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How to Start a College Fund for Your Grandchild

Posted on Thursday, February 16, 2023
by AMAC, D.J. Wilson

Parents and grandparents understand the value of education and often support their children and grandchildren in their academic endeavors. Not only does a college education allow students to gain valuable knowledge, but it opens possibilities for success in one’s given profession. Unfortunately, the cost of college has grown exponentially, often outpacing income and one’s ability to earn a degree without incurring huge debt. Per Think Impact, in 1963, the total cost of a college education (for the total of all four years, including room and board plus tuition and required fees) was $5,144. For 2023, Education Data states that the average cost of attendance for a student living on campus at a public 4-year in-state institution is $25,707 per year or $102,828 over 4 years. Private, nonprofit university students pay $54,501 per year or $218,004 over 4 years. To afford college, students often apply for Federal student loans. The principal and interest must be paid back after graduation via monthly payments. Due to the cost challenges associated with earning college degrees, parents and grandparents often come to the rescue. They may cosign student loans or aid younger family members by paying tuition or establishing college funds early-on. The latter is a popular way in which grandparents may help secure the educational future of their grandchildren.

Starting a college fund for a grandchild is best done while they are young. A 529 Plan is a tax-advantaged savings account that can go toward a beneficiary’s education. Since the money contributed is post-taxed, it can grow and be withdrawn tax free. As a bonus, depending upon the state, contributions may qualify for a tax deduction. 529s offer flexibility. Owners control the account and beneficiaries may be changed, should, for example, a grandchild decide not to attend college. And, up to $10,000 a year in tuition may be applied toward a child’s primary or secondary private school education if desired. A 529 college savings plan is a great way to put money toward educational expenses, including tuition, books, and room and board. Yearly contributions are not subject to limits; however, there are maximum lifetime limits per beneficiary that vary by state. John Hancock Investment Management explains that contributions are considered completed gifts that reduce the value of a donor’s estate. It is essentially an accelerated gifting feature that allows folks to make five years’ worth of contributions in a single year, up to $80,000 ($160,000 for couples filing jointly) per child or grandchild, without triggering federal gift taxes. Thus, it can essentially lower estate and gift taxes. A different way grandparents can contribute on limited basis to a grandkid’s education is via something previously called an Education IRA. Today it is known as a Coverdell education savings account. Like the 529 savings, money can grow tax free, but families are limited to a $2,000 contribution per  year per child and it must be used by the beneficiary before they turn age 30. It is generally better than a savings account because there are investment options. A uniform gift to a minor’s account is another way to contribute toward college education, but it is subject to state rules.

The ideal way to begin saving for a grandchild’s college education is to sit down with a trusted financial professional. It is worthwhile to discuss what amount(s) you are able and willing to contribute toward college and review options. This is essential as plans vary and rules for making contributions are subject to change. A financial professional will define benefits and risks and keep retirement goals in mind, so that grandparents may safely invest in their grandchildren’s future education.

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