5 Ways to Help College-bound Grandkids Pay for School
As the cost of higher education climbs, many grandparents are stepping in to help their grandchildren pay for college. If you have grandchildren and can afford the expense, odds are you want to pitch in.
Did you know that 62 percent of adults ages 50 and older are providing some form of financial support to a family member? Helping your loved ones alleviate some expensive college debt can be a smart financial strategy for you both — if done correctly. Depending on the amount and method of payment, there could be tax implications, as well as a negative impact on your grandchild’s financial aid. For example — keep in mind that if you pay for your grandchild’s education by pulling funds from your IRA (individual retirement account), you may incur taxes. According to IRS.gov, withdrawals from a Roth IRA are income tax-free as long as you are 59 ½ or older and your account is at least five years old. Withdrawals from traditional IRAs are taxed as regular income, based on your tax bracket for the year in which you make the withdrawal.
Before signing a check or opening a new account, here are five options to carefully consider. And of course, be sure to consult a tax professional and a financial aid specialist to make sure your plan works well for your family’s individual situation.
Pay tuition directly to the school. A straightforward way to fund your grandchild’s education, there’s also a special tax-code exemption that protects your tuition payment from gift tax. On the other hand, this method could have a negative impact on your grandchild’s financial aid. When you withdraw money from an investment account to use for this purpose, the parents must report the money as the child’s income on the Federal Application for Student Financial Aid form, commonly known as FASFA, which can reduce financial aid by as much as half the cash that’s withdrawn.
Contribute to your grandchild’s (or their parent’s) 529 Plan. 529 accounts offer tax-free earnings and tax-free withdrawals to cover education costs including tuition, books, and room and board. Many parents open an account on behalf of their children, but it’s very common for other relatives to make contributions. As a grandparent, you can give up to $15,000 annually and not be subject to the gift tax. If the money, however, is used for non-qualifying expenses or withdrawn early, penalties will apply.
Loan your grandchild the money. According to the Tax Act blog, you can give your loved one a loan of up to $10,000 interest free. Anything greater will be subject to a minimum IRS-set interest rate. Keep in mind, interest on the loan will be taxable to you, but not deductible by your grandchild. Also, loans are meant to be paid back, so make sure the terms are clear when you extend the offer.
Give them a cash gift. Unlike a loan, a gift is not intended to be paid back. According to IRS guidelines on gift exclusions, you can give your grandchild up to $14,000 a year without paying gift tax. However, the money you give to your grandchild is treated as untaxed income and affects financial aid eligibility by as much as 50%. To avoid this, you can gift the money to the parent — as the FAFSA does not consider cash gifts to parents part of the income that they must report when filing, according to Edvisors.
Pursue scholarships and awards. According to Mark Kantrowitz, a nationally-recognized expert on student financial aid, scholarships and student loans, grandparents can work with their grandchildren to help them find scholarships. He explains, “Maybe grandparents are a member of a fraternal organization that gives out scholarships and they can nominate their grandchild for it. In addition, some colleges have legacy scholarships. If your grandparents went to that college, you might be able to apply for a scholarship at that school.”
Kantrowitz also points to joint volunteer opportunities that include educational awards. “A grandchild volunteers through AmeriCorps, and the grandparent through Silver Scholars. Both can earn educational awards and the grandparent can give their education award to the grandchild.”
There are also scholarships available to grandchildren of military veterans. For example, from AMVETS National Service Foundation, the American Legion, and the Military Order of the Purple Heart Foundation. These are just a few sources.
Mark Kantrowitz also recommends encouraging your grandchild to file a FAFSA as early as they can for each school year. Students who file the FAFSA in October, November or December tend to get more than twice as many grants, on average, as students who file the FAFSA later. Also, be mindful of deadlines: Some colleges and states have very early financial aid deadlines, and some financial aid is awarded on a first-come, first-served basis.
