As college costs rise, grandparents may be part of solution

College costs continue to rise. In the past month, Georgetown University announced that this fall’s tuition will increase 4.9 percent to $64,896. Plus, room and board will jump between 4.5 to 9 percent. How can a typical family cover these expenses without taking out incredible debt?

Consider asking grandparents for help.

The reality is today more than half of students rely on grandparents for assistance. According to the 2014 Fidelity Investments report, 53 percent of grandparents were helping or planning to help pay for their grandchildren’s college costs. Their reported median contribution was $25,000. The survey reported that 35 percent of grandparents expected to contribute $50,000 or more.

Image by 3D Animation Production Company from Pixabay
Image by 3D Animation Production Company from Pixabay

Since then, an increasing number of families believe grandparents should contribute to college costs. Fidelity’s 2022 College Savings Indicator Study shows that 66 percent of parents agree that it is important for grandparents and other family members to help in funding their children’s college education. This is a 12-percent increase from the 2020 report, where 54 percent of parents thought grandparents should provide financial support.

Fidelity’s 2022 survey showed that more than 75 percent of parents have started saving for college. However, many felt less prepared to pay because of rising inflation and college costs.

The College Board reports that the average cost for tuition with room and board for 2022-23 is $53,430 for four-year, private colleges and $23,250 for four-year, in-state universities.

In 2022, Fidelity reported that the national average in student debt is $28,000. Ten percent of borrowers are straddled with $80,000 in education debt or more. The need to pay off exorbitant student loans will likely negatively impact a young adult’s ability to save for life events like getting married and purchasing a home.

Asking grandparents to contribute to grandchildren’s education can be an awkward conversation. However, educational gifts could provide tax benefits.

In 2020, Congress passed the Consolidated Appropriations Act of 2021 that modifies education planning. This is often referred to as eliminating the “grandparent rule.” These changes impact education funding starting this 2023-24 academic year.

When a student completes a Free Application for Federal Student Aid form for need-based financial aid, the new law does not require reporting specific types of non-taxable aid given to the student. Baird Retirement Management explains that this includes distributions from a grandparent-owned 529 account. Thus, the student is not penalized for having additional income from a grandparent’s gift that helps pay for college.

With the Baby Boomers expecting to have a large transfer of wealth to the next generation, grandparents contributing to college education is on the radar. The 2022 article, “How Grandparents Can Help Grandchildren with College” published by Mariner Wealth Advisors explains three ways to contribute to college costs.

First, giving cash gifts limited to $17,000 by individual or $34,000 by a married couple is gift tax free. Giving the cash gift to the parent, instead of the grandchild, does not need to be reported income on the Free Application for Federal Student Aid form.

Second, paying tuition directly to the college is not considered a taxable gift under federal law. This helps grandparents avoid using up the federal annual gift tax exclusion. This tuition-specific payment can be in addition to a separate grandchild tax-free gift.

Third, contributing to a 529 college education plan can grow tax deferred. Grandparents can open a 529 account and name a grandchild as beneficiary. Withdrawals used for the beneficiary’s education expenses are tax-free at the federal level. Funds can be used at accredited colleges in the U.S. and abroad.

The TD Ameritrade 2018 Saving Survey reports that nearly one in five grandparents have contributed to a grandchild’s college savings account.

Vermont Student Assistance Corporation reported in June 2021 that Vermont’s 529 plans hit 25,642 accounts and $573.4 million in assets. Deposits qualify for a 10 percent tax credit on contributions up to $2,500 per beneficiary each year ($5,000 if filing jointly).

Getting into college is a daunting task, and paying for college can be an ongoing battle. Researching all financial options can include approaching grandparents for financial help.

As college acceptances begin trickling in this March, many students and families will need to evaluate the cost of each college in choosing which to attend. Consider asking grandparents and other relatives, which is commonplace in many families. There is no “I” in team … with grandparents as part of the cheering squad.

(Margo Bartsch founded College Essay Coach, a full-service college admission business, and has been an adjunct professor in business at Champlain College and at Middlebury College.)