Grandparents Financing College

Acollege education is likely to be the most significant investment an individual makes in a lifetime, second only to purchasing a home. With college costs reaching stratospheric heights, it is no wonder that college counselors are increasingly asked for advice by grandparents of prospective college students about how to assist with expenses.

Since 1990, college costs and attendant fees have risen 92%. College costs at instate public colleges average $24,000 a year, while private colleges average $48,000 a year. Considering a four-year college education, the minimal costs run between $100,000 for a public college to

Grandparents

Financing College Since 1990, college costs and attendant fees have risen 92%. College costs at in-state public colleges average $24,000 a year, while private colleges average $200,000 for a private college. Moreover, $48,000 a year. while four years was the usual track for college graduation, a college education now commonly extends to six years. Before generosity gets the better of those who want to assist with college expenses, it is important to be informed about unforeseen consequences for all concerned. With forecasts of growing economic uncertainty, it is essential to evaluate how much one can help out without putting their own financial situation and retirement funds at risk. Even the most astute financial planners cannot fully account for those extraordinary expenses and unanticipated costs that may surface. Knowing the financial aid rules can also prevent accidental erosion of those funds.

Before proceeding, however, we must express our dismay at seeing so many parents and grandparents needlessly going into debt to fund a Rolls Royce education when there are Ford options. A possible alternative for your grandchild is attending at a community college for two years to complete the general education requirements and then transferring to the state university. Additionally, grandparents should insist on viewing the variety of financial aid packages offered by different universities. It’s not the starting block but the finish line that matters, and return on investment at a pricey and prestigious institution offering little aid can be quite disappointing. Check out any of the college ROI calculators like PayScale’s: http://www.payscale. com/college-roi

Grandparents who wish to assist with college expenses should pay the institution directly rather than the individual student, thereby avoiding the IRS gift tax on an individual’s gift by not exceeding $14,000 a year or a couple’s gift of $28,000 a year. Another option is to purchase a rental property in which the student and rent-paying housemates can reside instead of college housing. The rent helps pay the mortgage and possibly tuition, and the tax benefits from owning a rental property apply. Following graduation, the property may be retained, sold or exchanged in a 1031 “like-kind exchange.”

A further alternative is to enroll in a prepaid tuition or savings “Qualified Tuition program” 529 plan, named after that section of the IRS Code. The sooner a 529 plan is established, the more money will be available to pay for tuition and college costs. The tax-advantaged investment accounts of 529 plans can be set up as separate accounts for each individual child in their own name. Accounts can be transferred from one child to another later if one child goes to a more expensive school or needs the money earlier than another child. If the distribution of the 529 plan funds go directly to the student, it is seen as student income and can complicate the student’s chances for qualifying student aid, which is determined by the student filing their FAFSA [Free Application for Federal Student Aid]. There are means of distribution that will not adversely impact the student’s aid chances [e.g. grandparents distributing to the parents or delaying distribution until after the student graduates from college or in the student’s later years of college].

The individual setting up a 529 plan is not limited to the plan in their state of residency and the plans do vary by state, so it’s wise to do comparative shopping. Two valuable organizations with websites that give clear and succinct information regarding 529 plans are College Savings Plans Network [http://www.collegesavings.org/] and Savingforcollege.com [http://www.savingforcollege.com].

We are frequently asked why college costs have risen so dramatically. First, subsidies have declined from endowments and public funding, shifting more of the burden to families. Second, the cost of student services like learning support, athletics, and intensified competition for students has increased. Third, compliance with expanded regulation by agencies like the NCAA, insurers, or the federal government is extremely expensive. The University of Connecticut spends $400,000 to comply with the Clery Act for campus safety alone. For these reasons, it is improbable that the cost of a college education will decrease anytime soon, and the burden on families will remain significant.

A further alternative is to enroll in a prepaid tuition or savings “Qualified Tuition program” 529 plan, named after that section of the IRS Code.

Carolyn Kost and Frank Don own East West College Counseling, which provides students with expert help in selecting and applying to their best fit options for higher education.