Tips For For How Grandparents Can Aid College Bills


With 2014 underway, the race for college financial aid begins. Families can file the Free Application For Federal Student Aid (FAFSA) for the 2014-15 school year.

Even if your child is not yet in college, it's good to start planning. The student's grandparents can chip in.

In 2014, the annual gift tax exclusion is $14,000. Gifts up to that amount have no tax consequences. A hypothetical Al and Ann Hill can give $28,000 to their grandson Josh this year without any tax hit.

The Hills also can pay Josh's tuition bill directly to the school. There is no limit, and no gift tax effect.

But such gifts to a student show up on the FAFSA. They can reduce financial aid awards.

High-income families might not qualify for financial aid. But they might get some help, in these days of hefty college bills. That's especially true if multiple children are attending pricey schools.

So you may want to avoid grandparent gifts to students or direct tuition payments if you're hoping for financial aid.

Another option for grandparents is to make gifts to the student's parents. The Hills can give up to $28,000 to Josh's father this year. And $28,000 to his mother.

The other grandparents can do the same. None of these gifts will be reported on the FAFSA.

But parents' assets are reported. An increase in assets can decrease aid. But as long as parents use the gift money to pay college bills before the date on which they sign their FAFSA, it would not count as part of parental assets in calculating aid.

For a youngster who will be a freshman next academic year, the FAFSA might be filed early in 2014. Then the grandparents would give a cash gift in the spring to the parents. The cash would be used for college bills before the next FAFSA, for sophomore year, is filed. That would be early in 2015.

Largesse For Loved Ones

Another option for grandparents is to own a 529 college savings plan. Such plans offer tax-free investment buildup and tax-free withdrawals for college bills.

Contributions count as gifts. But you can use up to five years' worth of gift tax exclusion upfront.

So the Hills can give up to $140,000 to a 529 plan for Josh this year: 5 times $28,000. If they give that this year, the Hills may not be able to make any more tax-free gifts to Josh for four more years.

Grandparent-owned 529s aren't reported on the FAFSA. So grandparents can build up a large college fund without reducing need-based federal financial aid.

But there's a catch. If the Hills tap a 529 account to pay Josh's college bills, tax-free, those distributions will be counted as FAFSA income for Josh. The impact on aid could be steep.

One tactic would be to change ownership of the 529 account to Josh's parents. Then the 529 plan would be reported as the parents' asset but distributions wouldn't count as the student's income. This could decrease aid modestly.

"The other solution is to wait until after the FAFSA is filed for the senior year in college," said Mark Kantrowitz, publisher of, a network of websites about college funding. Then the grandparent 529 can be tapped for college costs, tax-free.

Suppose Josh starts college in August 2015. In January 2018, during his junior year, he fills out the FAFSA for his senior year.

After that FAFSA is filed, Josh's grandparents can use their 529 to pay his remaining college bills. Those distributions won't reduce financial aid if there are no more FAFSAs on which to report them.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Mutual Funds

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