3 main ways you can help a child or grandchild pay for college
As college costs continue to rise, it is becoming increasingly difficult for students to pay for it themselves. Total student loan debt in the US has risen to $1.75 trillion. This has resulted in many parents and grandparents wanting to help take on part of the college debt for their children or grandchildren. They should not jeopardize their financial future by going into retirement with someone else’s student loan debt.
However, the number of adults over 62 with student loan debt has reached 2.4 million borrowers. If parents and grandparents plan to help pay for college, they should plan ahead to stay debt-free in their golden years. There are many ways they can start planning now to help with college costs while still saving for their retirement.
529 Plans Offer Tax Advantages
529 plans are investment accounts that can be used to pay for the education costs of a specific beneficiary. Choosing a 529 plan also comes with tax benefits. It will grow free from federal tax and will not be taxed when the money is withdrawn. It is important to note that you can use a 529 plan from any state to help cover education expenses in any other state. However, depending on the state in which you live, you may qualify for more tax deductions using a 529 plan. There are seven states that offer a state income tax exemption for any 529 plan contributions: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania. There are no contribution limits for 529 plans, but there are limits for tax deductions. These plans can be used for more than just college fees.
For example, they can help cover student loan payments and college expenses such as books or meal plans. You can even use it to help pay for your K-12 education. While it’s a good option, the 529 plan comes with some drawbacks. If you are looking for university financial aid, 529 plans can work against you. You can also get higher fees with these plans. These drawbacks may be the reason why many are reluctant to use these plans for college.
Educational savings accounts are slightly different from 529 plans
A Coverdell Education Savings Account (ESA) is very similar to a 529 plan. Earnings in this account can increase tax-deferred, and withdrawals are tax-deductible when used for educational purposes, as in a 529 plan. However, the beneficiary will have to pay Taxes on any distributions beyond his eligible educational expenses. You can contribute only $2,000 annually, per beneficiary, so if you exceed that amount, the rest will be taxed. While there are many similarities, there are some differences between an ESA plan and a 529 plan. Contributors must earn less than $110,000 per year, cannot contribute to the account after the child turns 18, and the money is distributed automatically when the beneficiary turns 30 . An ESA may be a better option than a 529 plan if a shareholder wants to give an account to a beneficiary as they get older.
Tax-free gifts are an easy way to go
Grandparents can also give cash directly to the child or parents. To avoid the federal gift tax, you can give a tax-free cash gift of up to $16,000 to each recipient in 2022. This means that if you give anything less than $16,000 to an individual, neither you nor the recipient have to report it to the IRS. If you decide to go this route, be sure to discuss exact tuition and any other college expenses with your grandchild or child, and then make a detailed plan about exactly where the money will go. This will help ensure that the money you provide will go towards college expenses, such as tuition fees, rather than anything else.
Help your family in a smart way
Regardless of whether you’re helping with a family member’s college expenses or saving for retirement, consulting a financial planner should be your first step. They can help you come up with the right plan for you to save for college, retirement, and everything in between.
Founder and CEO of Drake and Associates
Tony Drake is a certified financial planner, founder and CEO of Drake & Associates in Waukesha, Wisconsin.Tony is an investment advisor and has helped clients prepare for retirement for more than a decade. He hosts the Retirement Ready Radio Show on WTMJ Radio every week and is shown regularly on television stations in Milwaukee. Tony is passionate about building strong relationships with his clients so that he can help them build a solid plan for their retirement.