So, do any of your children have grandparents helping with college? If so, how are they doing it? A lot more grandparents are helping with college but their help can sometimes affect financial aid or cause you to pay gift taxes so I’m wondering how you might be navigating those challenges.
I’m a freelance writer working on a story for Forbes.com about grandparents helping to pay for college and how they can do so without adversely affecting financial aid and would appreciate whatever tips you have so that I can pass them along to other parents/grandparents!
I’m also looking for sources if you know anyone - i.e. grandparents who are saving to help or currently paying for their grandkids school.
First you need to understand some important things about the gift tax
Educational expenses paid directly to a university are excluded from gift tax. From the IRS: “The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual. A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and its regulations.”
the Gift Tax is NOT paid by the person receiving the gift in any event. It is paid by the person MAKING the gift. A Grandparent. can make a gift to a grandchild of up to $14,000 per year in ADDITION to tuition ( say for room and board) without any gift tax consequences. And they can gift their child and their spouse 14 k each too. Gift tax consequences are HIGHLY unlikely.
Thanks Maya! That’s good to know. I had read something similar to that elsewhere but you lay it out so well here. That will be really useful to other parents/grandparents to know.
There are certainly some risks or downsides to having grandparents pay. Sometimes they want a big voice in where junior applies or attends. And every spring we see situations where grandparents had said they would pay a significant part of a kid’s college costs, but then they reneg (usually because they had no idea that college costs $60K/ year now). Hopefully that conversation happens around the time the kid starts their search, but sometimes that is breaking news after apps are in.
If the grandparents put money into accounts in the grandchildren’s names, the accounts will, depending on how they’re set up, count as the grandchildren’s assets and potentially reduce the grandchildren’s financial aid.
Have read/heard that some grandparents will pay off the ed loans after the student gets degree. This way, the student’s financial aid is not affected but can start career without burden of loans. Some have a 529, coverdell or other college savings plan, but many just gift to parents with or without strings.
Where gift amounts are $14,000/person/year or less, there are no gift tax implications but can be FAid consequences for folks who qualify for FAid. This means student can receive $14K from grannie, $14K for grandpa, if each chooses to give that amount, every year. They could also give similar amounts to each parent, if desired with no federal gift tax consequences.
Yes grandma had been saving up for both my sons’ colleges. She will be able to keep our situation from being very painful and reduce it to moderately painful. My son is looking as some of the most expensive colleges in the nation and that extra funding matters. My mother has not forced herself into the selection process so that is not a worry.
She has seperate accounts that she had placed the funds into, so she has an exact amount the has been put aside. No surprises at the last minute unless the stock market crashes.
The person giving the gift (of more than $14,000) pays gift taxes, not the person receiving the gift. (If he or she does not pay the gift taxes the recipient’s on the hook for it.)
If the student is receiving need-based financial aid, then the advice that commonly appears in the Financial Aid Forum is for the GP’s to loan the money to the student, and then forgive the loan after graduation. That way it never needs to be reported as additional support or as an asset on the Fin Aid applications.
However each student’s situation is unique, and the GP’s, parents, and student are well advised to run their numbers using various scenarios in order to determine which is best for them.
Gifting to parents will increase their assets, and typical aid formulas require a parental contribution of around 5% of asset value. The $14K gift will reduce FA by about $700 for most students.
In our case, GP just writes checks make out to the school for the amount they want to contribute. We don’t receive any FA, but this process makes the taxes a lot simpler.
In our case, grandparents set up 529s for each child. Has made college possible (since we have 4 kids). Great tax benefits for grandparents, no impact on FAFSA - although is declared on CSS. DS will have money left over in his account which he can use for grad school if he wants. DD chose a different path - but was able to afford the school she chose. She was offered student loans but is using the 529 money first.
One or both of the financial aid forms—I can’t recall if it’s the FAFSA, CSS, or both—does ask to report any other sources of funds to pay for college. This is where the grandparent money is supposed to be disclosed. So, yeah, you are supposed to report it regardless of HOW the grandparents are paying (529, writing a check directly to school, gifting the money to parents or the student) because it is a source of funds to pay for college. Advising your readers to avoid disclosing it—is it ethical? Is it legal? Or is it a valid loophole? That, to me, would be the question to answer.
@brantly Grandparent 529 accounts are not reportable for either FASFA or CSS. Parent 529 accounts are.
Grandparents 529 reporting only comes into play when funds are distributed and count as student income. There is I believe a $6200 safe harbor.
If possible it is best to use Grandparent 529 funds senior year or to repay loans. Gifting to the parent might also be an option because the hit to FA is rather small when the money is a parent asset.
We reported ours on the CSS. 529s can’t be used to repay loans - at least that’s what our research showed. It’s not considered a direct educational expense. And - since the money was again used directly for tuition, room board, books etc., it didn’t impact our students bottom line. However, we’ll see if it impacts our DD with next year’s CSS/FAFSA, since she had a job etc. Definitely believe in reporting everything as correctly as possible!
Gifts to an individual in excess of $14,000/year must be reported to the IRS by the donor, but reporting doesn’t necessarily trigger gift tax liability. We have a unified federal gift and estate tax; if a decedent’s taxable estate combined with all lifetime reportable gifts made by that person exceed a combined total of $5.43 million, then a federal gift and estate tax will be owed out of the estate. Since most estates are not that large, most people never need to pay a gift tax, even if they made one or more reportable gifts in their lifetime.
Our daughters didn’t qualify for need-based FA, so grandparental gifts had no FA consequences for us. Grandma could either make gifts to us as parents (up to $14K to DW and another $14K to me annually, though the limits were slightly lower in earlier years), or a gift of up to $14K to each daughter per year, or both, without even needing to report those gifts to the IRS. That’s a total of up to $56K per year ($14K to each of 2 parents and 2 daughters) without gift tax consequences, though we never needed or received anywhere near that much. Then, when D1 finished college with loans in excess of $14K, Grandma decided to be especially generous and pay off the entire loan balance. That gift had to be reported to the IRS because it exceeded $14K, but it will have no tax consequences because when she dies her taxable estate will be nowhere near $5.43 million, and the reportable gift to D1 was the only reportable gift she ever made in her lifetime.