Paying for College

Paying College Expenses for Your Grandchild?  Here are some important things you should know.

Grandparents have been helping their grandchildren obtain a college education for decades.  There are numerous ways in which that can be achieved.  The following are a few things grandparents in the Carmel Valley community should keep in mind as they contemplate how to assist their grandchildren with this important expense.

Increase Scholarship Chances

Grandparents may have affiliations with clubs and organizations that parents do not.  These affiliations might be helpful in obtaining scholarships.  For example, listing past and present employers, military service, memberships to certain organizations and colleges attended may help your grandchild learn of scholarships for which they are eligible.

Volunteer with your Grandchild

Participating in volunteer work with your grandchild can also help them obtain scholarships as many volunteer organizations offer scholarships for children and grandchildren.  It also can’t hurt to spend a little quality time together.

Contributing to College Savings Plans

Contributing to college savings plans is an obvious way to help your grandchildren save for college.  If a grandparent owns a 529 College Savings Plan, that plan is disregarded as an asset on the FAFSA.  However, distributions are reported as untaxed income to the student/beneficiary.  This can reduce eligibility for federal financial aid by as much as half of the distribution. This can be avoided if the account owner is changed to either the student or the student’s parents.

Making Accelerated Gifts

When contributing to a 529 plan, keep in mind that any year during which your contributions for a particular beneficiary exceed $13,000 (the annual gift exclusion), you may make an election on Form 709 to spread the contributions ratably over five years for gift‐tax purposes.  This allows frontloading of up to $65,000 per beneficiary ($130,000 for a married couple) into a 529 plan without created a taxable gift, assuming no other gifts are made to that beneficiary during that five year period.  If however, you die before the fifth calendar year, the contributions allocated to the years after your death are included in your taxable estate.

Paying Tuition Directly to Institution

Tuition payments made directly to an accredited school do not incur gift taxes, but this strategy can hurt the student’s eligibility for need‐based financial aid.  Giving the money directly to the school should only be considered if the family doesn’t qualify for need‐based financial aid or if the gift tax exclusion is not large enough.  It is a great way to get money out of the estate without the tuition payments counting toward their lifetime exemption, but the impact to financial aid should be considered.

Making Gifts to Parents vs. Student

Gifts to a parent are not reported as income (taxed or untaxed) on the FAFSA (Free Application for Federal Student Aid).  However, if the money is given to the grandchild, it is treated as untaxed income and affects aid eligibility.  It may be better to wait until after graduation to give the gift directly to the student to pay off student loans since that will not affect their eligibility for aid.

A 529 college savings plan is a tax‐advantaged investment program designed to help pay for qualified higher education costs. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover higher education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non‐educational withdrawals.

Your state of residence may offer state tax advantages to residents who participate in the in‐ state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in‐state plan.

 

Rich Mino, a financial advisor with Del Mar Financial Partners, Inc., works closely with families and small businesses in the Carmel Valley area.  He is passionate about making a difference in his community through financial literacy programs, and focuses on building strong relationships with all of his clients so that he can be a resource to them where needed most.  An active member of the Del Mar Kiwanis, Rich supports his Carmel Valley community through local service projects, and by sponsoring the Builders Club and Key Club leadership programs at Carmel Valley Middle and Torrey Pines High Schools.  In 2012, he is working to implement a financial literacy educational program to help prepare and educate kids with the challenges that they will face as they begin and graduate from college.  He is a registered representative of Securian Financial Services, Inc., Member FINRA/SIPC. Securities dealer and registered investment advisor.  Del Mar Financial Partners, Inc. is independently owned and operated. 12526 High Bluff Drive, Suite 280, San Diego, CA 92130. 438300 DOFU 01/2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties.  You are encouraged to seek tax or legal advice from an independent professional advisor.  The content is derived from sources believed to be accurate.  Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.  This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.