‘Twas the night before Christmas, when all through the land
Parents fretted and worried that tuition was higher than planned;
The funds set aside for college with care
Looked to be inadequate, causing concern and despair.
The teenagers hung out, air pods in their ears,
Not a care in the world for the next several years;
Mom’s anxiety grew and Dad felt a fool
Knowing too little was set aside for the kids’ school.
But it won’t be Santa Claus that rescues this tale;
More likely Grandma and Grandpa will put an end to this epic fail.
For whom better to step in, with money to gift
Before the end of a tax year and give college savings a lift.
It would be fun to continue this poetic approach to suggesting that grandparents can help a family’s college dilemma because it does give us hope and it could be the miracle so many families are looking for. In fact, the pending changes to the financial aid formulas (on deck for the 2024-2025 school year) seem to recognize that grandparents are, indeed, the “last great hope” for sending kids to/through college these days.
But for this story to have a happy ending, we need to guide grandparents and the families with college-bound kids correctly. If we don’t, they could end up negatively impacting financial-aid eligibility for the very students they are trying to help.
Although money from relatives has been a relatively small percentage of the solution, it’s likely to grow with pending changes to the financial aid formula. According to that national study “How America Pays for College 2021” from Sallie Mae, 11% of families helped fund college with money provided by [non-parent] relatives, who contributed an average of $5,060.
The study also noted that 58% of all families have created a plan to pay for all years of college before a student is enrolled, up from 40% in 2018. So the opportunity to expand our planning to the parents of the parents we serve has never been better.
Many families do not discuss finances so the thought of approaching grandparents about college funding can be a bit awkward. And many grandparents may have very specific ideas about how they want to “gift” to grandchildren, creating another barrier to effective and efficient funding of college. This is a “value added” role we as advisors can play. Our willingness to broach the subject, guide the discussion and educate both generations on the how to go about involving grandparents in paying for college is not to be underestimated.
Navigating a Slippery Slope
Grandparent contributions toward college will not impact merit-based money, but those funds could put need-based financial aid in jeopardy.
Cash set aside for grandchildren that is used for paying college costs needs to be reported as unearned income to the student on the FAFSA or CSS Profile the following year. Student income is assessed at 50% in the current formulas. This well-intentioned contribution toward college costs can have an unexpected (and unwelcome) impact of lowering financial aid eligibility and bumping up the overall out-of-pocket cost for the family. Assets in children’s names (including stocks and savings bonds) are assessed at 20% in the financial aid formula.
Advisors need to do a better job of helping families navigate this slippery slope and provide the guardrails and best practices that result in the right fit for the student (academically and socially/emotionally) and the right fit for mom and dad (financially). This balancing act can reduce the overall cost of college by 25% to 50% for each student in the household, for all years — well worth the effort it takes to create a cash flow blueprint.
Grandma and Grandpa can certainly contribute to an existing 529 Plan that is controlled by one of the children’s parents, and it’s more efficient than giving the assets directly to the student. Under the financial aid formula, a maximum 5.64% of the parent assets are assessed when calculating a student’s eligibility for financial aid – compared with 20% of the student’s assets – and money in a parent owned 529 plan are reported as a parental asset.
So if Grandma and Grandpa gift a generous $10,000 through the 529, only $564 would be counted by the FAFSA for the expected family contribution (EFC), compared with $5,000 if it were gifted directly to the student.
But we can do better…
Loans are Another Option
Grandparents could also loan the money to their grandchildren — either expecting to get paid back or planning to forgive the loan. Either way, intra-family lending seems like low-hanging fruit for many of the families we serve. It’s a way for grandchildren and their parents to avoid the complexities of the financial aid formulas and the reporting timelines (prior, prior year tax return but current year balance sheet).
Some grandparents may like the loan option, even if they plan to forgive it, because it could require their grandchildren to have more skin in the game if they think they’ll have to repay it. And if the grandparents do want a loan to be paid back, it could save their grandchild interest expenses.
Setting up a legitimate low interest rate loan using the applicable federal rate (AFR), which is currently less than the rate on direct student loans, is one option. This should include a written agreement with a legitimate repayment schedule, complete with a clause that would allow the grandparents an option to forgive the loan once the student has graduated with a degree. This seems like the easiest way to ensure the family gets access to capital they need for college without shooting themselves in the foot from a financial aid perspective.
In terms of the source of funds for this low interest loan, think savings or CD accounts earning less than 1%. Grandparents can also consider gifting or lending funds from required minimum distributions (RMDs) that are not used but end up being reinvested in non-retirement accounts, money that had been earmarked for annual gifting to the grandkids (this is a great candidate for the loan forgiveness option), or loans that collateralize cash value in old whole life policies.
A Win for Advisors Too
These ideas make a lot of sense if – and only if – the grandparents want to play a role in helping to pay for their grandchildren’s education. A conference call or Zoom session that the advisor leads, asking these kinds of questions, could unlock some liquidity for college that the family didn’t realize they had at their disposal. Facilitating that kind of intra-generational planning also serves to demonstrate our commitment to keeping and growing wealth within the family – a differentiator that really makes an impact.
“Facilitating that kind of intra-generational planning also serves to demonstrate our commitment to keeping and growing wealth within the family – a differentiator that really makes an impact.”
So, getting back into the spirit of the season:
Put the parents at ease and get straight to the task;
Include grandma and grandpa in the meeting and you do the ask.
Will you fund part of college – none, some, or all?
Are you willing to do it using a unique method of withdrawal?
So spring into action, to your clients give a wink
And show them that paying for college is easier than they think.
If grandparents are engaged and willing to pay,
Create a loan that can be forgiven at the end of the day.
Additional Reading: Failing: Advisors’ Approach to College Planning
Beth V. Walker is a wealth advisor with Carson Wealth Management and founder of Center for College Solutions, which is based in Colorado Springs, Colo. She can be reached at [email protected] or 719-522-2278.