It's no secret that higher education is costly. The average annual cost for public college tuition, fees, and room and board averaged $35,370 last school year,1 and some private schools can cost more than twice as much.
What are parents to do, especially when they still have to pay a mortgage and save for retirement?
When it's financially feasible, calling on grandparents for help can take some of the sting out of paying for college expenses. Because my wife and I finished paying the last of the PLUS loans (once called the Parent Loan for Undergraduate Students) for our three daughters' education just three years ago, we're concentrating on building our retirement accounts right now. Still, we'll do what we can to help defray our grandkids' college costs. Here's how you might, too:
1. Contribute to a college savings plan
Even with a small budget, you can help your kids meet their kids' college costs through education savings plans. One—the 529 plan—has high contribution limits and the potential to build a large college nest egg, but you don't need a bundle to open and maintain one. Some plans feature initial and subsequent contributions as low as $50. And if you start saving as soon as a child is born, the benefits of compounding over time can be significant.
Potential investment growth is tax-deferred, and money from the plan can be withdrawn tax-free for qualified education expenses. You own the plan's assets and can even switch beneficiaries to other family members. Assets in a 529 plan owned by grandparents also are excluded from the calculation that determines your children's and grandchildren's expected family contribution (EFC). This can make the difference between qualifying or not for financial aid.
Two-thirds of the states and the District of Columbia offer at least partial income tax deductions for 529 contributions. Check with your state to learn if it allows these deductions and, if it does, review any rules and limitations.
You might also consider opening a Coverdell Education Savings Account (ESA) in certain situations. They have low annual contribution limits, but also feature tax-deferred contributions and tax-free withdrawals for qualified expenses. Normally, guardians own these accounts. However, if you meet income requirements but your children don't—qualification is income-based—you might open and contribute to an ESA to help out.
2. Gift a little
Federal tax law allows individuals to gift up to $15,000 in 2018 free of federal gift tax. You may not be able to give enough to worry about this limit, but know that even a little bit contributed regularly helps. For example, imagine you open an account with $100, contribute another $50 per month, and earn 5 percent annually compounded monthly. After 18 years, you would potentially grow your small contributions to more than $17,000.2 No contribution is too small when you start early and contribute regularly.
If you don't have extra cash to gift, you may have some appreciated stock in your portfolio. This too is gift-able. The same $15,000 limit applies—and the recipient should be mindful of capital gains when cashing it in (the tax treatment varies widely depending on the person receiving the gift).
3. Use a college rewards card
Some credit card issuers offer credits on eligible purchases that you can direct to college savings plans or even to pay down student loans. We've had a rewards card for years. We should use it more often.
If you can't help financially right now
We helped put our three daughters through college, continue to pay a mortgage in a high-priced region, and are putting extra money into retirement accounts, so we know what it's like when dollars are tight. If you don't have money to spare right now, consider sharing your grandparently wisdom. Tell your kids and grandkids about:
- Legacy scholarships. Some colleges and universities award these to children, grandchildren, and even great-grandchildren of alumni.
- Company scholarships. Many organizations offer aid to children of employees.
- Grants through community affiliations. Do your children belong to the local Rotary Club, Kiwanis, or other community organizations? If they do, remind your kids they might score a small grant for your grandkids.
- Community service and affinity awards. Your grandchildren's service to the community could help them get college cash from places of worship, military organizations, cultural groups, and more.
- Sports and academic scholarships. We put three children through college, in part, by researching and applying for academic and sports-based aid wherever we could find it.
- State schools and community colleges. These lower-priced alternatives may offer a solid education at a cost-savings of thousands per year.
No contribution is too small
About three out of every four parents who use financial advisors to help save for their children's higher education agree family contributions are a crucial component. Of these parents, however, only 28% say that grandparents have asked how they can help to pay for grandkids' college.3
Talk to your kids
Whether you can help with small financial gifts or words of advice, know that every little bit you contribute can help make your children's lives easier and your grandchildren's education a little less costly.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917