The cost of obtaining a college education is growing exponentially, putting young graduates further and further in debt.
As tuition costs rise, it’s not uncommon for generous parents and grandparents to step in. If you’re considering being a part of your grandchild’s educational journey, you’re not alone.
Here are a few ways you can help support your grandchild’s education while keeping your own financial goals top of mind.
1. Be Present Before And During College
Grandparents play a significant role all throughout their grandchildren’s lives, whether through ongoing babysitting, caregiving, etc. And those regular interactions can actually be more beneficial—for both the grandparent and grandchild—than you might think.
Develop A Relationship Well Before College
A study by the University of Oxford found an incredible connection between a high level of grandparent involvement and better emotional and behavioral patterns among children. Other foundational studies show that the grandparent-grandchild bond can help insulate both parties against depression.
But it’s not just the children who reap the rewards of such a special connection. A 2022 issue of the Evolution and Human Behavior Journal discovered that grandparents who provide ongoing support for their grandchildren were more likely to live longer than other seniors.
And when you think about it, the data makes perfect sense.
Grandparents are often seen as a security blanket—one made of love, compassion, companionship, and a never-ending well of stories. And those interactions can shape children for the rest of their lives.
So, if you have the resources consider spending more quality time with your grandkids, like taking them on vacation, inviting them to a sporting event, theater night, concert, play, etc.
And, remember, quality time doesn’t have to cost a lot. You could spend a couple of hours teaching them how to make a special family recipe, help them learn a new skill, and introduce them to unique hobbies like fly fishing, camping, sewing, etc.
When you prioritize cultivating a strong relationship with your grandchildren, you’ll give them experiences and core memories that will last a lifetime.
Maintain Your Special Connection As They Grow
Developing and nurturing a connection with your grandchildren as they age is wonderful. But what you do together when they are in college may look different than when they were younger.
Draw from your relationship with them and stay present in meaningful ways. Perhaps you love to do something together like going to the movies. In that case, maybe you make it a point to see them once a quarter and watch a new film.
There are so many ways to stay present in your grandchild’s life—sending care packages, taking them out for a good meal (that’s not cafeteria food!), visiting on campus, and more.
Of course, staying involved in some ways will be most costly than others. For example, if your grandchild attends school out of state, that’s significantly more expensive than a short drive. So, focus on planning ways to stay involved that make sense for you and your budget.
2. Talk With Your Kids First And Set Your Goals
Before you start strategizing, it’s essential to communicate your intentions with your family. You should be able to plug into your kid’s existing ideas for funding education.
Make it clear that you’re here to help, and your intention isn’t to step on anyone’s toes. Family dynamics can make talking about money difficult, but be open to addressing your children’s and grandchildren’s concerns and questions.
Once you’ve had a conversation and established where things stand, develop some goals for yourself.
- Do you want to fund the majority of their schooling?
- How involved do you want to be?
When you know your goals, you can start planning accordingly.
3. Contribute to a 529 Plan
529 plans are one of the most common tax-advantaged tools for covering educational expenses. While you make contributions with after-tax dollars, the money in the account grows tax-free, and distributions for qualified educational expenses remain tax-free.
There are no annual contribution limits on 529 plans, just lifetime limits set by your state (sometimes this is upwards of $500,000). So feel free to pick an amount and contribute to the account monthly or yearly.
Just remember, the IRS considers contributions gifts and may be subject to the federal gift tax1 . For 2022, the exemption limit is $16,000 per individual filer or $32,000 for joint filers.1 To avoid the gift tax, consider keeping your contributions under the annual limit.
4. Pay For Experiences with a UTMA
Aside from a 529 plan, you may find it helpful to open a Uniform Transfer to Minors Act (UTMA) custodial account for your grandchildren. You control this taxable investment account, intending to eventually transfer the funds to a minor. Once your grandchild is legally considered an adult (this definition varies by state), they gain control of the assets in the account.
Unlike a 529 plan, the assets in a UTMA are not limited to only funding education expenses. If your child chooses to pursue an alternative path, like an apprenticeship or entrepreneurship, they can use the funds as they please. In addition, UTMAs have no lifetime contribution limits.
Many families find the flexibility and freedom of UTMAs to be advantageous for saving for a child or grandchild’s future needs. Aside from tuition, many aspects of gaining an education don’t fall under the umbrella of a 529’s “qualified expenses.”
A UTMA can help you pay for your grandchild’s travel, membership to Greek life or other organizations, semesters studying abroad, internships, etc. With a UTMA, for better or worse, there is no limit to what your grandchild can use the money to do.
5. Buy Savings Bonds
Series EE or I bonds are a great way for grandparents to help fund education expenses. Better yet, if you use the funds to pay for college, you won’t have to pay income tax on the interest.
I bonds are especially enticing for combatting today’s high inflation. The current inflation rate of I bonds is 9.62 percent, and you can purchase up to $10,000 per year straight from the U.S. Treasury.2
6. Don’t Forget About Cash
Of course, there’s always the option of giving your grandkids cold hard cash to help them out at school. If you go this route, there are a few things to remember.
You really have no control over what your grandchild chooses to do with the money. Cash could be a great way to assist if you’re just looking to help boost their rainy day fund. But if you’re focused on covering specific expenses like tuition, room and board, books and supplies, etc., it may be better to pay these directly or utilize another option (like a 529 plan).
Be mindful of the gift tax exemption limit when giving a significant amount of cash. If you go above the limit in a single tax year, you’ll need to fill out form 709 to report it, and it will be deducted from your lifetime exclusion.
Another way to support your grandchild (without actually handing money over) is investing in a rental property they can use during school. This route gives them a place to live with reduced (or no) rent while creating an alternative investment opportunity for you.
7. Keep Your Own Financial Goals in Mind
While you desire to stay active in your grandchild’s life and support them through college, you don’t want to risk your financial future. For example, it’s not a good idea to tap into your 401(k) for college expenses when you’re only a few years out from retirement.
Your grandchild will likely be grateful for any support you can give, no matter how large or small.
Supporting Your Grandchild’s Education
If you’re interested in financially supporting your grandchild’s education, there are plenty of avenues to consider. Feel free to reach out to our team, and we’d be happy to discuss your options.
1Frequently Asked Questions on Gift Taxes