Sep 6, 2023
Want to Help a Family Member with College Expenses?
Thanks to the many television commercials and school-supply advertisements in the Sunday newspaper, it’s easy to remember that a new school year is now upon us. For many recent high school graduates and their families, it’s also “pay college tuition” time, which can be a stressful endeavor.
It’s no surprise to anyone that the cost of college continues to rise. As costs increase, many grandparents, aunts, uncles and other family members may be looking for ways to help students reduce the impact on their wallets. What’s the best way to do this, considering your specific financial circumstances? Let’s take a look at six common ways.
1. Gift directly to the recent graduate
Cash or a check tucked into a graduation card is a convenient way to give money to a student for college. However, direct gifts present some issues when families submit their Free Application for Federal Student Aid (FAFSA) applications. Since 20% of the student’s assets and 50% of the student’s income (after some allowances) are considered money available for the family to use toward college, a cash gift could be considered either an asset or income, and therefore reduce the student’s eligibility for financial aid (source: www.savingforcollege.com). Another common issue is making sure the high school graduate actually uses the money for college and not for the newest cell phone or tablet.
2. Gift directly to the parents
This method also has merits, but timing the gift is crucial. According to FAFSA calculations, financial gifts to the parents of a student do not count as income available to cover the costs of college. However, if the gift is made before the parents file the FAFSA, they must report this gift on the application as an asset (counted less heavily than income, but still taken into consideration). As such, the gift may reduce the student’s eligibility for financial aid. Another possible issue with this method is ensuring that the parents actually use the gift to pay for the student’s education and not to pay down their mortgage or fund a family vacation. Kids aren’t the only ones who may be tempted to use a cash gift for something other than its intended purpose!
3. Pay the school directly for qualified education expenses
A big benefit of this method is that the money will definitely be used to pay for college expenses. Additionally, it’s a tax-free gift for the donor, even if the gift amount exceeds the annual exclusion limitation. Here's the main challenge: this payment to the school must be reported by the family when they fill out their FAFSA application for the next school year. This requirement could reduce the amount of financial aid available to the student.
4. 529 accounts not owned by immediate family
This is another way to make sure a money gift is used to pay for college. Prior to 2023, families were supposed to report any money received or paid from others on the student’s behalf, including any financial support coming from grandparents, friends or other relatives. This type of assistance would be considered untaxed income for the student, reducing the student’s chances of receiving need-based financial aid. In 2023, this type of assistance coming from grandparents or others outside of the immediate family no longer has any financial consequences and no longer affects the student’s chances of obtaining financial aid.
5. Contribute to a 529 account owned by the parent or student
What’s one benefit of this method versus utilizing a 529 account not owned by the parent or graduate? The distributions made from a 529 account owned by a parent or graduate are not considered income when the family applies for financial aid for the next school year. Yes, the 529 account will be considered an asset on the FAFSA application. However, only up to 5.6% of the account’s value will be considered part of the expected family contribution (source: www.savingforcollege.com)—a much lower percentage than student or parent income.
One of the most common questions raised by parents funding a 529 account is what happens if money is left over in the 529 plan, or what if their child decides not to go to college? Prior to the SECURE 2.0 Act, the options for leftover funds in 529 accounts were rather limited. However, starting in 2024, 529 account holders will be able to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary (subject to annual contribution limits). This will put some of these concerns to rest regarding unused 529 account funds and may jump start retirement savings for the beneficiary.
6. Help pay off student loans
Unlike the other methods mentioned above, this one takes place after the student graduates from college. The great thing about helping pay off student loans is that it has no impact on the family’s eligibility for financial aid during college. Plus, it’s a wonderful way to help the graduate shift their focus from paying down debt to starting a saving and investing regimen designed to help them achieve their future financial goals. One possible drawback of helping a graduate pay off their student loans is that some interest may have accrued while the student was in school if their student loans were unsubsidized.
As demonstrated, each of the six college money gift options we’ve considered has both merits and drawbacks. The key is to compare the benefits (reducing the burden of college expenses) with the possible disadvantages (impact on financial aid eligibility). A great first step is to talk with both the student and the student’s family about how you can help. If you need someone else to serve as a sounding board or provide financial advice on how best to support a budding college student’s dream, speak to your Corient Wealth Advisor.
ABOUT THE AUTHOR
Bryan Smalley, CFP®
Bryan is a Wealth Advisor in our Morristown, NJ, office. He is responsible for managing client relationships and coordinating all aspects of client service for the team. He currently serves on the firm’s Financial Planning Committee, providing research and input into such topics as Medicare and retirement planning. Bryan is an Ohio native (Go Bucks!) who has earned the CERTIFIED FINANCIAL PLANNER™ certificate along with a BA from the University of Toledo, an MA from Bowling Green State University and a certificate in Financial Planning from Boston University. Bryan, his wife, Liz, and their four children live in Flemington, NJ, where they enjoy exploring new places and spending time with family and friends.
Mike Klinger, CFP®, CRPC®
Mike is responsible for analyzing the client’s financial picture, preparing recommendations, and supporting Wealth Advisors in our development of strategies to help clients reach their goals. He holds the CERTIFIED FINANCIAL PLANNER™ designation, as well as Chartered Retirement Planning Counselor℠ designation. Mike attended Drew University, earning his degree in Business Studies while competing for the men’s basketball team. Following graduation Mike spent two years in Europe playing basketball professionally, while earning his master’s degree in Business from the Institute of Technology, Carlow.
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