3 Key Ways to Help a Child or Grandchild Pay for Education

As tuition fees continue to rise, it becomes increasingly difficult for students to pay for themselves. Total student loan debt in the United States has reached a staggering $1.75 trillion. This has led many parents and grandparents to want to help support some of their child’s or grandchild’s college debt. However, they shouldn’t jeopardize their own financial future by retiring with someone else’s student loan debt.

Even so, the number of adults over 62 with student loan debt has reached a startling 2.4 million borrowers. If parents and grandparents plan to help pay for college, they need to plan ahead to stay debt-free in their golden years. There are plenty of ways to start planning now to help pay for tuition while saving for retirement.

529 plans offer tax advantages

529 plans are investment accounts that can be used to pay for a specific beneficiary’s education. Choosing a 529 plan also comes with tax advantages. It will grow free of federal tax and will not be taxed when the money is withdrawn. It is important to note that you can use a 529 plan from any state to help cover the cost of studying in any other state. However, depending on the state you live in, you may qualify for even more tax deductions with a 529 plan. Seven states provide tax relief for any contribution to a 529 plan: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania. There are no contribution limits for 529 plans, but there are limits for tax deductions. These plans can be used for more than tuition.

For example, they can help cover student loan repayments and college expenses such as books or meal plans. You can even use them to help pay for K-12 tuition. While a good option, 529 plans have a few downsides. If you are considering financial aid for college, 529 plans may work against you. You may also encounter higher fees with these plans. These downfalls could be the reason many are hesitant to use these plans for college.

Education savings accounts are a little different from 529 plans

A Coverdell Education Savings Account (ESA) is very similar to a 529 plan. Earnings from this account can grow tax-deferred and withdrawals are tax-free when used for educational purposes, such as this is the case in a 529 plan. However, the beneficiary will have to pay taxes on any distributions that exceed their eligible educational expenses. You can only contribute $2,000 per year, per beneficiary, so if you go over that amount, the rest will be taxed. Although very similar, there are a few differences between an ESA plan and a 529 plan. Contributors must earn less than $110,000 per year, they cannot contribute to the account after the child turns 18 and the money is automatically distributed when the beneficiary turns 30. An ESA may be a better option than a 529 plan if the contributor wants to give the account to the beneficiary as they grow.

Tax-free donations are an easy way to go

Grandparents can also simply give money directly to the child or parents. To avoid federal gift tax, you can make a tax-free cash gift of up to $16,000 per recipient in 2022. This means that if you give less than $16,000 to an individual, you and your beneficiary does not have to declare it to theirs. If you decide to go this route, be sure to discuss the exact tuition and any other college expenses with your grandchild or child, and then make a detailed plan on exactly where the money will go. This will help ensure that the money you donate is for university expenses, such as tuition, rather than something else.

Help your family in a smart way

Whether you’re helping save for a family member’s college expenses or saving for retirement, consulting a financial planner should be your first step. They can help you find the right plan to save for college, retirement and everything in between.

Founder and CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™ and the Founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an investment advisor and has helped clients prepare for retirement for over a decade. He hosts the weekly radio show The Retirement Ready on WTMJ Radio and is regularly featured on Milwaukee television stations. Tony is passionate about building strong relationships with his clients to help them develop a solid plan for their retirement.

Leave a Comment

Your email address will not be published.