Saving early for college is crucial. Learn the best way you can contribute to your grandchild's future education.
After the birth of a grandchild, it is the goal of many grandparents to help provide for that child, often to the point of spoiling them. While some of these efforts are focused on simply making their grandchild happy, others aim to provide long-term financial security, most notably through a college fund. Given the high cost of a college education – not to mention the fact that the price increases notably year after year – contributions to one of these funds are sure to be appreciated by both your children and your grandchildren in the years to come. Starting a college savings account may seem like a daunting task. So, you might ask, what is the best way to set up a college fund for a grandchild? To find out, keep reading as the college savings plan experts over at Sootchy provide the answers you’re looking for.
A quick search for college funds is bound to turn up a variety of results, chief among them the ever-popular 529 plan, which provides some helpful tax breaks and can generate returns on your contributions as your grandchild grows from a child to a young adult. However, that’s not the only option families use; we’ll look at a few of the top choices below.
Let’s start with arguably the best college fund out there. A 529 plan can come in one of several forms – an education savings plan, a prepaid tuition plans, or an ABLE account – the first of which is the most common. These savings plans can make for great investments, as they can provide a rate of return that’s anywhere from 5% to more than 12%, depending on which plan you open and which investment options you choose. The biggest advantage of a 529 account, though, is the tax benefit, especially when compared to other kinds of investment plans.
When the money in your 529 plan grows, it does so tax-free, and spending the money (as long as it’s on a qualified education expense, such as tuition, housing, books, or equipment) can also be done without paying any federal income tax. Many states also waive their own income taxes, and some even provide deductions and credits for contributions to a 529 plan. Best of all, you’re not limited to the plan in your state; you can look around the country for the plan that fits your needs.
For a more open-ended investment plan, consider a UGMA custodial account. The owner of such an account can gift financial assets to their grandchild while maintaining control over the investments until the child comes of age. A UGMA account can also benefit grandparents looking to offload some of their assets for tax reasons, as they will be taxed at your grandchild’s rate and will no longer be considered part of your estate. However, because the assets would be in your grandchild’s name, they could limit their ability to receive financial aid when college rolls around.
A look into Coverdell accounts will reveal more than a passing resemblance to 529 plans; both can grow and be used tax-free, as long as they’re put toward a grandchild’s education. Coverdell accounts differ in some key areas, though. For one thing, they offer increased flexibility to use funds during a child’s elementary or secondary school years, a benefit some families appreciate. That said, account owners are very limited in terms of how much they can contribute to the account, and control of the account will be automatically handed to the beneficiary when they turn 18, which could affect their financial aid considerations much like a UGMA or UTMA account.
As you can see, there are a lot of factors to consider when setting up a college fund for a grandchild, but 529 plans offer a very specific advantage most funds lack: the ability to help cover the cost of higher education without negatively impacting a child’s financial aid. When applying for funds through the Free Application for Federal Student Aid (FAFSA) or at a particular school, all the assets available to your grandchild and their immediate family (i.e., parents) will be factored into the assessment of their financial need; the more assets they have, the less they’ll get in aid. Because a 529 account would be in your name, it won’t be considered when your grandchild asks for financial aid.
It’s important to note, however, that any payments out of a 529 plan on your grandchild’s behalf will be considered income and will affect the amount of aid they receive, but there are a few ways around this. One option is to roll over some of the money in your account (after the FAFSA is submitted) to one owned by the child’s parents, since payments out of that account won’t affect financial aid; however, keep an eye out for state policies that might claw back some of the tax breaks granted to your 529 plan.
Another, simpler option is to wait a few years before paying out funds. The FAFSA only looks at assets starting two years prior, so distributing funds after January 1st of your grandchild’s second year in college won’t affect their aid, as long as they graduate on a four-year timetable. Alternatively, you could wait until after your grandchild graduates and put the money toward any debt your grandchild may have, since 529 plans can be used to pay off up to $10,000 in student loans.
At a time when student debt continues to climb ever higher, saving for your grandchild's college is a great way to ensure that your loved one doesn’t wind up burdened with heavy financial obligations just as they launch their career. To make the process of opening a 529 plan for your grandchild quick and simple, the team at Sootchy offers a streamlined setup and contribution process through an easy-to-use smartphone app. Learn more by visiting Sootchy.com or downloading our app today.