If you have a grandchild graduating from high school next month, chances are you have been hearing a lot of talk about scholarships, financial aid and the cost of tuition.
The Wall Street Journal recently reported that the cost of college tuition, room and board is averaging about $19,000 a year at public universities and $42,000 at private nonprofit schools. With these costs, it is important for families to know their options regarding paying for college.
According to Sallie Mae, 17% of families relied on relatives to help pay for college. There are many different ways that grandparents (or other relatives) can help their grandchildren pay for college.
If your grandchild is looking to pay for college this year, your options are more limited than if you had planned for this in advance.
One way to help your grandchild immediately would be simply making cash gifts. However, the gift tax exclusion is currently $14,000 per person. This means that grandma can give $14,000 to a single individual and grandpa can give $14,000 per year without having to report the gift on any tax returns. However, these cash gifts could hurt the student’s chances for financial aid. If your grandchild is applying for financial aid you should not pay the money directly to the school because the school will reduce the student’s financial aid.
Another option would be for the grandparent to pay a student’s full tuition directly to the college. When this is done there is no gift tax, but these tuition payments cannot be deducted.
Typically the best option to help your grandchildren pay for college is by planning in advance and contributing to a 529 Plan. A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Amounts contributed to a designated beneficiary’s 529 accounts are treated as a gift. However, contributions of up to $14,000 can be made for each designated beneficiary without incurring federal gift tax in accordance with the annual exclusion. In addition, there is a special exemption to the gift tax for the purpose of contributing to a 529 Plan, which allows each grandparent to contribute a one-time gift of $70,000 (five years of the gift tax exemption). Arkansas taxpayers can deduct up to $5,000 (up to $10,000 for married couples) of their Arkansas 529 GIFT Plan contributions from their Arkansas adjusted gross income.
Tiffany is an associate attorney at Farrar & Williams, PLLC and can be contacted at 501-525-4401 or by email at firstname.lastname@example.org . She can answer any questions you have about this subject.
By: Manda Bass