By adding the cost of tuition, tuition, and housing, that number can easily double. But paying for college shouldn’t mean winning the lottery. Carefully coordinated planning by parents and grandparents with the help of a trusted financial advisor can help reduce the burden on families and their children.
Before grandma or grandpa wrote a check
Having the help of a parent will certainly take some of the pressure off. But before someone writes a check, you should have a serious discussion about how best to help.
Giving help the wrong way can hurt a student’s chances of getting financial aid.
Consider those strategies that will help the student in a financial aid favorable manner.
Consider paying off student loans after graduation
Financial assistance is based on different formulas to calculate the Contribution Familiale Prévue (CEF). Most of this information is based on information provided on a student financial aid form regarding the assets and income of parents and children.
Financial aid forms do not ask about the financial assets of other family members.
If you or a family member is lucky enough to have the extra money, you might be inclined to help. But giving a cash gift directly to the parents or the student will lead to an increase in reportable assets, which will reduce the calculated need, increase the CEF, and, in turn, reduce the amount of financial assistance possible.
And if a helpful parent comes forward and indicates they are going to help, the financial aid office will also reconsider the student’s financial need. Money paid to the school on behalf of the student could be treated as any other outside resource such as a private scholarship which reduces the assistance offered by the school.
A better way is to let the student qualify for maximum aid while still in school, and then help out by helping to pay off loan balances.
Family CFE too high?
For those who know their CEF is too high to qualify for assistance, there are still options for grandparents who are still able to help. These options at least give them tax savings.
Tip # 1: Pay the College directly
Since the aid will not be affected, just pay the school directly. Each grandparent can give up to the annual donation limit ($ 13,000 in 2010) to each student. This will help reduce the taxable estate of the grandparents and is an exempt gift to the student.
Tip 2: Set up a 529 savings plan
For grandparents who wish to help with tuition fees, a qualified tuition plan offers a great choice. The money set aside in these plans can be used for qualifying expenses like tuition, fees, books, and equipment.
These accounts offer a variety of investment options that can be tailored to the length of time before funds are needed. The funds grow tax free and if used for qualifying expenses they can be withdrawn tax free.
Grandparents can transfer large sums of money to these accounts without triggering gift tax. Each grandparent can effectively deposit up to five years of annual donations, which currently amount to $ 65,000. The assets of these accounts remain in the control of the grandparents and are not accounting assets for the student.
Tip # 3: Give away valued assets
Assuming the grandparent owns long-standing assets that have grown in value, one way to pay tuition and lower a potential tax bill is to gift those much-loved assets to someone in a tax bracket. lower. It can be the child or the parents.
This saves on the large capital gains tax bill that grandparents would likely incur if they sold the valued asset and use the proceeds to help directly pay for tuition or other fees. expenses.
Tip # 4: Create a charitable residual trust
For those who are both charity-inclined and eager to help a student, grandparents can set up a trust.
A charitable residual trust can be funded with highly valued assets which can then be converted into income producing assets. The income generated can be used to help the student. Eventually, the remaining assets can then be donated to the charity. This strategy helps grandparents avoid paying capital gains on assets and removes the assets from the taxable estate. While that’s not a problem this year (no inheritance tax in 2010), that will change in 2011 without congressional action.
For more advice and help, consider hiring a qualified college aid planner.