- Study after study shows that 529 plans are an excellent way to save for a child’s or grandchild’s college education—but there are some important caveats.
- Consider delaying grandparent-funded 529 distributions until the second half of the student’s sophomore year.
- Instead of just assisting with tuition, offer to pay for a college planner during a grandchild’s high school years. College planners can be a tremendous help for both parents and students.
As you drop your children off at school, concerns about sending them off to college someday are probably in the back of your mind. On top of the emotional issues that parents face when sending their children out into the real world, there are the financial realities. How will we afford it? How much financial aid will we receive? Will our child qualify for any scholarships? If grandparents help pay for college, will that affect the amount of financial aid we receive?
These are complex questions, but the short answer is YES. The way that a grandparent helps fund a grandchild’s higher education can have a significant impact on the student’s ability to qualify for federal financial aid.
The Grandparent Factor
If you’re a generous grandparent or expect to be one someday, here are three things to consider when helping a grandchild build their college savings:
- Don’t name the student (i.e. your grandchild) as the account holder of the college saving plan. If you do, the account will be treated as an asset of the student for financial aid purposes. That means 5.64 percent of the value of the account will go towards the student’s Expected Family Contribution (EFC).
- If possible, once your grandchild has started college, delay beginning distributions of funds until the second semester of sophomore year (if planning on graduating in four years). This will prevent the distributions counting towards the EFC.
- During your grandchild’s high school years, consider offering to pay for a professional college planner. These professionals generally work with a smaller group of students than a high school guidance counselor and can provide highly individualized attention to each student to help them optimize their essays, determine standardized test strategies, and guide students through the stressful college search process. It’s a wonderful type of gift because most college planners are paid consultants, not volunteers.
Keep Account General
Again, when offering to help pay for a grandchild’s education, don’t name the student as the account holder. Doing so, not only negates your ability to change the beneficiary, but it causes the funds you contribute to be counted as an asset of the student when calculating the student’s EFC. Even if your gift is not going to be used until later in the student’s college career, 5.64 percent of the value of the account will be considered available for college tuition/expenses and will decrease the financial aid the student may receive.
When the account is NOT in the child’s or parent’s name, the value of the account is not factored for the EFC. An important caveat: Several hundred of the nation’s more selective schools (generally private) use the College Scholarship Services (CSS) Profile, rather than the simple Free Application for Federal Student Aid (FAFSA) form to determine a student’s financial aid potential. While the FAFSA primarily looks for the parent’s and student’s work-related income and assets, the CSS Profile takes a much more detailed look at the family’s investments, home equity, and other assets that could be liquidated or borrowed against to finance college expenses. Those assets can often include the value of a grandparent’s college savings gift.
Grandparent funded 529 account distributions are factored into the FAFSA since the student’s unearned income is counted. When calculating the EFC, up to 50 percent of a student’s unearned income is factored into the calculation and can significantly lower need-based aid. In some cases, it can reduce the award amount by 20 percent.
However, there is a strategy you can use to mitigate this tuition hit.
Delay Grandparent Funding
FAFSA rules state that student and parent income from the second prior year will be used to determine a student’s eligibility for aid for the upcoming academic year. For the 2018-2019 academic year to which today’s high school seniors are applying, income from the 2016 calendar year will be used. The strategy is to delay grandparent funded 529 distributions until the second half of the student’s sophomore year of college (after the new calendar year). This way, by the time the distribution is counted in the FAFSA calculation, the senior year award has already been granted.
Use a Professional College Planner
This is all good information for when your student is attending college, but the first step is to get them to college. Consider using a professional college planner to guide both you and your promising student through the process. Parental (and grandparental) advice often falls on deaf ears as it’s tempting to relive one’s own college experience through your children or steer them towards your alma mater. Students are often better served by having an independent third party help guide them through the college decision process. These experts can help students identify which type of school is best suited to their interests and academic achievement level.
We have recommended college planners to several of our clients. Planners can help both students and parents work through the application process, narrow their choices, provide structure to the college search, and recommend schools that were not initially considered. According to Niche Ink, 58% of high school graduates attend college within 100 miles of their hometown, while 72% stay in-state. Only 11% of students venture more than 500 miles from their hometown.
At Soundmark, we strongly recommend working with a college planner to help guide your child toward the school that is best for them.
Helping parents and students with the financial side of college is definitely a welcomed gift. However, make sure that your well-intended gift does not have an adverse impact on the student’s financial aid prospects.
*It’s important to note that need-based aid and merit aid are generally independent of each other. Some schools offer more or less of each type of financial aid.
James Nevers, CFP® is an Associate Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, Directors and Executives at Amazon, Microsoft, and Boeing, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.