Maximizing your generosity
Contributing to a grandchild’s college education is a meaningful gesture that can help lighten their financial burden for many years after graduation. But you need to ensure you have the means in place to help them — and help yourself. Fortunately, there are financial opportunities to free up funds when you need them most. Exclusively available to homeowners and homebuyers age 62 and older, a Home Equity Conversion Mortgage (HECM) reverse mortgage loan allows you to borrow against the equity in your home, giving you access to funds that you can use today, or a line of credit that will be there when you need it (plus the unused amount in a line of credit grows over time, giving you access to more available funds).1
Another reverse mortgage loan option, Equity Elite, is intended for homeowners as young as 60 in certain states, and is designed specifically for higher-value homes as well as condo owners and buyers. This option offers loan amounts of up to $4 million (depending on home value), as well as no Mortgage Insurance Premium (MIP) fees and an option called Equity Elite Zero† that eliminates nearly all upfront costs.
Planning ahead for smarter giving
Whether you have college-bound grandchildren or simply want to secure a comfortable future for yourself and your partner, Reverse Mortgage Funding can help you explore your financing options. Call (877) 485-1359 to set up a convenient appointment with an experienced reverse mortgage specialist.
This content is sponsored by RMF, one of the nation’s leading reverse mortgage lenders. We are dedicated to helping older Americans live the retirement lifestyle that they imagined and deserve, in the comfort of their own home. As a result of our commitment to providing an extraordinary and positive customer experience, we have earned a 98% customer satisfaction rating;2 a 5-star / Excellent score on Trustpilot; 4.8 out of 5 stars on LendingTree; and an A+ rating with the Better Business Bureau. Call (888) 277-1567 to speak with a licensed reverse mortgage specialist to learn about our retirement financing products and solutions.
SEE WHAT FUNDS YOU MAY HAVE AVAILABLE
If you have equity in your home and believe you meet the eligibility requirements, a HECM may be the option that could help you retire smart.
†With this pricing option, borrower receives a lender credit covering nearly all closing costs. There is a non-refundable independent counseling fee of approximately $125 on average, which the borrower pays directly to the counseling agency. Terms and conditions apply. Not available in all states.
1If part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan.
2Source: RMF customer survey, December 2018.
This information is intended for those who are interested in financial education. This information is provided for convenience only, and RMF make no warranties concerning the accuracy or completeness of any of the information. Information is subject to change without notice, and RMF is under no obligation to provide updated information. Materials or statements made by a third party and located or posted on the Site are those of the third party and do not necessarily reflect the official policy or position of RMF. This is not financial, tax, compliance or legal advice and should not be taken or relied upon as such. Each individual should consult with his/her financial, tax, or legal professional. All mortgage origination services are provided by Reverse Mortgage Funding LLC, a state licensed mortgage lender, which is licensed or otherwise exempt from state licensing in the states in which it originates mortgage loans. Equity Elite Reverse Mortgage (“Equity Elite”) is Reverse Mortgage Funding LLC’s proprietary loan program, and it is not affiliated with the Home Equity Conversion Mortgage (HECM) loan program, which is insured by FHA. Equity Elite is available to qualified borrowers who also may be eligible for HUD, FHA’s HECM program or are seeking loan proceeds that are higher than HUD, FHA’s HECM program limit. Equity Elite currently is available only for eligible properties in select states. Please contact your loan originator to see if it is currently available in your state.
Upon a maturity event, any non-borrowing individuals with an ownership interest in the property, including non-borrowing spouses, will have 90 days to purchase the property from the estate or, if the non-borrower inherits the property, pay the loan in full using any sources of funds available to them. Any non-borrowing individual, including a non-borrowing spouse, should have a plan to pay off an Equity Elite reverse mortgage upon the borrower’s death or any other maturity event. If the non-borrower is unwilling or unable to purchase the property or pay the loan in full, there is no protection for the non-borrower (including a non-borrower spouse) to maintain an interest in the home or to continue residing in the home past the maturity event and the non-borrower may be evicted upon foreclosure. The FHA HECM program has protections in place for certain non-borrowing parties, so a reverse mortgage applicant with certain non-borrowing parties should strongly consider a FHA-insured HECM loan (see HECM guidelines or ask an RMF representative for details). Under the Equity Elite reverse mortgage loan program, a maturity event occurs when the last surviving borrower no longer lives in the home as his or her primary residence for at least 12 months, the property charges (including taxes, insurance, HOA dues or any other property charges) are not paid, required repairs are not completed or the property is not maintained, or any other maturity event, as specified in the Security Instrument, occurs.