As the price of college continues to grow, saving early is increasingly important. Learn the best accounts to start saving for your grandchild's education.
Paying for college has always been a tall order for families, but as the price tag on higher education continues to grow, the challenge can quickly start to seem insurmountable – at least, if parents have to finance the effort by themselves. In many families around the country, grandparents dote on their grandchildren, offering everything from sweets to cash to homecooked dinners, but in recent years, more grandparents have started to consider contributions to their grandkids’ education as a means to support their loved ones. Once that decision has been made, however, grandparents have to navigate the wide variety of savings and investment options used to finance college – an overwhelming task, to say the least. Thankfully, the college savings plan experts at Sootchy are happy to assist you in figuring out how to help your grandchild pay for college; continue reading to learn more.
A quick search online or trip to your local bank can turn up a number of financial tools grandparents can use to help their grandchild pay for college. Each of these options has its own pros and cons to consider; we outline the most popular and effective college savings accounts below:
No matter where you live, it’s worth exploring the various 529 college savings plans that the states have to offer. Each state has its own version of this tax-advantaged account, which is perhaps the most powerful of all the accounts used to pay for college. A 529 plan allows a grandparent to make contributions as their grandchild grows, and they earn returns on investments that are free from federal (and, in some cases, state) income taxes. Plus, many states offer deductions and credits for contributions to their 529 plan, so they definitely merit consideration.
Unlike 529 plans, which earn returns on investments in the form of a growing account balance, UGMA accounts allow you to gift stocks, bonds, and other assets to your grandchild to help them pay for college. As the person starting the account, you can designate yourself as custodian and manage the assets, which are technically owned by your grandchild and taxed at their lower rate. However, once they reach the legal age of adulthood, they are able to access the money and may use it for things other than college, if they want.
In a lot of ways, Coverdell education savings accounts are a pared-down version of the 529 college savings plan: Both allow for tax-free growth; both offer a variety of investment options; both are limited to covering education-related expenses. Coverdell accounts offer a bit more flexibility, though, as well as a few notable limitations. For instance, you can only contribute up to $2,000 per year with a Coverdell account, but you have the option to spend funds on primary and secondary education if helping your grandchild pay for college isn’t your goal.
A tried-and-true method of saving money and generating returns over time is the certificate of deposit, better known simply as a CD. In exchange for putting some money in a bank account and agreeing to leave it there for a number of years, the bank will provide a certain rate of return; the longer the money is left in the account (called the “term length”), the more interest you’ll earn. If your grandchild won’t be going off to college for a decade or more, a CD may be a useful, if inflexible, way to save money for when they do.
Although it may seem natural to put the funds for your grandchild’s college tuition in their name, it’s important to keep in mind that the identity of the account owner will have a direct effect on the amount of financial aid your grandchild might receive to help pay for college.
When weighing a student’s level of need, the federal government – via the Free Application for Federal Student Aid, or FAFSA – will look at all the assets they and their parents own. By putting the account in your grandchild’s name, you signal to the government that the assets can be considered as part of a FAFSA submission, which will reduce the amount of aid by 20% of the balance in the account and potentially hurt your grandchild’s ability to pay for college. Though they’re also considered when gauging need, the assets of parents only add a little more than 5% of their value to the government’s assessment, so you might want to put the account in their name instead.
Of course, there are many grandparents who would – understandably – prefer to keep the funds in their own name, which will not only allow them to retain control over the money but also shield the assets from the government’s view when their grandchild applies for financial aid. However, any payment you make from the account to help your grandchild pay for college will be considered part of their income for that year, and 50% of the value of that payment will be subtracted from the aid your grandchild receives. For this reason, it may be beneficial to wait to make payments until their junior or senior year, since FAFSA won’t take those payments into account, or put that money toward their student debt after college instead.
For grandparents with the means and the motivation to help their grandchild pay for college, 529 plans offer an opportunity to accumulate funds through tax-free gains and put that money toward expenses like tuition, housing, books, or equipment. With help from Sootchy, you can open a 529 plan quickly and easily; visit us online or download the Sootchy app to learn more.