Question: We’re 75-year-old retirees with $3.2 million. Our son’s pressuring us to help pay for our granddaughter’s college so she can avoid loans. It’s not our fault she picked a school that’s $90k a year! What should we do?
Answer: It’s hardly a secret that obtaining a college degree is an expensive prospect.
The average cost of college today is $38,270 per student per year, which includes books, supplies, and living expenses, according to the Education Data Initiative. The average borrower with federal student loans today owes $39,547. Moreover, the full annual cost of attending a top school can, shockingly, top $90,000. It’s understandable that your grandchild wants to avoid graduating with burdensome debt.
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If you’re well-off retirees, you may be asked to help cover your grandkids’ education costs so they don’t graduate with debt. But if you have a granddaughter who’s chosen a school with a $90,000-a-year price tag, that ask may not be reasonable, even if you have a $3.2 million nest egg to fall back on.
Here’s how to handle what could be a tricky situation without hurting your loved ones or putting your own retirement at risk.
You need to be comfortable helping out financially
As grandparents, it’s natural to want to help your granddaughter out. But even with a generous nest egg, you may not feel ready to start writing large checks just yet.
Mike McCracken, president and founder of Wealth Guide Financial, says, “Having $3.2 million at age 75 is a great position, but that doesn’t mean you should automatically write a big check for a $90,000-a-year school tuition.”
McCracken says that before you hand out so much as a dollar, ask yourself whether helping out with college will leave you with enough money to live comfortably for the rest of your lives without the risk of running out of money. Keep in mind that you may have extra costs to contend with, from home repairs to medical bills to long-term care. So the numbers need to work for you.
Brett Bernstein, CFP, CEO and Co-Founder of XML Financial Group, agrees.
“The first thing the grandparents need to do is build a financial plan to ensure that they can maintain their current lifestyle and see how much they can financially help their grandchildren,” he says. “Once they have an understanding of the actual number they can contribute, then they have to decide how much of that they want to gift.”
Make sure you’re treating your heirs fairly
It’s one thing to help fund your granddaughter’s college education if she’s your only grandchild. If not, you risk running into problems if you start cutting her large checks without mapping out a plan.
McCracken says the cleanest way to go about things is to document everything meticulously.
“Have your estate-planning attorney draft a simple amendment to your revocable living trust stating that the amount you paid for college will be subtracted from your child’s or grandchild’s eventual inheritance,” he suggests, assuming you have that legal document in place. If not, put something in place before distributing a portion of your assets.
Another option, McCracken says, is to treat the money as an interest-only loan that your granddaughter or their parents will repay.
“This keeps everything transparent, protects the other children’s share, and prevents anyone from being taken advantage of,” he says.
“Giving directly to your grandchildren could reduce their financial aid eligibility.”
Be as tax-efficient as possible with your giving
Unfortunately, there’s no easy way to enjoy a tax break in the course of gifting a grandchild money for college. Contributions to a 529 plan may grow tax-free, but you don’t get to deduct the sum you put in.
Still, it’s important to be mindful of tax implications. To that end, McCracken says that if you’re going to help, paying tuition directly to the school is usually the most tax-efficient route. This way, it doesn’t count against your annual gift tax exclusion.
McCracken also warns that giving directly to your grandchildren could reduce their financial aid eligibility.
Bernstein agrees that paying tuition directly is generally the best option, and that eking out tax savings is unlikely.
“The only way for a grandparent to get some benefit is if the school is willing to accept a highly appreciated asset in return for the tuition, or if the school is a qualified charity and the grandparent can [send] part or all of the required minimum distribution directly to the school,” he explains.
However, Bernstein says, these strategies typically don’t work, so “this comes down to what the grandparent can ultimately afford to gift and their willingness to do so.”
Read: Use the 529 Grandparent Loophole to Maximize College Savings
Don’t succumb to pressure
Aside from genuinely wanting to help your granddaughter, you may be feeling immense pressure to contribute toward her education. That’s why McCracken supports having an honest family conversation and setting clear boundaries up front.
“You can say something like, ‘We love you and want to help, but we also must protect our own retirement and want to keep our inheritance planning even among the heirs,'” he suggests.
From there, explain how you’re willing to structure the assistance if you feel comfortable chipping in.
“Helping the next generation is one of the most rewarding things you can do,” says McCracken. “But it should never come at the cost of your own financial peace of mind.”
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