemize.

Cons:

  • Your loan payments will be considered gifts, so any amount you give over $15,000 in one year will be subject to gift tax ($30,000 for married couples filing jointly).
  • According to the College Board, that amount won’t even cover the current cost of one year of tuition, fees, and room and board at a public university.
  • Unforeseen circumstances (e.g. death, illness) before your grandchild graduates may prevent you from being able to keep your promise.

4. Buy your grandchild U.S. Savings Bonds

Pros:

  • U.S. Savings Bonds are easy to purchase at your local bank or from Treasurydirect.gov.
  • Savings bonds are a relatively safe investment that offer guaranteed interest if held to maturity.
  • Series EE and I bonds purchased after 1989 by someone age 24 or older may be redeemed tax-free when the proceeds are used to pay for higher education expenses.

Cons:

  • The tax exclusion on Series EE and I savings bonds doesn’t apply unless the grandchild is your dependent - that means you’ll have to pay income tax when the bonds are redeemed.
  • Interest rates have been at historic lows and are not keeping up with tuition inflation.
  • Individuals may only purchase $10,000 worth of each Series EE and Series I savings bonds per calendar year.

5. Set up an education trust

Pros:

  • You are able to specify your wishes in the trust agreement, and the trustee will be legally obligated to fulfill them.
  • You’ll be able to restrict your grandchild’s access to the funds regardless of his or her age.

Cons:

  • Legal and accounting fees to establish and maintain a trust can be high.
  • Gifts are irrevocable, meaning that once you create the trust, you can’t undo it and get the funds back without the consent of the trustee and beneficiaries.
  • Any income earned in the trust will be taxed at high rates.

Earn cash back for college with Upromise. It's free to join.

Kathryn Flynn

Kathryn Flynn

Content Director

Kathryn is Content Director at Savingforcollege.com. She has been quoted in financial publications including the Wall Street Journal, the NY Times, Fortune, Money and GOBankingRates, and has been an expert guest on personal finance podcasts. Prior to Savingforcollege.com, Kathryn worked in product marketing at Henderson Global Investors (now Janus Henderson Investors), a global asset manager. She earned her MBA with Finance Concentration from DePaul University's Kellstadt Graduate School of Business, and has prior FINRA Series 7 and 63 licenses. Kathryn has 529 college savings plans for each of her three children, and enjoys creating content to help other families prepare for future higher education costs.