Are you trying to pay for your kid’s college? Not sure where the funds to pay for college will come from? Are their grandparents will to help pay for college? Depending on how old your children are can determine the best avenue for obtaining help from grandparents. There are several option to choose from with each having different effects on the student, you the parents and the grandparents.
If there is a shortfall in your child’s education expenses after you fill out the Financial Student Aid (FAFSA) there is really no need to consider having the grandparents help in saving. Why will they not help save? It is easy your child is about to start college as the FAFSA is filled out their senior year in high school. In this case it is best for the grandparents to make a cash gift to the parents for the child’s education. In 2014 the amount that can be gifted to you the parents is $14,000 for a single gift or $28,000 for a split gift where both grandparents are able to each give $14,000 before having to pay a gift tax. If the money is gifted to the parents it will have little effect on the FAFSA as compared to giving the gift to the children.
There is a reason why the grandparents should not pay the school directly in the event they are not able to pay the full amount. And that is any payments made on behalf of the student will reduce the child’s financial aid based on the FAFSA. But if the grandparents can afford to pay the entire tuition bill then the answer is much different. In this case, the grandparents do need to pay the institution directly as it will not be considered a gift and could help reduce their taxable estate. And since the payment is not considered a gift there is no limitation as to how much they can pay provided it is paid directly to the institution.
The third option for grandparents that are stepping in late to the college process is to make a bona fide loan to the parents. This must be a written loan, charges interest, and has a payment schedule. If the loan is made to the parents it does not have to be reported on the FAFSA. After the child’s college is over the grandparents can forgive up to the maximum allowed before gift taxes are applied, $14,000 for a single grandparent and $28,000 for a split gift per year until the loan is forgiven. But that arrangement cannot be made in any manner prior to the loan or during the life of the loan or it could be considered a gift and gift taxes would apply.
If the grandparents are involved when the child is younger and instead of paying for immediate college expenses we are in the savings mode there are some options. If the savings plan is in an approved 529 plan then the grandparents can make gifts to the child’s or parent’s 529 plan. The main difference is how the asset is accounted for on the FAFSA. If your child is young and the plan is just starting out the grandparents can make up to five years of gifts at once and then not make any to that child or you until the five years is up. That means a grandparent can make a single gift of $70,000 or $140,000 for a split gift to the child or you the parent.
While not all grandparents are in a position to help pay for college these are some examples on how they can of they are able. As always the best way to pay for college is start a savings plan early on in the child’s life. But under no circumstance should a parent risk their retirement in favor of paying for their child’s education. Your children have an entire working career to repay loans where as you only have yourself to really rely on for your retirement.
