Q: How can I help my grandchild with college without jeopardizing financial aid?
-- Worried Grandparent
A: Dear Worried:
It is wonderful that you have built the financial security to be able to provide a gift to your grandchild, and it is wise that you understand that doing so could impose a financial hardship on your grandchild.
Although some kids receive grant money that need not be paid back, far more receive merit-based loans that take income levels into account in determining eligibility.
Need-based aid generally anticipates that students will be able to contribute 20% of their assets toward their education. And, when a grandparent withdraws the funds to pay for their grandchild's college expenses, it will be counted as student income on the following year's financial aid application.
Student income is assessed at 50%, which means if a grandparent pays $5,000 of college costs it would reduce the student's eligibility for aid next year by $2,500. Although parental assets are also considered, parents are expected to contribute at a much lower level, 5.6%.
Given these factors, your grandchild will receive the most bang from your proverbial buck through one (or all) of the following three strategies:
- Route your contribution through your grandchild’s parent (considered income only at the parent’s rate);
- Put money into a 529 investment plan owned by you and make distributions to your grandchild’s parent instead of to the child directly (in this case, choose a 529 plan that allows for change in ownership); or
- Plan to make your gifts during your grandchild’s last three semesters, when your contributions need not be disclosed on financial aid applications (called Liberation Day) by having your grandchild take out loans for the early years of their education and then use the later gifted funds for paying off the loans.
These can be complex strategies that you should not engage in without professional support. Contact a Personal Family Lawyer® for help.
The gift of education is truly a gift that lasts a lifetime. If you’re ready to address your financial questions, schedule a Family Wealth Planning Session.™ A Personal Family Lawyer® can review your existing plan and help you make adjustments that will help you achieve your goals.